Changes to tax-free-cash from PPF: Update by John Reynolds

We’re in full flow with our AF7 Pension Transfers structured study plan now – working toward the CII AF7 exam on 8th October (I’ve just registered for the exam – and you should seriously be thinking about registering for your exam, before too much longer).

A key part of the exam (and thus our structured study course), is the PPF (Pension Protection Fund). It’s key for several reasons, not least the fact that under the new rules, a full comparative should be made between the occupational pension protection and any alternative arrangement (which, when comparing the PPF protection with an alternative arrangement, is most likely to be covered by the FSCS – but more on that in a later article).

FYI: APTA was 12 marks in the April 2019 exam and WILL be asked about in future exams.

In this blog, I’m going to discuss one specific aspect of PPF, which actually is changing in October 2019: commutation rates (for tax-free-cash lump sums) for members.

Individuals can choose to draw PPF compensation before normal pension age (NRD), but from age 55, like most other DB pension schemes, the payment levels are actuarially reduced to take account of the fact that compensation will be in payment for longer (these reductions are available on the PPF site here: https://ppf.co.uk/sites/default/files/file-2019-06/early-retirement-factors-2019.pdf

The same principle applies for commutation of the PPF compensation (whether paid at NRD or earlier), the PPF allows commutation of pension for a tax-free-lump sum (and thus reduced pension).

These commutation rates are being changed on 1 October 2019.

The full details of the new rates are here:
https://ppf.co.uk/sites/default/files/file-2019-06/commutation-factors-2019.pdf

And it shows that commutation rates have been amended upwards, for example, if you take a 65 year-old at NRD, the rates for commuting £100 of pre and post-97 pension has gone up (and you’ll notice the rates are higher the earlier you take the commutation – as opposed to the pension being lower the earlier you take it).

Any of that could come into your pension exam – or indeed, real life as a PTS.

Key exam point: The amount of tax-free-lump-sum that can be taken on retirement is broadly calculated as 25% of the total value of a member’s crystallised benefits – and you’ll recognise the formulae from your study notes:

PCLS = 20x Pre-comm-pension ÷ [3+ 20/CF] Assuming a commutation factor of 10 and a pre-commutation pension of £10,000 a year, the PCLS would be £40,000.
£10,000 x 20 / [3+ 20/10] = 200,000/5 = £40,000
The residual pension available is calculated as follows:
Residual pension = full pension – [PCLS/ commutation factor] So using the example above
£10,000 – [£40,000/ 10] = £6,000 a year
When you are in the exam, a good double-check on a commutation question is to do a reverse calculation:
Based on the example above, the value of the benefits crystallised is:
[Residual pension x 20] + PCLS amount
[£6,000 x 20] + £40,000 = £160,000
PCLS available = £160,000 x 25% = £40,000
That confirms that you are on the right track.

Commutation factors are not fixed and will vary from scheme to scheme and often change depending on the member’s age…..and you’ll see that from the PPF tables.

The higher the commutation factor used, the greater the cash that can be generated (which is normally the younger you commute). And the PPF have increased the commutation factors for those commuting after 1 October 2019.

Here is one last point on commutation and APTA and PPF – all of which are core elements of the CII AF7 exam:

I was recently looking at a DB pension for a GE Pension scheme member. They were 65 (at NRD) and the commutation factor for LPI benefits (max 2.5%) was 16.437.

The equivalent in PPF is 24.5

How would you compare these benefits for the purposes of APTA – and why do you think they differ so much in favour of the PPF member rather than under the scheme membership rules?

For everyone enrolled on our AF7 Structured Study Plan Expert Pensions will be actively encouraging you to get involved. It’s all about using your brain to engage in the things you need to know, the more you get involved the more you will remember. Memory is a valuable tool: there’s verbal memory, visual memory, audio memory, and muscle memory. The more your brain engages with the information, the more you will remember. That’s why we cover the facts with quizzes, video tutorials, blogs, exam style questions, workshops and podcasts. Powerful proven study plans that work:

https://expertpensions.co.uk/services/