Cash balance question

[mark.cup]

It is disgusting that we have 3 pensions and heading for a 4th all from the same company and they aren't obliged to put it all together in a way the masses can understand!

Let alone missing out often massive sums in peoples AVC's on quotes they expect you to make life changing decisions based on

[Postee2]

Isn't the simplest (and hopefully fairly accurate way) to work all this out is to first work out the 20*multiple of the annual pension amount/s and then add onto that the cash in the cash scheme pension and any AVC,s, which then gives you more or less the total cash value of the pensions, and then 25% of that total is the tax free lump sum, and then 5% of the remaining amount is roughly what your annual pension amount would be ?

For example
Annual pension/s (from the defined benefit schemes) £3000
20*£3000 = £60,000
Value of (most recent scheme) Cash Pension £30,000
Amount of AVC's (if you have any) £10,000.

So the total of that scenario would be £100,000.
25% of that is £25,000 so that would be tax free
Then the remaining £75,000 is what your annual pension would be calculated from.
5% of £75,000 is £3750.

So in this example If the total amount is £100,000, there would be lump sum of £25,000 and a rough annual amount of £3750 or £312 a month.

I believe the 5% figure is used because pensions are designed on average to last people 20 years (perhaps this is the average life expectancy after retirement), and 5 multiplied by 20 is 100. So 5% of the total pension pot is representative of each year you are expected to live for. That's my take on it anyway.
Some people live for longer of course while others don't so the total amount in the overall giant pension pot should be enough for everyone.
Any thoughts on this ? Or corrections ?

[RobertT]

Isn't the simplest (and hopefully fairly accurate way) to work all this out is to first work out the 20*multiple of the annual pension amount/s and then add onto that the cash in the cash scheme pension and any AVC,s, which then gives you more or less the total cash value of the pensions, and then 25% of that total is the tax free lump sum, and then 5% of the remaining amount is roughly what your annual pension amount would be ?

For example
Annual pension/s (from the defined benefit schemes) £3000
20*£3000 = £60,000
Value of (most recent scheme) Cash Pension £30,000
Amount of AVC's (if you have any) £10,000.

So the total of that scenario would be £100,000.
25% of that is £25,000 so that would be tax free
Then the remaining £75,000 is what your annual pension would be calculated from.
5% of £75,000 is £3750.

So in this example If the total amount is £100,000, there would be lump sum of £25,000 and a rough annual amount of £3750 or £312 a month.

I believe the 5% figure is used because pensions are designed on average to last people 20 years (perhaps this is the average life expectancy after retirement), and 5 multiplied by 20 is 100. So 5% of the total pension pot is representative of each year you are expected to live for. That's my take on it anyway.
Some people live for longer of course while others don't so the total amount in the overall giant pension pot should be enough for everyone.
Any thoughts on this ? Or corrections ?

My thoughts are:

1. The Cash Balance is predominantly attached to Age65 benefits, so you can't use too much of it to fund your Age60 lump sum.

2. Therefore it's best to work your Age60 and Age65 pots separately.

3. Your example would mean a higher pension than you've accrued!

4. It's not possible to convert AVC's or Cash Balance into more RM pension!

The 20x multiple works if your Cash Balance and/or AVC's are equal to, or less than 25% of your pot value. Because you can then commute some pension to make up your lump sum if need be.

For example:
A pension of £4k = pot value of £80k + AVC's of £20k = total pot value of £100k
That would mean all AVC's can be taken as tax free cash, plus you'll also have the option of giving up around £250 in pension to make the lump sum up to 25%. Assuming a 1:20 ratio.

But it doesn't work if your AVC's and/or Cash Balance are over 25%, because you can't have a bigger pension than you've accrued.
Therefore the method in my post upthread, would be the better way of working things out.

For example:
A pension of £4k = pot value of £80k + AVC's of £60k = theoretical total pot value of £140k.
But if the pension is 75% of the pot, then the max tax free lump sum would be the other 25% or £26,666.
Therefore the remaining £33,334 of AVC's would be paid out as a UFPLS.
The only way you could get more pension is to transfer out and buy an annuity.

The 20x multiple is really just a way of working out your lump sum and doesn't really mean your pension is actually worth that much. Because as you say, everyone lives for a different length of time. Some will get more than their monies worth and some won't.

[Postee2]

Isn't the simplest (and hopefully fairly accurate way) to work all this out is to first work out the 20*multiple of the annual pension amount/s and then add onto that the cash in the cash scheme pension and any AVC,s, which then gives you more or less the total cash value of the pensions, and then 25% of that total is the tax free lump sum, and then 5% of the remaining amount is roughly what your annual pension amount would be ?

