DB Pension: Multiple for cash lump sum vs multiple for transfer value

[nicodemusboffin]

Not sure if this should be here or DAK - apologies if misplaced.

I have a defined benefit pension which will give me 26x annual pension amount if I transfer out (subject to passing the perfectly sensible hurdles.) However, if I choose to take a percentage of the pension as a cash lump sum I'll only get 11x the amount of annual pension foregone. It also seems I can take this option without any hurdles at all.

Why the disparity? Is this disparity common with DB schemes? And if it is, why isn't it a scandal?

Thanks in advance.

[ursaminortaur]

Not sure if this should be here or DAK - apologies if misplaced.

I have a defined benefit pension which will give me 26x annual pension amount if I transfer out (subject to passing the perfectly sensible hurdles.) However, if I choose to take a percentage of the pension as a cash lump sum I'll only get 11x the amount of annual pension foregone. It also seems I can take this option without any hurdles at all.

Why the disparity? Is this disparity common with DB schemes? And if it is, why isn't it a scandal?

Thanks in advance.

With the first option you may well find the"perfectly sensible hurdles" rather more difficult to overcome than you expect. Although the company may be willing to pay a reasonable level of transfer value to get rid of your claim on the pension fund (26 times is reasonable but not particularly generous compared with some transfer rates in recent years - though of course interest rates have risen recently which would have decreased transfer values) the government has put in place a lot of hurdles and companies dealing with this are worried about future mis-selling claims. If the transfer value is more than £30,000 then you have to get advice from an authorised advisor which can be expensive. The advisor may well then cover their a** and advise against the transfer. Legally even if the advisor advises against the transfer you can insist on it going ahead however nowadays fewer and fewer companies are willing to accept transfers from such insistent clients.

As to commutation values, commuting part of a DB pension into tax free lump sums, these can be scandalously low. Public sector pensions generally have a multiplier of 12 but some private companies are just as bad - such low values are generally written into the pension rules which may have been more appropriate decades ago when interest rates were much higher. Although this is scandalous it is unlikely to change as there is little sympathy from the general public for people they generally see as having gold plated pensions and hence no pressure to improve commutation multipliers.

[Dod101]

I should imagine that pension trustees prefer an 'all or nothing' approach anyway. On the whole, DB schemes as we all know are being run down and if a member wants to cash in they would like him to cash in the entire liability. Otherwise they still need to maintain the same records and so on and there is really no benefit to the trustees so they have no interest in a partial commutation. I would think that they want to do nothing to encourage such applications.

Dod

[nicodemusboffin]

Many thanks for the replies ursamintauor and Dod.

Personally the question is actually academic, as I intend to take the full pension amount.

However, if I were a pensioner who had accepted an 11x commutation rate only to find out later I could have received more than double the amount I'd be furious - and possibly considering legal action. (Note I'd only know about the transfer amount if I'd gone to the trouble of asking - I suspect some may not even know it's an option.)

Incidentally, unlike Dod, I suspect the trustees would be delighted if I accepted a mere 11x commutation rate for 25% of my pot, and indeed the default option is set to the 25% lump sum choice. Again, the difference between the ease which one can choose to take the far worse commutation option compared to the difficulties needed to be overcome to take the transfer value option is striking.

[Dod101]

Many thanks for the replies ursamintauor and Dod.

Personally the question is actually academic, as I intend to take the full pension amount.

However, if I were a pensioner who had accepted an 11x commutation rate only to find out later I could have received more than double the amount I'd be furious - and possibly considering legal action. (Note I'd only know about the transfer amount if I'd gone to the trouble of asking - I suspect some may not even know it's an option.)

Incidentally, unlike Dod, I suspect the trustees would be delighted if I accepted a mere 11x commutation rate for 25% of my pot, and indeed the default option is set to the 25% lump sum choice. Again, the difference between the ease which one can choose to take the far worse commutation option compared to the difficulties needed to be overcome to take the transfer value option is striking.

Well the trustees would probably be reasonably happy that you were prepared to accept their terms but it is only compensating them I imagine.

Dod

[elkay]

For comparison, when I retired in 2021 the transfer value for different parts of my pension varied from 31x to 38x. (33 for the period similar to yours). The commutation rate varied from 21x to 23x.

My pensions advisor has said that the TV would be significant lower now, but I don't know how the commutation values might be affected.

Elkay

[SebsCat]

I must admit that I take a somewhat different view on this subject. The default option for most DB schemes is to take a cash lump sum and the rest as your pension for life. So the way I look at it is that the trustees are offering to take that lump sum and give you an index-linked guaranteed annuity for life at 9.1%. An absolute bargain (roughly double the market rate) and you should indeed snap their hand off!