Pension Trivial commutation calculation 21 February at 12:55PM in Pensions, annuities & retirement planning 5 replies 244 views

horrible65

My wife requested a trivial commutation quote from an old pension scheme when she reached age 60 in May last year and received a payment figure of 33k. She decided to defer and asked for a new quote in January when she was given a figure of 25k. The only explanation we could get for the big drop was that it was linked to the rise in the bank base rate but they refused to supply the calculation used. This raises two main questions in how do I know their calculations are correct and if the amount is so dependant on the BBR do we just wait for it to go back down before requesting a new quote?.

xylophone

Was this a defined benefit pension scheme?

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500

https://techzone.abrdn.com/public/pensions/Guide-triviality-small-pots

Tommyjw

You wouldn't know the calculations are correct because they can basically make up how to calculate it however they want. A fixed factor, linked to commutation rates, linked to transfer values, something else, every scheme will be different and knowing the background workings of where its come from doesnt change anything.

Linton

In providing commutation the Trustees have to be fair to your wife and all other members of the scheme. The figures are calculated by an actuary based on the costs of providing your wife with the pension.

Since May last year gilt interest rates have gone up significantly which means that it is much cheaper than previously for the Trustees to provide the guaranteed pensions.  Since they are spending less on everyone else they cannot pay your wife extra as a commutation figure.

She could wait for gilt interest rates to go down significantly but that may not happen for years.  And in the meantime your wife is losing out as she does not have the cash which could otherwise be invested.

dunstonh

. The only explanation we could get for the big drop was that it was linked to the rise in the bank base rate but they refused to supply the calculation used. 

From the wording "trivial commutation". that means this must be a Defined benefit pension.   

We know that CETVs on DB pensions have dropped by around half  from their peak.   So, the loss is in the ballpark expectation.

The type of pension your wife has was never designed to be cashed in and it is not an investment linked pension.    The fact there is a triviality rule was really aimed at very small pensions.   it is probably financially better to keep the pension

The reason for the drop is basically the reverse of why CETVs ballooned between 2008-2021.   The liability calculations use gilt yields.  Gilt yields fell to historic lows after the credit crunch sending CETVs rocketing.   However, gilt yields started to increase late 2021 over inflation concerns and various events in 2022 occurred, including two black swan events, that basically saw the price of gilts go back to 1990s pricing in a single year.

The higher the yield, the lower the transfer value and vice versa.

This raises two main questions in how do I know their calculations are correct and if the amount is so dependant on the BBR do we just wait for it to go back down before requesting a new quote?.

The calculations are to cover the liability and the drop is in line with expectation (its actually less but chances are you are not comparing peak and trough figures.

it is unlikely the value will ever return to what it was in real terms in our lifetimes.   It would need quantitive easing to start again and its not as direct to the base rate as you think.  Market sentiment of the UK economy and financials have more to do with it.  However, base rate can drive some of that.   Effectively, the 2008-2021 period was a bubble and it burst in 2022 and we are back to the lower end of the more typical wavy line.

horrible65

Thanks for the detailed explanation and I now have some sort of understanding regarding the fall in the amount offered. It is still worth taking the commutation as it is 25 times the annual pension (previously 33 times!!) but it is just a shame that there weren't warnings about sharp falls in commutations when guilt yields started increasing last year as it will be affecting probably many thousands of people.