Pension Guides & Guidance

Comment or Reports from GMB on news and events affecting your Pension. Pensions, your pay when you retire!

Everything You Ever Wanted To Know About Pensions But Were Afraid To Ask!

May 2020

Pensions Regulator Warning RE: Risks of Transfering out of a Defined Benefit Pension.

Financial Markets are in turmoil at the monent due to the global coronavirus pandemic

As a response to this The Pensions Regulator, Financial Conduct Authority and Money and Pensions Service have taken the unprecedented step of producing a letter warning pension scheme members about the dangers of transferring their defined benefit pension to a defined contribution arrangement.

The letter asks members to be very careful when considering transferring their  pension as stock markets have fallen and are likely to go down for some time

They add that should anyone be approached and offered a transfer service it is most likely a scam and individuals should be extremely vigilant. Also they are unusually explicit in stating

"transferring out of a DB pension scheme into a different type of pension arrangement is unlikely to be in your best long-term interests as you’ll be giving up a valuable level of predictability in your retirement income. You will also give up the protection that is offered by the Pension Protection Fund (PPF), in case your employer becomes insolvent*"

It is therefore really important that members get guidance or advice before making a decision.

Trustees have been asked to issue this letter to any members who ask to transfer their pension .

*The PPF has a duty to protect people with an eligible DB pension when an employer becomes insolvent and will compensate you in those circumstances

Please remember that you can’t change your mind once you’ve transferred out of a DB pension.

You can read the regulator's full statement on their website.



January 2020

What is the McCloud Judgement and why is everyone talking about it?

In 2015 new pension schemes were introduced in the Public Sector and everyone was transferred into them unless they were less than 10 years from retirement (i.e. older people were protected from entering the new schemes). In December 2018 the Courts ruled that this protection was age discriminatory. This became known as the McCloud judgement.

The discrimination now needs to be removed and those who have suffered a detriment as a consequence must be remedied – and the remedies must be upwards.

The GMB is to start discussions with all relevant employers to develop proposals that will ensure that no GMB member will be any worse off as a consequence of the court’s ruling.

This will impact upon many GMB members in public sector pension schemes - especially Local Government, the Civil Service and the NHS where we have substantial numbers of members. It may also impact on those private sector schemes with similar provisions.

Identifying the remedy will not be straightforward because there are thousands of individuals who were transferred into the new schemes that are expected to be better off given the greater flexibilities and higher accrual rates in those schemes. Individual calculations may have to be made to determine each position.

Changes to legislation will be necessary to deliver the commitment to remove the discrimination from all public service pension schemes whilst also ensuring that members can keep the benefits that they have earned to date.

Any changes to the schemes will be subject to consultation to ensure that they are properly equality proofed before implementation. Further details on the proposed changes and the process for consultation will be advised to GMB members as usual.




December 2019

Some More Definitions - Commutation & Actuarial Valuation

Commutation: Many pension schemes, particularly the larger Defined Benefit schemes pay out a lump sum as well as a Pension upon retirement. This is being withdrawn by many schemes and being replaced by “commutation”. Commutation means you can buy a lump sum by giving up part of your pension (You commute part of your pension into a lump sum). For example, in the NHS and Local Government Schemes you can give up up to 25% of your pension in return for a lump sum. In both schemes the “commutation rate” is 12 – i.e. for each £1 of pension you give up you receive a £12 lump sum. For example:

Pension = £5,000p.a. Lump Sum = £0

After full commutation (giving up 25%, £1,250)

Pension = £3,750 p.a. Lump Sum = (1,250 x 12) £15,000

This adds flexibility and choice to the pension package and the schemes continue to monitor the appropriateness of the commutation rates.

Actuarial Valuations: The amount of money in a defined benefit pension scheme must be monitored and measured to ensure that there is always enough money coming into the fund (its assets) to pay out the pensions due (its liabilities). This is a very complicated task especially when longevity, interest rates, stock market returns, interest rates and other factors need to be taken into account.

Some funds are huge, with hundreds of billions of pounds of assets, hundreds of thousands of people paying into the fund and hundreds of thousands of pensioners. So the valuation of the fund is very important and a shortfall in the predicted amounts of money required may lead to a reduction in benefits or an increase in contributions, a surplus may lead to the opposite. The amounts in the funds are measured regularly (normally every 3 years). They are known as such because they are a valuation carried by an Actuary - like most things in pensions, its simple really.




