Good commutation? Bad commutation?

colmel16

Sorry in advance if this has been covered before. Transferring out of a DB scheme is more often than not considered a bad move even with large commutations, Advice is needed if over £30000 to give some financial protection. But little seems to be said about DB 25% tax free cash being offered when taking the pension , no advice needed or given. The 2 DB schemes i have been in (lgps and british steel) both offered 12x (if i remember correctly) commutation tax free. a very poor deal, yet from memory most people jumped at it. why has this not been picked up on and addressed?

Brynsam

Addressed in what way? Commutation rates are often different from transfer values because they don't serve the same purpose.  For example, commutation only refers to the member's own pension, not any spouse's or other survivor benefits payable, so you aren't on a level playing field here.

The focus on transfers out of DB schemes has certainly brought this into sharper focus, but as you don't have to commute if you think it's poor value, that's your answer. There is no '25% tax free cash' with DB schemes. The rules of any particular scheme set out the maximum cash you can take, with that maximum being subject to any HMRC limit.

Public sector schemes in particular are notoriously stingy when it comes to commutation rates. 

colmel16

you do not have to commute with either transfer or tax free lump sum, the point i am trying to make is that you are compelled to take advice to transfer  but not for lump sums even though they offer less to the recipient in the way of value,

dunstonh

But little seems to be said about DB 25% tax free cash being offered when taking the pension , no advice needed or given.

There is no 25% tax free cash on a DB scheme.  There is a pension commencement lump sum that is based on a calculation that is designed to be similar to the 25% pension commencement lump sum on DC schemes but the methodology is very different.

you do not have to commute with either transfer or tax free lump sum, the point i am trying to make is that you are compelled to take advice to transfer  but not for lump sums even though they offer less to the recipient in the way of value,

a transfer is a very high risk transaction that statistically is not likely to be in the best interests of the individual.   Whereas how much PCLS someone decides to take (or not take) really has limited damage potential.

Thrugelmir

colmel16 said:

The 2 DB schemes i have been in (lgps and british steel) both offered 12x (if i remember correctly) commutation tax free. a very poor deal, yet from memory most people jumped at it. why has this not been picked up on and addressed?

Perhaps to some people the ability to access a lump sum was more important for a particular personal reason. Sometimes it's optimisation over maximisation that's the determining factor. 

Dox

colmel16 said:

you do not have to commute with either transfer or tax free lump sum, the point i am trying to make is that you are compelled to take advice to transfer  but not for lump sums even though they offer less to the recipient in the way of value,

Much less risk with commutation, which (unless you commute the whole lot on the grounds of triviality, which is increasingly rare) leaves the member with a DB pension for life, albeit a smaller one, and any eligible survivors will pensions for life based on the member's whole pension, not the post-commutation one.

Malthusian

colmel16 said:

you do not have to commute with either transfer or tax free lump sum, the point i am trying to make is that you are compelled to take advice to transfer  but not for lump sums even though they offer less to the recipient in the way of value,

One of the principles behind the 25% tax free lump sum, which has been in place long before pension freedoms, is that if someone takes 25% of their pension and spunks it up the wall on a sports car it doesn't matter too much, as they'll still have 75% of the pension left. (I.e. what Dox said.)

Until Osborne's "pension freedom" reforms in 2015, this principle was enshrined in the rules on how you could draw benefits from defined contribution pensions as well as defined benefit ones.

zagfles

Yes it's a good point. Our union did a retirement "course" I went on, which consisted of a number of talks or rather sales spiels including a financial adviser who was trying to sell the idea of taking the lump sum even at 12x or less and investing it, as that would make more than taking the full DB. While at the same time saying "we don't do DB transfers (at maybe 30x +)".

Of course there's the point above that it's only a small part of the pension, but effectively saying "we can do better than a 8% index linked annuity" with no real mention of risk.

Wouldn't be surprised to see them here soon https://www.financial-ombudsman.org.uk/decisions-case-studies/ombudsman-decisions

Dox

zagfles said:

Yes it's a good point. Our union did a retirement "course" I went on, which consisted of a number of talks or rather sales spiels including a financial adviser who was trying to sell the idea of taking the lump sum even at 12x or less and investing it, as that would make more than taking the full DB. While at the same time saying "we don't do DB transfers (at maybe 30x +)".

Of course there's the point above that it's only a small part of the pension, but effectively saying "we can do better than a 8% index linked annuity" with no real mention of risk.

Wouldn't be surprised to see them here soon https://www.financial-ombudsman.org.uk/decisions-case-studies/ombudsman-decisions

Back in the old days(!) - 1980s and early 1990s - taking maximum tax free cash from a DB scheme genuinely was a no brainer. Annuity rates were so good that you could often buy an annuity with the tax free lump sum which not only was comparable to the DB pension given up but was sometimes even better. Because the lump sum from the pension scheme became 'yours', if you used the lump sum to buy an annuity, you then benefited from favourable tax treatment: part of an annuity bought with your own money is treated as a return of capital, so that part is not subject to tax. 

Albermarle

The 2 DB schemes i have been in (lgps and british steel) both offered 12x (if i remember correctly) commutation tax free. a very poor deal, yet from memory most people jumped at it. 

Many lower paid workers see the tax free cash as a kind of retirement bonus and the large majority take it even when it is not the right decision financially for most of them .

Although I guess if you had a big credit card bill/overdraft/ large mortgage it could still make sense, although I suspect it is mainly spent on holidays and home improvements .

zagfles

Dox said:

zagfles said:

Yes it's a good point. Our union did a retirement "course" I went on, which consisted of a number of talks or rather sales spiels including a financial adviser who was trying to sell the idea of taking the lump sum even at 12x or less and investing it, as that would make more than taking the full DB. While at the same time saying "we don't do DB transfers (at maybe 30x +)".

Of course there's the point above that it's only a small part of the pension, but effectively saying "we can do better than a 8% index linked annuity" with no real mention of risk.

Wouldn't be surprised to see them here soon https://www.financial-ombudsman.org.uk/decisions-case-studies/ombudsman-decisions

Back in the old days(!) - 1980s and early 1990s - taking maximum tax free cash from a DB scheme genuinely was a no brainer. Annuity rates were so good that you could often buy an annuity with the tax free lump sum which not only was comparable to the DB pension given up but was sometimes even better. Because the lump sum from the pension scheme became 'yours', if you used the lump sum to buy an annuity, you then benefited from favourable tax treatment: part of an annuity bought with your own money is treated as a return of capital, so that part is not subject to tax. 

Indeed. But this was last year!