Defined Benefit  

DB scheme members unable to cash out small pots

DB scheme members unable to cash out small pots

Members of defined benefit schemes who haven’t equalised their contracted out benefits have been stopped from cashing out their small pension pots, FTAdviser can reveal.

Normally savers over the age of 55 are allowed to take the whole of their pension as cash, as long as the value doesn’t exceed £30,000 in total.

This option, known as trivial commutation, is also available for savers over the age of 55 where one of their pensions is worth less than £10,000, with the limit of cashing out three of these pots.

However, since the High Court determined in a ruling in October that scheme trustees must equalise benefits between women and men who have guaranteed minimum pensions, some members haven’t been allowed to take advantage of these rules.

Paul McGlone, president of the Society for Pension Professionals, said: “An example I heard about recently was a member planning to commute a small DB pension (total value less than £10,000) to pay for his daughter’s wedding. They now cannot do that."

He explained the problem was that trivial commutations payments must completely extinguish the members’ benefits, "and without knowing what the equalised benefits are that can’t happen".

Many schemes are not yet in a position to equalise benefits as they are still waiting on another court case, tax advice from HM Revenue & Customs and guidance on how to carry out the equalisation.

Mr McGlone said: “In the meantime, most benefits can still be paid. Members can still be paid pensions, because they can be topped up later if necessary. Members can still take transfer values because they can be topped up later as well.

Vicky Mullins, senior consultant at XPS Pensions Group, said while these were small pensions they were still relevant for savers.

She said: “A member receiving £3 a month as a pension they built up, for example, could capitalise that and take it as a lump sum instead, making it more meaningful for them."

She added: “We think that there is a pressing need for schemes to get on with allowing equalisation for members options, so whilst there are a number of challenges to get through, such as the tax treatment, from a very human level, it’s really important members have access to the options that they should.

“We have a circumstance where the member wants to access the pension because their spouse has died, and they want to take that in a trivial payment because it is a small benefit monthly, but it's not insignificant as a lump sum.”

Ms Mullins said XPS was working with the schemes it administers to allow for equalisation in options such as pension transfers, and a lot of that work is carried over to trivial commutations. Some of the pension funds the firm works with are already allowing it for deferred members.

She explained that cashing out of small pension pots was a popular option for savers.