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Small DB Pension cash offer

MartynC27
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Small DB Pension cash offer

#454803

Postby MartynC27 » November 1st, 2021, 12:46 pm

Moderator Message:
moved to Pensions - Practical as requested by OP (chas49)

My wife is 60 years & 3 months old and has accumulated several pensions of various sizes. Five of them are Defined Contribution (DC) pensions ranging in current value from £50,000 to £200. None are in payment. She also has two small Defined Benefit pensions (DB) to which she stopped making contributions over 30 years ago and are currently deferred.

The trustees of one the DB Superannuation Schemes has just written to her to say they intend to make an offer to exchange her Deferred Benefits for a one-off cash lump sum.
Her current accrued deferred benefits in this DB scheme are approximately :-
Pension: £896 pa and a Lump Sum: £1791 (increased according to CPI capped at 5% per year)

My question is –
Is this approach from the DB scheme trustees offering a cash lump sum quite normal for people with small a deferred pension and is it generally a poor option ?

Would a deferred pensioner normally be offered a larger sum by asking the DB Scheme for a 'Transfer Sum' quote with a view to transferring the deferred Benefits into a new SIPP or a DC pension ?

Alternatively she could just take a the pension (Lump sum + Pension) when it becomes available at 65 from her two DB Superannuation schemes ?

Would it be better to transfer her five DC pensions and two DB deferred pensions into a SIPP or into her largest DC Pension Scheme or another scheme such as PensionBee ?

My wife has a full National insurance record for a full state pension in six years time. She is currently doing part-time self-employed admin work earning about £9000 pa. She is no longer contributing to any pension scheme. She plans to carry on working part-time until State pension age.

Any comments would be appreciated.

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Re: Small DB Pension cash offer

#454847

Postby TUK020 » November 1st, 2021, 3:01 pm

MartynC27 wrote: [quote snipped for brevity]

Probably better posted on the Pensions board. Suggest you report your post to a mod, and request for it to be shifted

Moderator Message:
moved to Pensions - Practical as requested by OP (chas49)

MartynC27
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Re: Small DB Pension cash offer

#454923

Postby MartynC27 » November 1st, 2021, 7:11 pm

Does anyone know if you would need to get financial advice in order to transfer a small DB pension into a SIPP or a DC pension in order to consolidate ?

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Re: Small DB Pension cash offer

#454929

Postby genou » November 1st, 2021, 7:20 pm

MartynC27 wrote:Does anyone know if you would need to get financial advice in order to transfer a small DB pension into a SIPP or a DC pension in order to consolidate ?

If the transfer value is under 30k, then no advice is needed.

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Re: Small DB Pension cash offer

#454940

Postby Alaric » November 1st, 2021, 7:35 pm

MartynC27 wrote:My question is –
Is this approach from the DB scheme trustees offering a cash lump sum quite normal for people with small a deferred pension and is it generally a poor option ?

Would a deferred pensioner normally be offered a larger sum by asking the DB Scheme for a 'Transfer Sum' quote with a view to transferring the deferred Benefits into a new SIPP or a DC pension ?


If they have any sense, not always a given, the amount paid to leave the scheme will be the same in both cases.

it's not uncommon for a cash offer to be made to remove from the scheme a liability to pay future lifetime payments of a relatively small amount. If the scheme DB Trustees are trying to run the scheme down, it also makes sense from that viewpoint.

Have they quoted an amount? Be aware that 75% of it will be potentially taxable at a marginal rate if taken as personal cash.

MartynC27
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Re: Small DB Pension cash offer

#454980

Postby MartynC27 » November 1st, 2021, 9:11 pm

Alaric wrote:
Have they quoted an amount? Be aware that 75% of it will be potentially taxable at a marginal rate if taken as personal cash.


She has not yet received the quote. As I know she will be very tempted by a cash offer I was trying to find out the implications and options were before the letter from the trustees arrived so I could advise her !

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Re: Small DB Pension cash offer

#455142

Postby parallellines » November 2nd, 2021, 1:28 pm

The permitted upper limit for such cash out offers is normally scheme benefits worth less than £10K, which the DB scheme benefits clearly exceed. There is a higher limit of £30K, but this only applies if the individuals benefits across all registered pension schemes fall within the £30K, and which clearly isn't met here either. So I don't see how the offer can be delivered.

My guess is the Trustees aren't aware what other pensions members have. So they have just written to all members with scheme benefits worth less than £30K, and the existence of the "all schemes" restriction will only be explained in the formal offer.

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Re: Small DB Pension cash offer

#455161

Postby Avantegarde » November 2nd, 2021, 3:49 pm

Are you sure it is the trustees making the offer, and not the employer? It has been a ruse for more than a decade for some employers to offer some scheme members money to leave, in order to reduce the funding costs of the scheme and thus reduce future liabilities for the employer. If the offer is good for the employer it is probably not good for the would-be pensioner, unless you have a clear and pressing need for the cash right now.

