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

xylophone

Was the pension itself calculated on a 1/80 accrual rate? That is to say, a member earned a pension of 1/80 of  pensionable final salary for each year of membership up to a certain number of years (say 45 for example)?

Albermarle

Bimbly said:

Pat38493 said:
Weirdly, the email was signed off by the "Mercer Events team"!

You may not get your pension quotation, but at least you'll get an invite to the Christmas party.

Although the invite will probably not arrive until February 

saver_ali

xylophone said:

Was the pension itself calculated on a 1/80 accrual rate? That is to say, a member earned a pension of 1/80 of  pensionable final salary for each year of membership up to a certain number of years (say 45 for example)?

I’ve found the current trust document on the website, and it seems to be 1/60th.

I’ve also found a couple of other paragraphs in the document that might be relevant.

Re commutation… “Such commutation shall, however, be restricted if necessary to ensure that the Member’s pension from state pension age is not less that his Guaranteed Minimum Pension. The amount of reduced pension in consideration of such commutation shall be determined by the Trustees having taken actuarial advice.”
I interpret this as the reason why, up till now, the maximum cash lump sum has been only £11.5k.

Then in a separate section….”The trustees may, where permitted by the 1993 Act and in accordance with the requirements of the Act, make arrangements for a GMP to be commuted in exchange for a lump sum, suspended or forfeited.”
Maybe the changes in the plan that they have mentioned in their latest letter are related to this.

Anyway, I’m just going to wait and see what we hear next. Thanks for all your comments. 👍

saver_ali

Just an update on this, as it’s now done and dusted….. It appears that the massively increased amount of tax free lump sum offered when my husband started taking his DB pension was correct. Mercer did seem more efficient than our previous dealings with them, although goodness knows why they had been quoting the very small tax free amount for many years. 

Anyway, thanks to those who commented.

Askfirst

Interesting thread.

One question I would have is whether the fixed 7.5%pa GMP revaluation keeps going if someone takes their pension a few years before the normal retirement age. As I understand it, the final GMP is only calculated when you reach 65 and if you retire earlier, the pension company pays an approximation of where the GMP had got to. (WTW FWIW :-))

saver_ali

Askfirst said:

Interesting thread.

One question I would have is whether the fixed 7.5%pa GMP revaluation keeps going if someone takes their pension a few years before the normal retirement age. As I understand it, the final GMP is only calculated when you reach 65 and if you retire earlier, the pension company pays an approximation of where the GMP had got to. (WTW FWIW :-))

Sorry, only just seen this. I don’t know the answer to your question, but I would think probably not. My husband was 65 when he took the pension, so it wasn’t relevant to him. 

FIREDreamer

Askfirst said:

Interesting thread.

One question I would have is whether the fixed 7.5%pa GMP revaluation keeps going if someone takes their pension a few years before the normal retirement age. As I understand it, the final GMP is only calculated when you reach 65 and if you retire earlier, the pension company pays an approximation of where the GMP had got to. (WTW FWIW :-))

I can answer this from experience. This is what happened to me but I have rounded the figures for simplicity.

I had a db pension that I wanted to take early in 2019.

Quoted ER Pension = £3,500 (A)
Revalued GMP at 65 = £4,000 based on 7.5% pa revaluation to age 65. (B)

Because (A) < (B) I was not permitted to take an ER Pension.

Move on to 2021 …

Quoted ER Pension = £4,100 (A)
Revalued GMP at 65 = £4,000 based on 7.5% pa revaluation to age 65. (B)

Because (A) > (B) I was able to take an ER Pension, which I did. The maximum pension I could commute for tax free cash was (A) - (B) = £100 for a PCLS of £2,000. The Revalued GMP could not be commuted for cash even though the GMP revalued to that point may have been under £3,000. I did not take the PCLS and took a pension of £4,100 pa.

Since I retired the full £4,100 has received CPI increases in payment subject to a max of 5% each year - a big real drop last year in real terms. It is about £4,600 now.

When I get to 65, if my pension has grown to say £5,500 then what happens is £1,500 is non GMP so keeps getting capped CPI increases. The remaining £4,000 is the revalued GMP which becomes GMP at age 65 so gets 0% increases on pre April 1988 GMP and CPI with a 3% cap on the post April 1988 GMP. Most of the GMP is post April 1988 thankfully.

So from 65 I will get £5,500 split as …

£1,500 non GMP increasing at CPI capped at 5% (might be more or less depending on inflation up to 65)
£100 pre 1988 GMP which does not increase in payment
£3,900 post 1988 GMP increasing at CPI capped at 3%

Hope this helps.

Askfirst

Hi @FIREDreamer, is it the case that although you have taken the pension, that part of it that is deferred GMP continues to be revalued at 7.5% on paper until you reach 65 and then an adjustment made to your overall pension? Or did the fixed rate revaluation of GMP cease once you started receiving the pension?

hyubh

Askfirst said:

Hi @FIREDreamer, is it the case that although you have taken the pension, that part of it that is deferred GMP continues to be revalued at 7.5% on paper until you reach 65 and then an adjustment made to your overall pension? Or did the fixed rate revaluation of GMP cease once you started receiving the pension?

The GMP qua GMP revalues until GMP Age, whether that's what is actually paid before GPD is entirely down to the scheme. The 'typical' treatment for a date of retirement (DOR) < GPD case is to take the revalued GMP and revalued excess at DOR, then increase the whole pension as excess until GPD. At that point the 'real' GMP/excess split is made.

FIREDreamer

Askfirst said:

Hi @FIREDreamer, is it the case that although you have taken the pension, that part of it that is deferred GMP continues to be revalued at 7.5% on paper until you reach 65 and then an adjustment made to your overall pension? Or did the fixed rate revaluation of GMP cease once you started receiving the pension?

The GMP revalued at fixed rate in the background until age 65 when it replaces part of the non GMP as shown in my figures above. The pension amount at 65 is unchanged - at 65 some of it is relabelled as GMP and gets lower increases in payment from that point.