For example
Annual pension/s (from the defined benefit schemes) £3000
20*£3000 = £60,000
Value of (most recent scheme) Cash Pension £30,000
Amount of AVC's (if you have any) £10,000.

So the total of that scenario would be £100,000.
25% of that is £25,000 so that would be tax free
Then the remaining £75,000 is what your annual pension would be calculated from.
5% of £75,000 is £3750.

So in this example If the total amount is £100,000, there would be lump sum of £25,000 and a rough annual amount of £3750 or £312 a month.

I believe the 5% figure is used because pensions are designed on average to last people 20 years (perhaps this is the average life expectancy after retirement), and 5 multiplied by 20 is 100. So 5% of the total pension pot is representative of each year you are expected to live for. That's my take on it anyway.
Some people live for longer of course while others don't so the total amount in the overall giant pension pot should be enough for everyone.
Any thoughts on this ? Or corrections ?

My thoughts are:

1. The Cash Balance is predominantly attached to Age65 benefits, so you can't use too much of it to fund your Age60 lump sum.

2. Therefore it's best to work your Age60 and Age65 pots separately.

3. Your example would mean a higher pension than you've accrued!

4. It's not possible to convert AVC's or Cash Balance into more RM pension!

The 20x multiple works if your Cash Balance and/or AVC's are equal to, or less than 25% of your pot value. Because you can then commute some pension to make up your lump sum if need be.

For example:
A pension of £4k = pot value of £80k + AVC's of £20k = total pot value of £100k
That would mean all AVC's can be taken as tax free cash, plus you'll also have the option of giving up around £250 in pension to make the lump sum up to 25%. Assuming a 1:20 ratio.

But it doesn't work if your AVC's and/or Cash Balance are over 25%, because you can't have a bigger pension than you've accrued.
Therefore the method in my post upthread, would be the better way of working things out.

For example:
A pension of £4k = pot value of £80k + AVC's of £60k = theoretical total pot value of £140k.
But if the pension is 75% of the pot, then the max tax free lump sum would be the other 25% or £26,666.
Therefore the remaining £33,334 of AVC's would be paid out as a UFPLS.
The only way you could get more pension is to transfer out and buy an annuity.

The 20x multiple is really just a way of working out your lump sum and doesn't really mean your pension is actually worth that much. Because as you say, everyone lives for a different length of time. Some will get more than their monies worth and some won't.

And there was me thinking I'd finally got my head around this witchcraft.
So, in regards to the the UFPLS (I looked it up, Uncrystallised funds pension lump sum). . . Does that mean that if this Cash Balance Scheme drags on forever (and let's face it, it'appears to be doing so), people will be forced to pay tax on it if it ends up being more than 25% of their overall pension pot. I now can see and realise where I went wrong mainly in my illustration, and should have realised that as both the ABC:s and cash pot are basically defined contribution pensions, that they can not be taken forever as a royal mail pension. However my maths was assuming a draw down of them over 20 years tbh.

[RobertT]

And there was me thinking I'd finally got my head around this witchcraft.
So, in regards to the the UFPLS (I looked it up, Uncrystallised funds pension lump sum). . . Does that mean that if this Cash Balance Scheme drags on forever (and let's face it, it'appears to be doing so), people will be forced to pay tax on it if it ends up being more than 25% of their overall pension pot. I now can see and realise where I went wrong mainly in my illustration, and should have realised that as both the ABC:s and cash pot are basically defined contribution pensions, that they can not be taken forever as a royal mail pension. However my maths was assuming a draw down of them over 20 years tbh.

Many, if not all, are already paying tax on their Cash Balance. The longer it stays active, the more tax you'll pay on it.

It was only supposed to be a short term, transitional scheme!

AVC's are classed as DC schemes and the DBCBS is effectively one too, although how it grows is DB.

They're both designed to be used to fund the tax free cash when taking your main benefits. Particularly good for section C'ers, who don't get a lump sum as standard.

[Postee2]

And there was me thinking I'd finally got my head around this witchcraft.
So, in regards to the the UFPLS (I looked it up, Uncrystallised funds pension lump sum). . . Does that mean that if this Cash Balance Scheme drags on forever (and let's face it, it'appears to be doing so), people will be forced to pay tax on it if it ends up being more than 25% of their overall pension pot. I now can see and realise where I went wrong mainly in my illustration, and should have realised that as both the ABC:s and cash pot are basically defined contribution pensions, that they can not be taken forever as a royal mail pension. However my maths was assuming a draw down of them over 20 years tbh.

