Transfer value confusion

SpareAdime

I have a small DC pot with GMP underpin from an old employer. (£140k)
Their pre-retirement pack left many questions, some of which they still can't explain.
 
First, they quote a DC transfer value of £46k "which is not subject to the GMP underpin and can be transferred separately." 

Then they outline the following options - in rough figures:
1. Take £3k/annum GMP and transfer the residual £80k uncrystallised fund elsewhere
2. Take GMP + £35k PCLS and use the residual crystallised £44k to buy an annuity elsewhere
3. Take GMP + £20k PCLS and transfer the residual £60k uncrystallised fund elsewhere

As they seem already to be withholding £60k from the total pot to fund the GMP, surely the whole of any residual fund is not subject to the underpin?  I must be missing something here!  Where on earth does the £46k transfer figure come from?

Many thanks.

xylophone

Do not you (or the administrator) have a copy of the Scheme Guide/Rules which should set out the benefits offered and payable?

I think that this may have been a Contracted Out Mixed Benefit  Scheme , that is to say, a DC  pension that contracted out of additional state pension on a salary related basis.

If you were a member of this scheme pre 6 April 1997, among other benefits, it had to  provide  a pension at least as great as you would have accrued had you remained contracted in. This is the GMP. 

It is payable at age 60 for a woman and age 65 for a man.

With regard to the GMP, what has the administrator had to say  about how it will increase in payment (bearing in mind that a scheme does not have to provide any increase in payment on pre 88 GMP and only up to 3% CPI on post 88 GMP)?

Can you clarify, are you being advised that there are in effect two parts to your entitlement

(a) a DC pot of £46,000 which you may transfer to a pension scheme of your choice (stakeholder/SIPP/personal pension) or used to buy an annuity

(b) a pot valued at £140,000 which is subject to the underpin and from which you must take the GMP, ( the cost of providing which has been calculated by the actuary as £60,000)?

On a separate note, (assuming that you are under SPA) have you obtained a state pension forecast?

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

What is shown as estimate to 5/4/23?

SpareAdime

Many thanks for your response and your interest.  This was a contracted out DB scheme that I joined in mid 1990 and which was changed to DC in 1997 when my large US employer was acquired by a larger one.  I left at the end of 1999 when my GMP, I'm now told, was approx. £700. and was "increased by 6.25%/annum up to my 65th birthday" a few years ago - when the total fund was about £170k. 

I paid AVCs throughout my employment but I am sure this is included in the total fund figure of £140k now quoted. Getting a detailed breakdown of the figures from the HR company that manages the scheme seems very difficult but here's what I think:

The £35K PCSL in option 2 is the usual 25% of the whole fund, but the £20k figure in option 3 is (20 x £3k x 25%) plus £5k - which must be 25% of that portion of my AVCs which, under HMRC rules, can produce a PCLS without the fund remainder being immediately crystallised.

Finally, if the scheme says: "You will get £3k GMP plus £80k residual funds to transfer elsewhere" (option 1), there surely cannot be an underpin of those residual funds as they will no longer hold them. Does that mean I can transfer them without IFA hassle.  I would like to move them to a drawdown arrangement that I already have some funds in and let the capital grow - after the bashing it has taken.

That still makes me wonder what the £46K DC "transfer" value actually refers to!

Many thanks.  I hope these ramblings are understandable!

xylophone

When you joined the company in 1990,  you joined the  Contracted Out  Salary Related Defined Benefit Pension  Scheme.


The pension would have been structured in such a way that you accrued a Guaranteed Minimum Pension (all post 88) and an

excess over GMP.


You made additional voluntary contributions to this scheme.


In 1997, the GMP system came to an end -  from then on, contracted out DB schemes had to pass what was called the

"reference scheme test" and members built up what were called Section 9 (2B) rights.


It appears, however, that the DB scheme you originally joined was closed to future accrual in 1997 - one would have expected

 that all members then became deferred members of that scheme and members of the new  DC scheme.


If this had been the case, one would have expected that within the deferred pension, the GMP would revalue by whatever

method was chosen by the Trustees (Fixed Rate or Full Rate, in your case Fixed Rate - see here if interested)

https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/

and the balance by at least  the statutory percentage or under scheme rules (which could be more generous).


Incidentally, if a  member retired more than seven weeks later than their 60th birthday (women) / 65th birthday (men), their

accrued GMP  had to be increased by at least 1/7% for each complete week thereafter.


