Question regarding how DB PCLS is calculated

v6_pete

I’m presently looking into taking my DB pension at the age of 55, and to this end I requested a quotation showing my annual pension amount in the case where I take the maximum possible Pension Commencement Lump Sum (PCLS).

I’ve just received the quotation, and was surprised to find that the PCLS figure that’s been quoted is 30% less than the figure I received last year on similar quotation for the same pension which assumed a later retirement date of age 60.

My understanding was that the PLCS is simply 25% of the pension pot total fund value. My question is therefore what is the reason for the 30% difference in PCLS figures that I have been given  - is this simply a matter of the “predicted” total fund value being 30% bigger five years later, or is there an error somewhere?

Grateful if someone can please educate me 😊

xylophone

See https://techzone.abrdn.com/public/pensions/Tech-guide-tax-free-cash#anchor_2

under

Maximum tax free cash - defined benefit (DB) schemes

v6_pete

Many thanks for the link - that's very helpful! I'll work through the example using my numbers, which should help me get a handle on how it works.

Linton

25% of the pension value only applies to DC pensions.  For DB pensions it is solely covered by the scheme rules and in the case of early retirement I would guess actuarial advice.

There is no fund assigned to you to be predicted.  Rather a set of obligations to all scheme members based on normal retirement date and cash flow perhaps coming from maturing bonds to meet those obligations.  The pension scheme has to act in the interests of all members equally.  If giving you more at the age of 55 reduces that available for everybody else then there is a problem.

You can of course ask them to reconsider but I see no requirement for them to do so.

Marcon

v6_pete said:

Many thanks for the link - that's very helpful! I'll work through the example using my numbers, which should help me get a handle on how it works.

You need to check your own scheme rules - they may or may not permit you to take tax free cash up to the maximum permitted by HMRC. There can also be other reasons to restrict tax free cash (e.g. if you have a 'Guaranteed Minimum Pension' as part of your DB benefit, there must be enough 'pension' to cover this when you reach age 65/60 depending on whether you are male/female, which could limit your tax free cash).

v6_pete

Very many thanks everyone, that's given me a much better understanding of the issues - I'll go off and have a careful read through the scheme information.

xylophone

You need to check your own scheme rules - they may or may not permit you to take tax free cash up to the maximum permitted by HMRC. There can also be other reasons to restrict tax free cash (e.g. if you have a 'Guaranteed Minimum Pension' as part of your DB benefit, there must be enough 'pension' to cover this when you reach age 65/60 depending on whether you are male/female, which could limit your tax free cash).

The information given in the link is pretty comprehensive, have a read!

It does point out (amidst a wealth of detail)

• Calculating the tax free cash from defined benefit schemes can be complicated as the maximum amount depends on how the tax free cash is provided

The precise terms will vary from scheme to scheme and depend on market conditions and the member's age when the tax free cash is paid.

• Guaranteed minimum pension (GMP) - No tax free cash can be paid from GMP. But where other benefits are crystallised at the same type as the GMP, the maximum tax free cash is based on the total crystallised value including the GMP. This can mean that the individual's tax free cash entitlement could be less than 25%.

Marcon

xylophone said:

You need to check your own scheme rules - they may or may not permit you to take tax free cash up to the maximum permitted by HMRC. There can also be other reasons to restrict tax free cash (e.g. if you have a 'Guaranteed Minimum Pension' as part of your DB benefit, there must be enough 'pension' to cover this when you reach age 65/60 depending on whether you are male/female, which could limit your tax free cash).

The information given in the link is pretty comprehensive, have a read!

No thanks; I'm already fully familiar with this, but just wanted to be sure OP was aware in case it wasn't covered.