DB tax free lump sum - a spanner in the works!

saver_ali

I’ve been quiet on here for a couple of years. We have various pensions, I have a pension withdrawal strategy, and everything has been ticking along relatively nicely, but a spanner has just been thrown in the works!

My husband is already retired, but will be 65 later this year and will be taking his DB pension from an old employment.

[As background, I had horrendous dealings with the same scheme administrators in 2019 over a different pension, and I have very little confidence in them. I won’t name names, but @a@Albermarle will know who I mean! ]

Anyway, my husband received his pensions options pack, which said he could take the full annual pension of £18,243 pa and no TFLS, or a maximum TFLS of £11,855 and a reduced pension of £17,436 pa. (Or anything in between.)

The pension administrators have an online illustrator which I have been monitoring over the years, and this has been the type of figure I have been expecting. My husband was going to take the maximum lump sum, but it’s not a major decision in the overall scheme of things for us, 

Then at the weekend he received a letter saying that from 1st August 2023 the plan is changing the way the maximum cash lump sum that members can take from the scheme is calculated. All members retiring after that date may be able to sacrifice more of their annual pension for a higher initial cash amount. 

A new retirement illustration is available on request, which we have asked for. In the meantime, we went on the online illustrator and it is now showing a maximum TFLS of £83,675, with a reduced annual pension of £12,551. This is a massive difference! It is a life changing amount for us and, if true, means we have to give it a lot of thought.

But my post doesn’t relate to that. My distrust of the administrator makes me wonder if this is a mistake. Or if it’s correct, what has changed?

The plan provides access to a consultant with whom we can discuss the various options. We have spoken to him twice, and he seems knowledgeable but he’s in a different part of the company, and doesn’t know any details of the scheme. He can only submit queries on our behalf. He doesn’t know how the maximum lump sum is calculated, and why it was restricted to quite a low amount in the original options pack. His initial thought was that the recent letter won’t affect us, and we shouldn’t have been sent it.

This seems very odd, and why would we have received the letter if it didn’t affect us? And why has the online illustrator changed to give the new amount? It has been reliable up until now. 

It can’t be a change in commutation rate because the calculation of £17,436pa with £11,855 cash is still the same on the latest online illustrations.

What other changes to the plan could allow a higher lump sum? Maybe they’re trying to reduce their commitment to future expenditure, and are offering a cash amount in exchange for no annual increases, but surely that should be made clear?

My thoughts are that the original limit of £11,855 could relate to GMP (my husband’s employment was 1978 to 1991), and I’m not aware of any recent legislation changes which might allow a higher lump sum now.

Has anyone any thoughts on any of the above?

Obviously we have to wait for the new illustration. If it confirms the new TFLS of £83k, we take it, and they later realise that they’ve made a mistake, can they ask for the money back? 

Thank you.

Marcon

saver_ali said:

I’ve been quiet on here for a couple of years. We have various pensions, I have a pension withdrawal strategy, and everything has been ticking along relatively nicely, but a spanner has just been thrown in the works!

My husband is already retired, but will be 65 later this year and will be taking his DB pension from an old employment.

[As background, I had horrendous dealings with the same scheme administrators in 2019 over a different pension, and I have very little confidence in them. I won’t name names, but @a@Albermarle will know who I mean! ]

Anyway, my husband received his pensions options pack, which said he could take the full annual pension of £18,243 pa and no TFLS, or a maximum TFLS of £11,855 and a reduced pension of £17,436 pa. (Or anything in between.)

The pension administrators have an online illustrator which I have been monitoring over the years, and this has been the type of figure I have been expecting. My husband was going to take the maximum lump sum, but it’s not a major decision in the overall scheme of things for us, 

Then at the weekend he received a letter saying that from 1st August 2023 the plan is changing the way the maximum cash lump sum that members can take from the scheme is calculated. All members retiring after that date may be able to sacrifice more of their annual pension for a higher initial cash amount. 

A new retirement illustration is available on request, which we have asked for. In the meantime, we went on the online illustrator and it is now showing a maximum TFLS of £83,675, with a reduced annual pension of £12,551. This is a massive difference! It is a life changing amount for us and, if true, means we have to give it a lot of thought.

But my post doesn’t relate to that. My distrust of the administrator makes me wonder if this is a mistake. Or if it’s correct, what has changed?

The plan provides access to a consultant with whom we can discuss the various options. We have spoken to him twice, and he seems knowledgeable but he’s in a different part of the company, and doesn’t know any details of the scheme. He can only submit queries on our behalf. He doesn’t know how the maximum lump sum is calculated, and why it was restricted to quite a low amount in the original options pack. His initial thought was that the recent letter won’t affect us, and we shouldn’t have been sent it.

