Basic State Deduction and impact on DB scheme

segovia

Hi

Can someone please explain what the Basic State Deduction is and what impact it will have when my wife reaches retirement age in 7 years time?

She is due to take her DB pension in June this year at age 60

Reduction to pension from State Pension Age (SPA)

As a former Commercial Union member with pensionable service between 31 July 1968 and 31 December 1999 your pension will be reduced at SPA by the Basic State Pension Deduction (BSPD). Your pension will be reduced by an estimated £1,002.88 in accordance with the Scheme Rules.

Regards

J

Malthusian

Pretty much what it says. When she reaches her 67th birthday her DB pension will go down by £1,003, but her State Pension will start so her total income should more than make up for that. Have both of you obtained State Pension Forecasts?

The idea is to even out the income she receives from 60 and 67, rather than having a modest income from 60-67 and then a big jump after 67. Naturally, with a deduction of only £1,003 it doesn't make much odds in her case.

Some schemes offer the choice between a stepped pension like this and a non-stepped pension which is slightly lower but doesn't go down at SPA.

segovia

Thanks

Is the DB scheme therefore paying more than it what it would have done between 60 and 67 had the State Pension Age not changed?

Is the £1,003 fixed or will the deduction increase with inflation ? 

J

xylophone

The idea is to even out the income she receives from 60 and 67, rather than having a modest income from 60-67 and then a big jump after 67. 

No - this is not a "stepped pension" but an example of "clawback".

See  https://www.pensionbee.com/pensions-explained/pension-rules/what-is-pension-clawback

It was a feature of a number DB Schemes but in many (most?) cases it was abolished.

However, it still exists in eg Barclays 64, M&S,  and (notoriously) HSBC.

https://committees.parliament.uk/writtenevidence/9758/pdf/

Marcon

segovia said:

Thanks

Is the DB scheme therefore paying more than it what it would have done between 60 and 67 had the State Pension Age not changed?

Yes.

segovia said:

Is the £1,003 fixed or will the deduction increase with inflation ? 

Depends on the rules of the scheme. You need to ask the administrators to confirm.

xylophone

Is the DB scheme therefore paying more than it what it would have done between 60 and 67 had the State Pension Age not changed?

She should check scheme rules carefully.

Example

https://www.mandspensionscheme.com/i-have-taken-my-pension/my-pension/when-the-state-pension-deduction-is-applied

If you joined the Scheme on or before 31 December 1995:

The deduction is applied to your pension at either age 65, or (if earlier) your State Pension age.

However, if you’re a female member who stopped earning benefits in the Scheme before 1 January 1997, any part of your deduction earned before 17 May 1990 applies at age 60.

If you joined the Scheme on or after 1 January 1996:

The deduction was taken into account when you stopped earning benefits and we calculated the pension you had earned. The information provided below does not apply to you and you do not need to take any action.

segovia

I have given my wife some questions to ask the pension administrators. However, I am still trying to get my head around why the deduction kicks in and what gov legislation allows it.  

Most of what I have read so far suggests the pension administrators deem you would have too much money when you receive the state pension so we start to take some off you. This doesn't make sense and it is specifically penalises those will small pension pots.  J

Dazed_and_C0nfused

segovia said:

I have given my wife some questions to ask the pension administrators. However, I am still trying to get my head around why the deduction kicks in and what gov legislation allows it.  

Most of what I have read so far suggests the pension administrators deem you would have too much money when you receive the state pension so we start to take some off you. This doesn't make sense and it is specifically penalises those will small pension pots.  J

According to your original post she had s defined benefit pension.  So there was no "pot" but a promise to pay a pension based on the scheme rules.  Which presumably allowed such a deduction.

Do you think she would have been better off is she had been building a pension pot?

She is due to take her DB pension in June this year at age 60

eskbanker

segovia said:

I am still trying to get my head around why the deduction kicks in and what gov legislation allows it.

Turning it round the other way, what legislation do you believe would outlaw it?

xylophone

I have given my wife some questions to ask the pension administrators. However, I am still trying to get my head around why the deduction kicks in and what gov legislation allows it.  

Have a look at this

https://commonslibrary.parliament.uk/research-briefings/sn01121/

When the State Pension was introduced in 1948, it was recognised that some employees in the public and private sectors already had occupational pensions. A state pension paid in addition could provide them with incomes in retirement which would not be not far short of retiring salary.  Also, where the occupational scheme was contributory, the total contributions required might be quite heavy. Provision was therefore made for occupational pension schemes to take account of the new State Pension.

Public service schemes included a reduction in pensions at State Pension age (SPA) to avoid duplication of benefits. These ‘national insurance modification’ rules were abolished from 1980.

Private sector occupational schemes also included such arrangements in their rules, which are sometimes described by the term “pension integration,“ clawback or bridging pension.

.............

The Department for Work and Pensions has received a number of recent representations on the HSBC defined benefit occupational pension about its pension clawback policy from individuals and from Members of Parliament writing on their behalf.

This is one of a number of what are sometimes called integrated pension schemes. These schemes were designed to avoid additional contributions from sponsors and members by taking account of some or all of the State Pension when calculating the amount of occupational pension payable. The arrangement is set out in scheme rules which would have been available to members when they joined the scheme.

Such arrangements are not a requirement of Department for Work and Pensions legislation. It would not be right to compel schemes to withdraw this integration arrangement. That would amount to a retrospective change imposing significant additional unplanned costs. Pension scheme rules on the calculation of benefits are many and varied, and must remain a matter for employers and scheme trustees to decide 

segovia

Our main gripe is she has been in the scheme for 44 years and 6 weeks before she is due to take it we only just discover this deduction.  We have also had about 5 IFA's look at it during the past 5 years when she was considering a transferring out of the scheme. All of their forecasts DIDN'T mention and reduction at state pension age.