At retirement age, members would then be offered a  pension from the deferred DB scheme which at GMP age would be split into
its component parts (GMP/excess) - the scheme would be required to pay increases on post 88 GMP of up to 3% - with regard to the excess, this would be covered by scheme  rules but it should be noted that there was no obligation on schemes to pay any increase on pre 97 pensions in payment.

The AVCs would likely have formed a separate  DC type fund but it is possible that scheme rules permitted this to be used to buy

 additional  scheme pension at retirement or perhaps an annuity in addition to scheme pension.


The new DC pension would be available at retirement age under the rules then applicable to DC pensions.


Therefore one would have expected that when you left the employer, you would have been provided with a statement of deferred benefits

in respect of the DB Scheme, a statement of the value of the AVCs and a statement of value of the DC Scheme.



When you left employment, were you given any form of statement which showed your entitlement to pension benefits?

If so, what did it say?


Are you sure that the £46,000  to which the Administrator refers does not represent the AVC fund?


If so, are you also entitled to choose in addition to that £46,000  ( and after taking the £3000 per annum GMP) 


either

(A) a transfer of £80,000  (uncrystallised) to a personal pension of some type

or

(B)  a tax free lump sum of £35000 and  £44,000 which MUST be used to purchase an annuity

or

(C) a tax free lump sum of £20,000 and  a transfer of £60,000 (uncrystallised)  to a personal pension of some type?





What have the Administrators said about increases on the GMP in payment?

SpareAdime

Wow, thanks again xylophone for the comprehensive response.  You gave me plenty to think about - and research!

To cover the points you raised: When the DB scheme was converted to DC, older members could retain their existing rights and, officially, so could younger ones - provided they "left the company". Existing DB rights were "valued" and formed your DC opening balance. 

Up to 2012, different classes of contribution were detailed annually, and the value of your main and AVC investments were listed separately, so I had a printout of my fund value soon after leaving in 1999 and annually thereafter, though I had no idea about the GMP. In 2012 the company was acquired by an even bigger US concern and pension admin was contracted to a notorious UK outsourcer.  Subsequently, only your total fund value is reported and I am certain that my £140k figure includes both elements.  This has dropped substantially since 2020.

In response to your very welcome analysis above, I revisited the pre-pension pack and responses to queries I have received. (I appreciate that sentence makes me seem like I'm becoming a pensions obsessive - which could be correct!)

In 2020 the total fund was £173k and the scheme quoted a "money purchase benefits transfer value" of £87824
Option 3 quoted a GMP of £2400pa plus a restricted PCLS of £16k and a residual uncrystallised fund of £87824
They also, unrequested, sent documents to effect a full transfer out of the scheme with a quoted CETV of £87824
These figures surely can't all be true?
The fund is now £140k and option 3 quotes GMP £3k, PCLS £20k and uncrystallised residual fund - £60000
The residual crystallised fund after GMP and a £35k PCLS (option 2) is £44.5k 
The DC transfer value is now said to be £46k. I think this is just an error, so my question remains, can I speedily and simply transfer the residual uncrystallised fund elsewhere - leaving the GMP with them - or must I seek advice?

Their "pre annuity" lifestyle fund has been falling rapidly, so my holding is now all in cash.

All the best,

xylophone

In 2020 the total fund was £173k and the scheme quoted a "money purchase benefits transfer value" of £87824
Option 3 quoted a GMP of £2400pa plus a restricted PCLS of £16k and a residual uncrystallised fund of £87824
They also, unrequested, sent documents to effect a full transfer out of the scheme with a quoted CETV of £87824
These figures surely can't all be true?
The fund is now £140k and option 3 quotes GMP £3k, PCLS £20k and uncrystallised residual fund - £60000
The residual crystallised fund after GMP and a £35k PCLS (option 2) is £44.5k 
The DC transfer value is now said to be £46k. I think this is just an error, so my question remains, can I speedily and simply transfer the residual uncrystallised fund elsewhere - leaving the GMP with them - or must I seek advice?

Highlighted in bold - this just doesn't seem to make sense.

The fact that the value could decrease over four years does make sense - there is was clearly a high DC element within the pension  so a strong connection with equity (and in particular bond values which  fluctuated wildly in this period).

If we say then that there is now a total value of £140,000 and forget the £46,000 which seems to be a red herring, we could say  that you have a scheme which includes a "safeguarded benefit" valued at over £30,000  and cash over and above what is required to secure the "safeguarded benefit"?