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Re: Small DB Pension cash offer

#455164

Postby Adamski » November 2nd, 2021, 3:57 pm

The value of a DB scheme offered typically 20 to 33 times annual pension plus tax free lump sum. can take it if you've got used for it, even if most is taxable at 20% but personal choice.

Example:

So let's say offer £896 x 20 = 17920 + 1791 = £19711.

They'll give 25% tax free as a lump sum, and the balance take off 20% tax.

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Re: Small DB Pension cash offer

#455169

Postby Dod101 » November 2nd, 2021, 4:11 pm

parallellines wrote:The permitted upper limit for such cash out offers is normally scheme benefits worth less than £10K, which the DB scheme benefits clearly exceed. There is a higher limit of £30K, but this only applies if the individuals benefits across all registered pension schemes fall within the £30K, and which clearly isn't met here either. So I don't see how the offer can be delivered.

My guess is the Trustees aren't aware what other pensions members have. So they have just written to all members with scheme benefits worth less than £30K, and the existence of the "all schemes" restriction will only be explained in the formal offer.


I am out of touch with this sort of thing nowadays but my daughter thinks I know and asks me for advice which I cannot give, so I am interested.

What is meant by the above comments? Do you mean that if it is over these limits from all sources the individual needs to get advice? It cannot be that the Trustees cannot make an offer of more than these numbers and yet that is what this post reads like.

Dod

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Re: Small DB Pension cash offer

#455171

Postby Dod101 » November 2nd, 2021, 4:15 pm

Avantegarde wrote:Are you sure it is the trustees making the offer, and not the employer? It has been a ruse for more than a decade for some employers to offer some scheme members money to leave, in order to reduce the funding costs of the scheme and thus reduce future liabilities for the employer. If the offer is good for the employer it is probably not good for the would-be pensioner, unless you have a clear and pressing need for the cash right now.


Are you sure that is the case? Pensions scheme assets are held by Trustees and the employer simply contributes to ensure, in the case of DB schemes that there are sufficient assets to meet the future liabilities. It is true that if the whole scheme was would down the employer would have no further liability but I am not confident that they have the ability to act independently of the trustees which is what you are implying.

Dod

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Re: Small DB Pension cash offer

#455185

Postby parallellines » November 2nd, 2021, 5:07 pm

Dod101 wrote:
What is meant by the above comments? Do you mean that if it is over these limits from all sources the individual needs to get advice? It cannot be that the Trustees cannot make an offer of more than these numbers and yet that is what this post reads like.

Dod


No, I mean the offer cannot be delivered at all.

But the OP's wife hasn't had the offer yet, just a warm up letter.

I expect that the offer (when it comes) will require the member to provide details of their other pension benefits as a condition of acceptance, and in this case, it will lead to withdrawal of the offer.

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Re: Small DB Pension cash offer

#455189

Postby MartynC27 » November 2nd, 2021, 5:30 pm

MartynC27 wrote:
Alaric wrote:
Have they quoted an amount? Be aware that 75% of it will be potentially taxable at a marginal rate if taken as personal cash.


She has not yet received the quote. As I know she will be very tempted by a cash offer I was trying to find out the implications and options were before the letter from the trustees arrived so I could advise her !


The DB Scheme is a "University Superannuation Scheme". The initial letter dated 23 Oct 21 was from a 'Senior Pensions Administrator' who stated they were writing to my wife on behalf of the 'Trustee'. The letter said the 'Trustee' will write in mid November with an 'option' to exchange the pension benefits for a 'one off' lump sum.

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Re: Small DB Pension cash offer

#455194

Postby mc2fool » November 2nd, 2021, 5:38 pm

parallellines wrote:The permitted upper limit for such cash out offers is normally scheme benefits worth less than £10K, which the DB scheme benefits clearly exceed. There is a higher limit of £30K, but this only applies if the individuals benefits across all registered pension schemes fall within the £30K, and which clearly isn't met here either. So I don't see how the offer can be delivered.

My guess is the Trustees aren't aware what other pensions members have. So they have just written to all members with scheme benefits worth less than £30K, and the existence of the "all schemes" restriction will only be explained in the formal offer.

It's not clear to me what the point of the small pot & trivial commutation rules is nowadays, given that since the pension freedoms one can transfer any DB pension of up to £30K into a SIPP without advice and then cash the whole SIPP in anyway, should one want. What am I missing?

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Re: Small DB Pension cash offer

#455218

Postby ursaminortaur » November 2nd, 2021, 8:26 pm

mc2fool wrote:
parallellines wrote:The permitted upper limit for such cash out offers is normally scheme benefits worth less than £10K, which the DB scheme benefits clearly exceed. There is a higher limit of £30K, but this only applies if the individuals benefits across all registered pension schemes fall within the £30K, and which clearly isn't met here either. So I don't see how the offer can be delivered.

