v stupid question re small pension

ceegee

I have read through some threads which I feel may have answered my v stupid question, but would appreciate confirmation from any experts around.

I contributed to an occupational pension for about 4 years. I was only working part-time then and my latest indication is that my contributions would provide an annual income of approximately £100 to £120. I realise that this is a small benefit, but every little helps, as they say.

This morning I received a letter from the Pensions Administrator regarding the changes coming next year, with regard to small pensions. One sentence in the letter is ambiguous, it reads:

"In order for us to confirm whether you may surrender your whole benefit for a cash sum now, we require proof of your full name and address" blah, blah, blah.

The word "now" is actually in bold type. I was very excited at first and thought that the "now" applied to the surrender of the pot. But on re-reading it through more pessimistic eyes, I feel that the "now" may apply to their confirmation of whether or not I can have it as a lump sum at retirement age.

I know that I have wittered on here, I apologise! I also know that it may well appear to be a stupid question, but as weatherwax said in one of his/her posts, my talents lie in other areas!

So my question is......what does the "now" refer to?

ceegee

Having referred to the pension scheme booklet, it looks as if the following might be the case. If anyone would not mind quickly reading this and replying with their thoughts, then that would be great.

At present, the scheme allows for retirement at age 50, for reasons other than ill health. The changes due in April do, I believe, increase the minimum retirement age to 55. I will be 50 in February. My pension is very small (about £100 per annum). Would I be right in assuming that because:

a) I will be 50 in February and

b) my pension is very small

that I can look forward to a small lump sum around my birthday? Also, presumably, I could also be getting back my very small AVC cash fund?

Any thoughts on this would be appreciated!

Thank you.

george_2

i dont think so. You can normally only draw a pension at 55 with consent of the trustees, but if they agree you will also find that they will "reduce" the pension as it will be payable for a longer than expected term.

Your scheme will probably have a lump sum option, but again check whether this is commutable (reduced pension in exchange for lump sum)

EdInvestor

Hi ceegee,

You might be eligible for "trivial commutation" of this pension under the old rules, but I'm not sure what the age limits are.

Under the new rules starting next April, there's a minimum age of 60.

The fact that the rules are changing might explain why they've contacted you

Robert_Sterling_3

Sometimes I think it is best to ask the person who sent you the letter for clarification rather than asking a third party to try and guess what it meant.

ceegee

Thank you all for your input. I think I shall give them a ring. The reason I asked this question is that the letter came on Saturday and I wanted to find out as much as possible as soon as possible! I don't know if anyone will be interested, but I will post the information that I am able to glean.


Hi, Mr Sterling :cool:

ceegee

Well, I have rung them. It is correct that, as I will be 50 before A-Day and my pension is "trivial", I can take it as a lump sum when my birthday comes. When they have received my paperwork back (I posted it yesterday) they will send me a quotation and I can chose whether or not to take the money!

Now, what shall I spend it all on? Should I pay off the mortgage or take a world cruise? :rolleyes:

Robert_Sterling_3

Hi Ceegee.

MrChips

Ceegee, it sounds like you have sorted this out now, but I can give you a bit of extra background if you like.

The introduction of the pension protection fund means that schemes now have to pay a levy for each member of the scheme. A lot of schemes therefore are looking to trim down the number of members where possible. Before April 2006, anyone with a scheme pension of less than £260 a year can opt to sacrifice this for an "equivalent" cash lump sum - this is known as trivial commutation. From April 2006 the rule is changing so that you can only trivially commute you pension if your total pension from ALL scheme sources is less than £x (I forget exactly what this is but is about £750 I think).

Schemes are scouring their records either for current pensioners on less than £260 or deferred members (like you) who could retire (possibly early with a reduction) on less than £260.

The current earliest you can retire (except in ill-health) is 50 but this is being phased up to 55 between April 2006 and April 2010. Given you turn 50 in February 2006, and your annual pension at that time is under £260, you can quite legitimately convert it to a lump sum - don't expect too much though!

I am not quite sure how to interpret your figures, is the ~£100 per year what you would get (after early retirement reduction) at 50? Or would the reduction be applied to that figure?

For the former, you might expect a lump sum of between £2000 and £3000 (depending on the post-retirement benefits available in the scheme and the generosity of the commutation factors set by the actuary). For the latter, it would be about half that.

ceegee

I'm not expecting a lot!!!! I have approximately £150 AVCs in a deposit account and am expecting that to be a fair chunk of what I get!

The last figures given to me for the pension were:

at age 60 minimum p/a £65.09 maximum p/a £89.97

at age 65 minimum p/a £75.46 maximum p/a £114.96


a minimum increase of 3% per annum will be applied to the whole of the deferred pension

If it was me working it out (and I am no actuary!) I would say, well, she's getting it at age 50, so let's reduce it £40 p/a and assume she'll live till she's 75 (dangerous assumption...I might get run over and killed tomorrow!). So that's 15 years (75 minus 60, being when I would have taken it) @ £40 p/a equals £600 less tax which comes to £468. Add on the AVCs (minus tax) at £117 and my total would be £585. Blimey, that would be a fortune to me!

I look forward to hearing from them to see how very, very wrong I undoubtedly am.

MrChips

Well I am an actuary ;-)

A bit of arithmatic with your figures indicates a pension at exit of about £39.35 at the age of about 47. By law this must revalue so that when you retire, it increases by the minimum of the increase in the retail prices index over the period or 5% per annum. However it seems your Scheme is a little more generous than this and guarantees at least a 3% per annum increase (i.e. your pension will increase with rpi, but with a minimum of 3%pa and a maximum of 5% pa). This is where I get your pension at exit from, i.e. so 13 years of minimum 3% increases takes it to £65.09 and 13 years of maximum 5% increases takes it to £89.97.

Given the rate of inflation in the last 3 years, your pension increase will be at the lower end of this, i.e. 3% pa for 3 years which is 39.35 x 1.03^3 = £43.

Now because you are taking the money earlier than the normal retirement age of the scheme, this should be reduced (because you will be paid for longer, and because the scheme can't earn interest on the money if you have it).

A very approx early retirement reduction is about 4% for every year early but I don't know the NRA of your scheme, so will go for a very approx 50% reduction for early payment. This means your pension falls to about £22.

You sell yourself short with your prediction of a death at 75! Current life expectancy for a female aged 50 is mid 80s! But taking into account interest on the money in the scheme, the scheme will need less than £35 per £1 of pension for you. More like say £25.

This means you should get a lump sum of approx 25 x 22 = £550.

I have made some heroic assumptions to get this figure so there could be an error of 10% in either direction approximately. You will also get your AVCs on top of this as you point out. And then there is tax at 20%.

Let me know what you eventually get, would be interesting to see how wrong I am ;-)