Many, if not all, are already paying tax on their Cash Balance. The longer it stays active, the more tax you'll pay on it.

It was only supposed to be a short term, transitional scheme!

AVC's are classed as DC schemes and the DBCBS is effectively one too, although how it grows is DB.

They're both designed to be used to fund the tax free cash when taking your main benefits. Particularly good for section C'ers, who don't get a lump sum as standard.

So, if the cash balance turns out to be taxable (due to it representing possibly more than 25% of the overall pot), would there be a way of avoiding that ? By possibly transferring it out a drawing it down gradually ? Or will people have little choice but to take it as a lump sum regardless.
I'm failing to see why it's called defined benefit cash balance when it just seems to be a pot of money.

[rkss]

Do you need to add both pensions in the calculation ie RMPSPS plus RMPP as well both lump sums from each?

[RobertT]

And there was me thinking I'd finally got my head around this witchcraft.
So, in regards to the the UFPLS (I looked it up, Uncrystallised funds pension lump sum). . . Does that mean that if this Cash Balance Scheme drags on forever (and let's face it, it'appears to be doing so), people will be forced to pay tax on it if it ends up being more than 25% of their overall pension pot. I now can see and realise where I went wrong mainly in my illustration, and should have realised that as both the ABC:s and cash pot are basically defined contribution pensions, that they can not be taken forever as a royal mail pension. However my maths was assuming a draw down of them over 20 years tbh.

Many, if not all, are already paying tax on their Cash Balance. The longer it stays active, the more tax you'll pay on it.

It was only supposed to be a short term, transitional scheme!

AVC's are classed as DC schemes and the DBCBS is effectively one too, although how it grows is DB.

They're both designed to be used to fund the tax free cash when taking your main benefits. Particularly good for section C'ers, who don't get a lump sum as standard.

So, if the cash balance turns out to be taxable (due to it representing possibly more than 25% of the overall pot), would there be a way of avoiding that ? By possibly transferring it out a drawing it down gradually ? Or will people have little choice but to take it as a lump sum regardless.
I'm failing to see why it's called defined benefit cash balance when it just seems to be a pot of money.

It only needs to be more than 25% of your RMPP Age65 pot!

It is possible to transfer the Cash Balance out to a personal pension. If you did that, the first 25% would be tax free and the remainder could then be drawn down. Whether you pay tax on that would depend on your other income.

It is just a pot of money, but what goes in is guaranteed, as are the annual bonuses once they're added, it can't go down! Whereas the value of a DC scheme can fluctuate with it's investments and you could end up with less than goes in.

[RobertT]

Do you need to add both pensions in the calculation ie RMPSPS plus RMPP as well both lump sums from each?

Yes. Both RMSPS and RMPP provide both Age60 and Age65 pensions. Work out Age60 and Age65 separately.

If you're in section B, multiply each pension by 20, then add on the standard lump sum.

The DBCBS is only attached to RMPP Age65 benefits, so can only be used to fund the tax free cash for pension accrued for the 6 years from 2012-2018. Although a small amount can be used with Age60, as the RMPP are responsible for some inflationary increases of RMSPS benefits.

[rkss]

I have already taken my nra60. Benefit but there is a pension showing for the nra65 from rmps and also larger one with rmpp for Nra65.

[freespeech]

Isn't the simplest (and hopefully fairly accurate way) to work all this out is to first work out the 20*multiple of the annual pension amount/s and then add onto that the cash in the cash scheme pension and any AVC,s, which then gives you more or less the total cash value of the pensions, and then 25% of that total is the tax free lump sum, and then 5% of the remaining amount is roughly what your annual pension amount would be ?

For example
Annual pension/s (from the defined benefit schemes) £3000
20*£3000 = £60,000
Value of (most recent scheme) Cash Pension £30,000
Amount of AVC's (if you have any) £10,000.

So the total of that scenario would be £100,000.
25% of that is £25,000 so that would be tax free
Then the remaining £75,000 is what your annual pension would be calculated from.
5% of £75,000 is £3750.

So in this example If the total amount is £100,000, there would be lump sum of £25,000 and a rough annual amount of £3750 or £312 a month.