This seems very odd, and why would we have received the letter if it didn’t affect us? And why has the online illustrator changed to give the new amount? It has been reliable up until now. 

It can’t be a change in commutation rate because the calculation of £17,436pa with £11,855 cash is still the same on the latest online illustrations.

What other changes to the plan could allow a higher lump sum? Maybe they’re trying to reduce their commitment to future expenditure, and are offering a cash amount in exchange for no annual increases, but surely that should be made clear?

My thoughts are that the original limit of £11,855 could relate to GMP (my husband’s employment was 1978 to 1991), and I’m not aware of any recent legislation changes which might allow a higher lump sum now.

Has anyone any thoughts on any of the above?

Obviously we have to wait for the new illustration. If it confirms the new TFLS of £83k, we take it, and they later realise that they’ve made a mistake, can they ask for the money back? 

Thank you.

As you say, the commutation rate is about the same at around 15:1.

This isn't a pension increase exchange (PIE) exercise, or they'd have to say so - and as the commutation rate hasn't changed significantly, that's unlikely to be a factor in any case.

It sounds as if there has either been a rule change to allow members to take the maximum amount of tax free cash permitted by HMRC, or a policy change by the trustees allowing something similar.

Your husband needs to ask the 'consultant' to submit the relevant query on his behalf and then wait for an answer.

Pat38493

Lump sum of 11855 seems incredibly low for a pension that size.  I would have been more suspecting that the first number was completely wrong than the revised one, except that you are saying these kind of numbers were also available online for a long time.  

From what I’ve seen on these boards, numbers of £80K or more would be much more common for an annual pension of that size.

More to the point, the commutation rate your husband is offered of 14 is not very good - a lot of folk on here would caution against taking that unless you desperately need the cash right now, or unless it’s an edge case like it avoids you paying higher rate tax in retirement.

If the administrator starts with an m then I would definitely ask for verification and follow up questions - I have received documents from them in the past which I am not convinced were correct.  

It also does seem odd that there could be such a dramatic change just because they decided to change something - the scheme will have rules and they should be following the rules. Unless I’m wrong,  any misinterpretation or change of administrator would not normally result in changes that dramatic unless the first calculations were completely wrong.

Also to address one of your other points, unfortunately I think that if the pension administrator made a mistake and paid you too much, the answer is yes they can come back later and demand their money back, and I’ve seen several threads on this forum from people who had to pay it back years later  (which to me seems astonishing when people are making big life decisions based on those documents).

Of course even if that happens, depending on the amounts involved, if you just ignore them or stall them for as many years as possible, they might decide it’s cheaper to abandon the issue than to take you through the courts to try to get the money back.

xylophone

Anyway, my husband received his pensions options pack, which said he could take the full annual pension of £18,243 pa and no TFLS, or a maximum TFLS of £11,855 and a reduced pension of £17,436 pa. (Or anything in between.)

That seems a very low maximum TFLS for a pension of over £18,000 a year

https://techzone.abrdn.com/public/pensions/Tech-guide-tax-free-cash#:~:text=The tax free cash must,(3 + 20/CF)

but

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

The general rules on the maximum amount of tax free cash available also applies to DB schemes, although sometime the scheme rules will provide more restricted levels of tax free cash.

However, there are some special circumstances where an individual's tax free cash rights can be higher or lower than 25%. These include:

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

• Where the fund includes GMP

With regard to the commutation factor, it is certainly not generous but a slight improvement on the Public Service schemes which offer 12:1. It is also within the range cited in the above articles.

Check the figures again with the Administrator - ask for sight of documentation concerning any change to scheme rules. 

squirrelpie

It seems somewhat strange to me to introduce such a significant change with no warning, indeed apparently after it has happened! I'd expect such a change to be introduced after months or years of notice?

hyubh

saver_ali said:
In the meantime, we went on the online illustrator and it is now showing a maximum TFLS of £83,675, with a reduced annual pension of £12,551.

That's making the maximum scheme lump sum aligned with the maximum under covering pensions tax law - viz., 25% of the capital value, which includes the lump sum itself: (12,551 x 20 [i.e. the LTA multiple] + 83,675) x 0.25 = 83,675 [or thereabouts]. It's perfectly possible scheme rules have changed to allow more options - the largest public sector schemes did so right back in 2006, when the general max 25% thing first came into being. However you'd want to be sure of course.

The plan provides access to a consultant with whom we can discuss the various options. We have spoken to him twice, and he seems knowledgeable but he’s in a different part of the company, and doesn’t know any details of the scheme. He can only submit queries on our behalf. He doesn’t know how the maximum lump sum is calculated, and why it was restricted to quite a low amount in the original options pack. His initial thought was that the recent letter won’t affect us, and we shouldn’t have been sent it.