December 2019

Some More Definitions - Commutation

Many pension schemes, particularly the larger Defined Benefit schemes, pay out a lump sum as well as a pension upon retirement. The lump sum is normally a multiple of your pension. For example, in the NHS the lump sum is 3x your pension. So if you received a pension of £5,000 p.a. you would receive a pension of £15,000. The lump sum is tax free.

However, this facility is being increasingly withdrawn by many schemes. Those schemes now offer “commutation” whereby you have to give up part of your pension in order to receive a lump sum. (You ‘commute’ part of your pension into a lump sum).

Tax rules allow you to give up as much as 25% of your pension in return for a lump sum. Currently in public sector schemes the “commutation rate” is 12 – i.e. for each £1 of pension you give up you receive a £12 lump sum.

In the example above someone who received a £5,000 p.a. pension would receive a £15,000 lump sum. Under this new system someone in receipt of a £5,000 p.a. pension would receive no lump sum. They would need to give up part of their pension to receive a lump sum.

If they gave up the full 25% (25% of £5,000 = £1,250) their pension would be reduced to (£5,000 - £1250 =) £3,750 p.a. and they would receive a lump sum of (1,250 x 12) £15,000.

Old System: Pension £5,000; Lump Sum £15,000.

New System: Either Pension £5,000; Lump Sum £15,000 or Pension £3,750; Lump Sum £15,000 - or anything in between*.

*One is not required to commute the whole 25%, one can commute as much or as little as one prefers.

This adds flexibility and choice to the pension package and the schemes continue to monitor the appropriateness of the commutation rates.




October 2019

Some Definitions - Defined Benefit, Defined Contribution, Accrual Rate, Annuity

Defined Benefits Pension Scheme: An employer-sponsored scheme where the eventual pension is based on your earnings (generally either your final salary or your career average), your length of employment and the scheme's rate of accrual.

Defined contribution pension (Often referred to as a money purchase scheme): A pension plan where monies are paid in and invested (generally in stocks and shares), the eventual retirement income is based on the amount of money paid in, the returns on the investments. There are several different types including company, personal, stakeholder, self-invested and group personal pension plans. The resulting pot is usually used to buy an annuity – an insurance contract that pays out regular income.

Accrual rate: This is the rate at which you build up pension benefits while a member of a defined benefit scheme. The rate is multiplied by your earnings to calculate how much money you will eventually be entitled to. It is typically expressed as a fraction, and the bigger the fraction the more pension benefit you will get. So a 1/60th rate would generate more benefits that a rate of 1/80th.

Annuity: This is an insurance contract that pays out a regular income, either for a set period of time or until you die. It is usually bought with the money from your pension fund. The income it will provide will depend on a number of factors including your age when you buy it, whether or not you're a smoker, and annuity rates (which are normally based on interest rates) at the time of purchase.




September 2019

What can I do with my Defined Contribution Pension Pot?

In the last bulletin we explained the difference between Defined Benefit (DB) and Defined Contribution (DC) Pensions. A DB scheme will give you a fixed income based on your salary (and sometimes a lump sum) whilst a DC scheme builds a pot of money for you to use to fund your retirement.

Generally speaking there are 6 ways you can use your defined contribution pension pot.

  1. Leave your whole pot untouched – you don’t have to take it upon reaching your chosen retirement age. You can leave your money where it is until you need it.
  2. Guaranteed Income (Annuity) You can use your pot to buy an insurance policy that guarantees you an income for the rest of your life – no matter how long you live.
  3. Adjustable Income – Your pot is invested to give you a regular income. You decide how much you want to take out and when and how long you want it to last.
  4. Take your whole pot in one go - You can cash in your entire pot – 25% is tax free, the rest is taxable.
  5. Take cash in chunks – you can take smaller sums of money from your pot until you run out. Your 25% tax-free amount isn’t paid in one lump sum – you get it over time.
  6. Mix your options - You can mix different options. (Usually, you would need a bigger pot to do this).

The GMB does not give individual financial advice to members in regard to any of the above. We simply point out the available options and advise members to seek their own advice.

We do however campaign strongly to improve pensions in the workplace and although GMB supports DB over DC schemes (as they provide greater security) where the employer does operate a DC scheme we campaign to ensure the employer pays in more than the employee and that funds are transparent and invested responsibly.



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