I believe the 5% figure is used because pensions are designed on average to last people 20 years (perhaps this is the average life expectancy after retirement), and 5 multiplied by 20 is 100. So 5% of the total pension pot is representative of each year you are expected to live for. That's my take on it anyway.
Some people live for longer of course while others don't so the total amount in the overall giant pension pot should be enough for everyone.
Any thoughts on this ? Or corrections ?

My thoughts are:

1. The Cash Balance is predominantly attached to Age65 benefits, so you can't use too much of it to fund your Age60 lump sum.

2. Therefore it's best to work your Age60 and Age65 pots separately.

3. Your example would mean a higher pension than you've accrued!

4. It's not possible to convert AVC's or Cash Balance into more RM pension!

The 20x multiple works if your Cash Balance and/or AVC's are equal to, or less than 25% of your pot value. Because you can then commute some pension to make up your lump sum if need be.

For example:
A pension of £4k = pot value of £80k + AVC's of £20k = total pot value of £100k
That would mean all AVC's can be taken as tax free cash, plus you'll also have the option of giving up around £250 in pension to make the lump sum up to 25%. Assuming a 1:20 ratio.

But it doesn't work if your AVC's and/or Cash Balance are over 25%, because you can't have a bigger pension than you've accrued.
Therefore the method in my post upthread, would be the better way of working things out.

For example:
A pension of £4k = pot value of £80k + AVC's of £60k = theoretical total pot value of £140k.
But if the pension is 75% of the pot, then the max tax free lump sum would be the other 25% or £26,666.
Therefore the remaining £33,334 of AVC's would be paid out as a UFPLS.
The only way you could get more pension is to transfer out and buy an annuity.

The 20x multiple is really just a way of working out your lump sum and doesn't really mean your pension is actually worth that much. Because as you say, everyone lives for a different length of time. Some will get more than their monies worth and some won't.

And there was me thinking I'd finally got my head around this witchcraft.
So, in regards to the the UFPLS (I looked it up, Uncrystallised funds pension lump sum). . . Does that mean that if this Cash Balance Scheme drags on forever (and let's face it, it'appears to be doing so), people will be forced to pay tax on it if it ends up being more than 25% of their overall pension pot. I now can see and realise where I went wrong mainly in my illustration, and should have realised that as both the ABC:s and cash pot are basically defined contribution pensions, that they can not be taken forever as a royal mail pension. However my maths was assuming a draw down of them over 20 years tbh.

As we have had the DBCBS for over 5 years now and the combined contributions (RM and employee) are almost 20% this suggests that all of us now have a fund at least equal to a years pay. As the vasy majority of the CB scheme is NRA65 it is likely that this sum will be more than the lump sum payable for NRA65 so some tax is likely. This is compounded further if you have AVC's. To a degree the UFPLS approach helps as the first 25% of that "extra" is also tax free so we will have 25% of the "pot" tax free and then 25% of the remainder (if uncrystalllised) is also tax free.

[rkss]

Just to clarify, ones payments to cash balance scheme and employers contributions - do they stop when you reach age 65?
If so there would be no advantage in my colleague not taking their Nra65? As I see it.

[RobertT]

I have already taken my nra60. Benefit but there is a pension showing for the nra65 from rmps and also larger one with rmpp for Nra65.

The RMSPS pay out two years of Age65(2010-2012). The RMPP pay out the other six years(2012-2018).
The Cash Balance is attached to the RMPP.

Just to clarify, ones payments to cash balance scheme and employers contributions - do they stop when you reach age 65?
If so there would be no advantage in my colleague not taking their Nra65? As I see it.

I think they do stop at 65.

But as previously mentioned, he can still benefit via the RMDCP and CDC(in the future).

[Thailand1]

Hi Robert

With reference to your post below;

For example:
A pension of £4k = pot value of £80k + AVC's of £60k = theoretical total pot value of £140k.
But if the pension is 75% of the pot, then the max tax free lump sum would be the other 25% or £26,666.
Therefore the remaining £33,334 of AVC's would be paid out as a UFPLS.

Does the remaining £33,334 paid out as UFPLS have a 25% pension tax free relief or is it all taxed?

Thanks in advance.

[RobertT]

Hi Robert

With reference to your post below;

For example:
A pension of £4k = pot value of £80k + AVC's of £60k = theoretical total pot value of £140k.
But if the pension is 75% of the pot, then the max tax free lump sum would be the other 25% or £26,666.
Therefore the remaining £33,334 of AVC's would be paid out as a UFPLS.

Does the remaining £33,334 paid out as UFPLS have a 25% pension tax free relief or is it all taxed?

Thanks in advance.

Yes, the first 25% of a UFPLS is tax free.