Pension Protection Fund Compensation

StevieFL14

Hi All,

An old company that I worked for for 10 years became insolvent in 2010. The company DB pension was taken over by the Pension Protection Fund. I was wondering if I should take my PPF compensation now at 55 while still working (PAYE job with DB pension ) as the tax free cash would come in handy at the moment. The quote I received for taking the compensation at 55 is a tax free lump sum of £12,328.34 and a monthly payment of £485 for life which should increase at 2.5% per year. At 60 my schemes normal retirement date the quote is a tax free lump sum of £12,620 and a yearly pension of £6740. It looks as though I will gain very little by leaving my compensation in the fund and not taking it now although not sure. I realise that I would need to pay tax on £485 per month as earnings. Are there any other pitfalls I should be aware of?     

JoeCrystal

£485 per month is taxable.

StevieFL14

Thanks Joe yes I realise I would have to pay tax at 40% on the £485 each month as earnings so should only probably see £290 of that as extra income after tax . Are there any  benefit's in leaving the compensation in the scheme and not taking it now? It seems that I would loose hardly anything only gain by taking payments 5 years early but wanted to make sure I have got my facts wright as I am new to this   .   

molerat

What are your intentions at 60 and will you be a 40% taxpayer then ?

StevieFL14

I will probably look at retirement then when my other DB pensions have matured a bit more .

LHW99

I don't know what happens when a DB pension goes through the PPF, but assuming it remains counted as a DB pension, could you use the additional money to add to your current work pension (AVC or added years) or to start a separate DC (Sipp)?

If it is still counted as DB, you won't trigger the MPAA I think, but you have to (I assume) know the pension input amount to work out how much headroom you have for extra contributions.

StevieFL14

Thank you I was going to use the tax free cash for some house repairs and the extra monthly income maybe look to top up my other pensions if possible. Can anyone see any beneficial reason to keep the compensation in the fund and not take it?

Linton

LHW99 said:

I don't know what happens when a DB pension goes through the PPF, but assuming it remains counted as a DB pension, could you use the additional money to add to your current work pension (AVC or added years) or to start a separate DC (Sipp)?

If it is still counted as DB, you won't trigger the MPAA I think, but you have to (I assume) know the pension input amount to work out how much headroom you have for extra contributions.

A. DB pension taken over by the PPF remains a DB pension. If it was not in payment at the time you only get 90% of the original pension. If in payment you get the full amount.

I believe that if it is not in payment some non financial benefits may not be carried over but cannot remember which.

hugheskevi

Linton said:

LHW99 said:

I don't know what happens when a DB pension goes through the PPF, but assuming it remains counted as a DB pension, could you use the additional money to add to your current work pension (AVC or added years) or to start a separate DC (Sipp)?

If it is still counted as DB, you won't trigger the MPAA I think, but you have to (I assume) know the pension input amount to work out how much headroom you have for extra contributions.

A. DB pension taken over by the PPF remains a DB pension. If it was not in payment at the time you only get 90% of the original pension. If in payment you get the full amount.

I believe that if it is not in payment some non financial benefits may not be carried over but cannot remember which.

It is whether an individual is above or below normal pension age that determines whether they get 90% or 100% compensation, not whether it is in payment or not.

Prior to the establishment of the PPF, when there was a priority order for schemes winding-up underfunded it was common for senior folks who knew what was about to happen to commence their pensions early shortly before the employer became insolvent. That meant they were very high in the priority order and got a full pension, perhaps losing some increases. Whereas lower paid staff who might even be older than them but who had not yet commenced their pension lost huge proportions of the pension due to being low in priority order (and lots of large pensions of the senior folks being protected at their expense).

Hence the PPF reason for using normal pension age and not whether pension is in payment or not.

OldScientist

StevieFL14 said:

Hi All,

An old company that I worked for for 10 years became insolvent in 2010. The company DB pension was taken over by the Pension Protection Fund. I was wondering if I should take my PPF compensation now at 55 while still working (PAYE job with DB pension ) as the tax free cash would come in handy at the moment. The quote I received for taking the compensation at 55 is a tax free lump sum of £12,328.34 and a monthly payment of £485 for life which should increase at 2.5% per year. At 60 my schemes normal retirement date the quote is a tax free lump sum of £12,620 and a yearly pension of £6740. It looks as though I will gain very little by leaving my compensation in the fund and not taking it now although not sure. I realise that I would need to pay tax on £485 per month as earnings. Are there any other pitfalls I should be aware of?     

Just to note that
1) PPF pensions increase by CPI capped at 2.5%, so by a maximum of 2.5% (not 2.5% each year). High inflation will lead to a reduction in income in real terms.
2) The increase between 55 and 60 is small because the fraction of people who die between those ages is small. I think the actual nominal amount at 60 will be increased by the capped CPI (i.e., deferred pensions have the annual increase applied).
3) Obviously, spending the tax free cash now will be money/income you will not have in retirement. Whether this is important depends on your other sources of retirement income.

Marcon

StevieFL14 said:

Hi All,

An old company that I worked for for 10 years became insolvent in 2010. The company DB pension was taken over by the Pension Protection Fund. I was wondering if I should take my PPF compensation now at 55 while still working (PAYE job with DB pension ) as the tax free cash would come in handy at the moment. The quote I received for taking the compensation at 55 is a tax free lump sum of £12,328.34 and a monthly payment of £485 for life which should increase at 2.5% per year. At 60 my schemes normal retirement date the quote is a tax free lump sum of £12,620 and a yearly pension of £6740. It looks as though I will gain very little by leaving my compensation in the fund and not taking it now although not sure. I realise that I would need to pay tax on £485 per month as earnings. Are there any other pitfalls I should be aware of?     

Probably helps to compare like for like:

At 60: £12,620 lump sum, yearly pension £6,740
At 55: £12,328 lump sum, yearly pension £5,820

So even allowing for 40% tax on your annual pension, you're going to be better off taking the pension now, especially as you have an immediate use for the tax free lump sum, assuming the above figures are accurate.

Linton said:

LHW99 said:

I don't know what happens when a DB pension goes through the PPF, but assuming it remains counted as a DB pension, could you use the additional money to add to your current work pension (AVC or added years) or to start a separate DC (Sipp)?

If it is still counted as DB, you won't trigger the MPAA I think, but you have to (I assume) know the pension input amount to work out how much headroom you have for extra contributions.

A. DB pension taken over by the PPF remains a DB pension. If it was not in payment at the time you only get 90% of the original pension. If in payment you get the full amount.

I believe that if it is not in payment some non financial benefits may not be carried over but cannot remember which.

The PPF quaintly terms what they pay out as 'compensation'. It doesn't trigger the Money Purchase Annual Allowance, because compensation from the PPF is only paid in respect of former DB schemes.

I am not sure what 'non-financial' benefits could be carried over, but I'm not aware of any that are.