Dearie me, you're being far too nice. What's the point of this internal 'consultant' if he doesn't know for sure either way on something so basic...!

It can’t be a change in commutation rate because the calculation of £17,436pa with £11,855 cash is still the same on the latest online illustrations.

Which would be grist to the mill of thinking the trustees have indeed belatedly aligned scheme rule with post-A Day covering legislation on the matter.

What other changes to the plan could allow a higher lump sum?

A DB scheme can change its rules retrospectively if there's no detriment to the member. And simply giving more options falls into that.

Maybe they’re trying to reduce their commitment to future expenditure, and are offering a cash amount in exchange for no annual increases, but surely that should be made clear?

For sure, from the POV of the funding position of the scheme, paying off liabilities is a good thing. However, simply allowing more commutation - using the existing commutation rate - up the statutory maximum is a very 'soft' way of doing that. The public sector schemes I alluded to before did so only with an explicitly 'poor' commutation rate, from the member's point of view.

saver_ali

xylophone said:

That seems a very low maximum TFLS for a pension of over £18,000 a year

https://techzone.abrdn.com/public/pensions/Tech-guide-tax-free-cash#:~:text=The tax free cash must,(3 + 20/CF)

Thanks for the links. I did the calculation using the formula and lo and behold it came out at £83,673!

saver_ali

@Pat38493 you guessed correctly about the administrators! I hope you sorted out your pensions with them in the end.

We will have to wait and see what they come back with, but all the replies here so far reckon that the original maximum lump sum is too small, so I feel more confident in questioning it. I just hope we can get the right information in the next few months.

We definitely have to give a lot of thought as to how much to take as a lump sum, if offered the larger amount. I’ve been doing loads of spreadsheets over the last couple of days! We have no idea yet if there is any affect on the widows pension amount (there wasn’t with the lower lump sum) and there is no clear statement about future annual increases. Higher rate tax could become an issue as our pensions are heavily biased towards my husband. And even a couple of % less towards the LTA may help - his total pensions are under it at the moment, but until the legislation is passed I won’t believe it’s being scrapped!

Thanks for your comments. 😀

Marcon

saver_ali said:

@Pat38493 you guessed correctly about the administrators! I hope you sorted out your pensions with them in the end.

We will have to wait and see what they come back with, but all the replies here so far reckon that the original maximum lump sum is too small, so I feel more confident in questioning it. I just hope we can get the right information in the next few months.

No - that wasn't what my reply said. The original maximum lump sum wasn't 'too low' if that was in line with the scheme rules and/or policy of the trustees (assuming they have a discretion over permitted maximum amount to be commuted).

saver_ali said:

We have no idea yet if there is any affect on the widows pension amount (there wasn’t with the lower lump sum) and there is no clear statement about future annual increases. 

There won't by any impact on the spouse's pension; it is only the member's own pension which can be commuted.

squirrelpie said:

It seems somewhat strange to me to introduce such a significant change with no warning, indeed apparently after it has happened! I'd expect such a change to be introduced after months or years of notice?

If you did that, members would be dithering around for ages waiting for the change to be introduced and you'd get a huge spike in queries/complaints, especially if the scheme had no late retirement option. It's not a change in overall value of benefits; just a change in 'shape' in terms of how they can be accessed. Think too of the issues which could arise if the commutation rate worsened in the intervening period...

xylophone

We have no idea yet if there is any affect on the widows pension amount (there wasn’t with the lower lump sum) and there is no clear statement about future annual increases.

Your husband should request a copy of the updated  Scheme Guide.

Your questions re commutation and widow's benefit and pension increases in payment should be covered.

Example here

https://pensions.gov.scot/nhs/bereavement/death-benefits

Surviving widow: 50% of your pension before commutation or any reduction for early payment. (Commutation is giving up an amount of pension payable in retirement in exchange for a lump sum.)

With regard to increases on pensions in payment, you have mentioned that your husband's pension includes a GMP.

https://techzone.abrdn.com/public/pensions/Tech-guide-guaranteed-min-pen may be of interest but your husband should consult the Scheme Guide.

Has your husband obtained a state pension forecast?

https://www.gov.uk/check-state-pension

Albermarle

squirrelpie said:

It seems somewhat strange to me to introduce such a significant change with no warning, indeed apparently after it has happened! I'd expect such a change to be introduced after months or years of notice?

Remember the administrator is Mercer.........

OP - You should also consider just taking the full pension as the commutation rate is poor with both lump sums.
Do you know the term of the pension, particularly with regard to annual/inflation increases?