Why did my pension suddenly have to come out of the protected part?

Why did my pension suddenly have to come out of the protected part?

My question is one of honesty. I just took a pension from an available benefit plan.

It’s only a small pension, but I was hit with what I thought looks like “sharp practice,” so I thought I’d ask what you thought.

My total annual pension was £4,110, broken down into £1,810 before 1997 and £2,300 after 1997. I have chosen to take the lump sum of £19,779.

Sharp practice? My retirement lump sum came from an inflation-protected bit — should I complain

I was surprised to see the total pension reduction applied to the amount after 97, reducing it to £1,156 per annum.

Therefore, any increase in pension in the future would apply to a much smaller amount. I would have thought that the reduction would have been applied both before and after.

This plan never pays discretionary increases on pre-97 pensions and appears to limit post-97 increases to 3 percent.

I know these corporate arrangements always hide behind the catch all of ‘at the discretion of the trustees’ but this seems a bit sharp to me. What do you think? Do I have reason to complain?


Steve Webb replies: Many salary-related or defined benefit pension plans allow you to take part of your pension entitlements all at once.

While you could choose to take your full pension entitlements as a regular monthly pension, you could instead opt for a lump sum in combination with a lower regular pension, which is what you have done.

The question then arises of how much they should deduct from your pension in exchange for paying a lump sum.

This is done through a process known as ‘commutation’.

They take the lump sum – in your case just under £20,000 – and convert that into a deduction from your regular pension – in your case around £1,144.

This is a ratio of about 17 to 1 (sometimes referred to as a “commitment factor”).

One way to think about this would be that if you were likely to get a pension for 17 years, it would be roughly equal (aside from things like taxation and inflation) between taking a regular pension and taking an equal amount as a lump sum.

However, as you mentioned, the question is not only how much they deduct from your total pension, but also what part of your pension they reduce.

Simply put, from 1997 most occupational pension plans were required by law to provide some protection against inflation once retirement came into effect, but before 1997 the rules were less generous.

I covered this in more detail in a recent column: Why aren’t company pension plans forced to give people “triple-locked” annual raises?

I fully understand your point that you would have preferred the pension plan to reduce your ‘pre-97’ pension in exchange for the lump sum payment instead of your ‘post-97’ pension, because it is the post-97 pension that the most generous inflation protection.

However, there are a few reasons why things are not so simple.

The first is that the scheme can take this difference into account when calculating the surrender factors.

Mums fell a huge £1 billion short in the latest state pension scandal

HMRC will be launching a letter writing campaign this autumn to find people averaging £5,000 each in arrears.

About 143,000 parents, mainly between 60 and 70 years old, who applied for child benefit between 1978 and 2000 are said to have been affected.

Another 44,000 people who were underpaid would have died, meaning their beneficiaries would be eligible for payouts.

Steve explains the steps to take if you think you’ve missed something in today’s column, and there’s more information about missing “Home Responsibilities Protection” and state pension here.

In other words, in exchange for the same lump sum, it would have deducted a larger amount if it applied the deduction to your pre-97 service.

The scheme would save less money to reduce this part of your pension. So it’s not necessarily the case that you’re out of pocket because of what the scheme has done.

The second thing to be aware of is that there are rules around pre-97 pensions, including an obligation for the plan to provide you with a guaranteed minimum pension.

It is possible that applying the deduction in full to the pre-1997 pension would have brought this figure below the legal minimum, which would not be allowed. So then they would have had to do a mix of deductions from pre- and post-1997 retirement installments, which is starting to get pretty messy.

Ultimately, many of these things are governed by the rules of the scheme, and they can vary from scheme to scheme.

If your schedule rules say that those who receive lump sums see a Post 97 service deduction first, then I’m afraid there’s not much you can do about that decision. However, as explained above, you don’t necessarily lose as a result of that rule.

Ask Steve Webb a retirement question

Former Pensions Secretary Steve Webb is This Is Money’s Agony Uncle.

He’s ready to answer your questions whether you’re still saving, retiring or juggling your finances in retirement.

Steve left the Department of Work and Pensions following the May 2015 election. He is now a partner at actuary and consultancy firm Lane Clark & ​​Peacock.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.

Steve will do his best to answer your message in a future column, but he won’t be able to reply to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime telephone number with your message – this will be kept confidential and will not be used for marketing purposes.

If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free retirement assistance to the public. It can be found here and the number is 0800 011 3797.

Steve get a lot of questions about AOW forecasts and COPE – the Contracted Out Pension Equivalent. If you write to Steve on this subject, here he answers a typical reader question about COPE and the state pension.