See

https://www.gov.uk/government/publications/pension-benefits-with-a-guarantee-and-the-advice-requirement

As far as I can see, (but I stress that I am no expert)  if the GMP is covered and payable (presumably monthly through the current administrator),  then advice in respect of a transfer of the remainder (which is not safeguarded) to a SIPP would not be required.

You can check this with the Administrator.

With regard to the options offered, is it definitely the case that if you chose option 2, you would be required to purchase an annuity?

And have you confirmed the indexing in payment on your GMP which is all post 88?

Incidentally, presumably you claimed your SP around three years ago.

Were you ever a member of any other contracted out scheme?

If not. what was the COPE shown on your state pension forecast (assuming you obtained one)?

SpareAdime

Many thanks for your considered response - as before.

I am already in receipt of both SP and a small public sector pension.

I agree with you that the £46k figure is inexplicable without a more complete breakdown - and getting answers to the actual questions asked isn't a strong suit of the administrator.  As you saw from the above, they don't do numbers very well either. (Another example: my total pot value was exactly the same - to the penny - in both their 2013 and 2014 member's updates. How strange!)

Meanwhile, I think my plan will be to take their option 3 to take a restricted PCLS and move the residual balance to a flexible drawdown scheme elsewhere. (Anywhere!).  My reading of the rules - thank you for the link - is that I shouldn't need advice to do that.

They are offering me a reduced PCLS of £20k, in round terms, based on my GMP x 20 x 0.25 provided the funding comes from my residual pot and not from the GMP funding itself. However, this would amount to £15k.  What I'm not sure of is where the other £5k might come from.  If only the GMP is going into payment, then isn't all of the balance uncrystallised and therefore not eligible for PCLS, whatever the source (AVC or main fund)?  I wouldn't wish to fall foul of any HMRC rules.

Grateful as ever!

xylophone

They are offering me a reduced PCLS of £20k, in round terms, based on my GMP x 20 x 0.25 

Are you sure of this?

It seems just to be a straight 25% of (£140,000 - £60,000)?

If this is the case,  what is the tax position on the £60,000 transferred out?

With regard to the £35,000 option,  £35,000 is exactly 25% of £140,000 (value of pot before allowing for GMP).

Had you looked into the annuity option?

SpareAdime

I probably didn't explain this very well.  What I was saying is that the "reduced PCLS" of £20k was more than I could account for as just 25% of the GMP fund, and I can't explain where the extra £5k is coming from if I am not immediately taking benefits from a greater sum than the GMP £60k.  Those figures are a clearly stated option - allowing me to transfer £80k to another scheme or buy an annuity on the open market.  They don't do annuities themselves.

Their own figures to explain the full PCLS used the formula (GMP x 20) + 80,000 = £140000.  140000 x 25% = £35k
They don't explain how the £20,000 "reduced PCLS" was arrived at. I assume GMP x 20 is part of it but I don't know what would justify the higher total.  

I am very grateful for the effort you have put in to help me with this.  

FIREDreamer

SpareAdime said:

I probably didn't explain this very well.  What I was saying is that the "reduced PCLS" of £20k was more than I could account for as just 25% of the GMP fund, and I can't explain where the extra £5k is coming from if I am not immediately taking benefits from a greater sum than the GMP £60k.  Those figures are a clearly stated option - allowing me to transfer £80k to another scheme or buy an annuity on the open market.  They don't do annuities themselves.

Their own figures to explain the full PCLS used the formula (GMP x 20) + 80,000 = £140000.  140000 x 25% = £35k
They don't explain how the £20,000 "reduced PCLS" was arrived at. I assume GMP x 20 is part of it but I don't know what would justify the higher total.  

I am very grateful for the effort you have put in to help me with this.  

It’s probably 25% of the £80,000 non-GMP.

xylophone

The pot holds £140,000 in cash.

Option 1 

GMP (which is the equivalent of an annuity index linked to maximum 3% CPI). This "costs" £60,000.

£80,000 (uncrystallised) transfer out to a personal pension.

If you opted to crystallise the whole, £20,000 would be tax free PCLS with the balance  taxable as income when drawn down.




Option 2

A tax free PCLS of £35,000 (25% of £140,000), the GMP costing £60,000, compulsory  open market option annuity (taxable) with the

balance (should be £45,000)?


Option 3

GMP costing £60,000, PCLS of £20,000,  uncrystallised £60,000 to personal pension.

If the £60,000 is uncrystallised, then presumably you could take a £15,000 PCLS from the personal pension, with £45,000 taxed as

income when drawn down?

That is to say, option 3 would give the same amount tax free as option 2 but without the obligation to buy an annuity?