My guess is the Trustees aren't aware what other pensions members have. So they have just written to all members with scheme benefits worth less than £30K, and the existence of the "all schemes" restriction will only be explained in the formal offer.

It's not clear to me what the point of the small pot & trivial commutation rules is nowadays, given that since the pension freedoms one can transfer any DB pension of up to £30K into a SIPP without advice and then cash the whole SIPP in anyway, should one want. What am I missing?


There are two potential advantages to using the small pots rules.

1) The small pots are not tested against the LTA and hence taking them does not use up any remaining LTA.

2) Taking small pots from a DC pot does NOT trigger the MPAA.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/small-pots-and-triv-qna/

A. Small pots do not use, or require the customer to have any available, lifetime allowance (LTA). So, they can be used to avoid LTA excess charges where someone has used all their LTA but has a stranded pot worth up to £10,000. An UFPLS payment is subject to the client having sufficient available LTA before age 75 and at least some remaining LTA on or after age 75.

Small pots do not trigger the money purchase annual allowance (MPAA). An UFPLS payment of any amount does trigger the MPAA.



The triviality rules are slightly different in that they now only apply to DB schemes and you need to have some LTA allowance left before you can take it.

https://adviser.royallondon.com/technical-central/frequently-asked-questions/triviality-and-small-pots/

A: Under a defined benefit scheme it's still possible for benefits to be taken on the grounds of triviality, but the following must apply:

The scheme rules allow it.
No previous trivial lump sum paid more than 12 months ago.
All of the benefits under the scheme have to be taken at the same time.
The total benefits value of the member's pension savings is not more than £30,000.
The member has some lifetime allowance available.
The member has reached at least age 55 or a lower age if the member meets the ill-health requirement or if the member has a protected pension age.
After the payment the member has no rights left in the scheme.
25% of lump sum will be tax-free, the balance will be taxed at the member's marginal rate.
.
.
.
Under a money purchase scheme triviality is no longer an option but benefits can be taken as an uncrystallised funds pension lump sum (UFPLS)

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Re: Small DB Pension cash offer

#456787

Postby Avantegarde » November 9th, 2021, 11:46 am

Dod101 wrote:
Avantegarde wrote:Are you sure it is the trustees making the offer, and not the employer? It has been a ruse for more than a decade for some employers to offer some scheme members money to leave, in order to reduce the funding costs of the scheme and thus reduce future liabilities for the employer. If the offer is good for the employer it is probably not good for the would-be pensioner, unless you have a clear and pressing need for the cash right now.


Are you sure that is the case? Pensions scheme assets are held by Trustees and the employer simply contributes to ensure, in the case of DB schemes that there are sufficient assets to meet the future liabilities. It is true that if the whole scheme was would down the employer would have no further liability but I am not confident that they have the ability to act independently of the trustees which is what you are implying.

Dod


I am sure. There have been many cases in which employers have by-passed the trustees entirely, and with this aim in mind. In this case, judging from another post, it does seem that this is a trustee initiative, maybe to tidy up lots of small pension pot entitlements that are expensive to administer.

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Re: Small DB Pension cash offer

#457104

Postby MartynC27 » November 10th, 2021, 4:42 pm

As Avantegarde says above it does seem that this is a trustee initiative in order to tidy up small pension pot entitlements.

I am concerned however that any 'Cash Offer' is could be smaller than the 'full value' of my wife's deferred pension as they know a beneficiary may be tempted by a quick settlement now of several thousand pounds in cash in exchange for a small pension and lump sum at 65.

Is the Cash Equivalent Transfer Value (CETV) likely to be different and I assume it would be a good idea to ask the trustees for a CETV quotation to compare ?

As stated above my wife does have several small deferred pensions (DB and DC) she could consider amalgamating.

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Re: Small DB Pension cash offer

#458123

Postby Loup321 » November 15th, 2021, 11:31 am

MartynC27 wrote:
The DB Scheme is a "University Superannuation Scheme". The initial letter dated 23 Oct 21 was from a 'Senior Pensions Administrator' who stated they were writing to my wife on behalf of the 'Trustee'. The letter said the 'Trustee' will write in mid November with an 'option' to exchange the pension benefits for a 'one off' lump sum.


The USS is currently struggling a lot and very much underfunded. They are trying to get employers and employees to increase their contributions to what would probably be unsustainable levels. The employees think the employers should foot the bill, and there were strikes in late 2019 (University students that year had it terribly, with the USS strikes AND Covid-19) by University Lecturers.

This website https://commonslibrary.parliament.uk/research-briefings/cbp-8156/ seems to give an overview of the recent reviews.

The trustees might be trying very hard to get rid of future liabilities, to make the scheme look better on paper and the auditors happier. Whether to cut and run is down to the offer made to your wife. I would prefer to be out of this scheme rather than in.


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