View more on these topics

Should DB members be taking a tax-free lump sum?

Andy Zanelli Axa 2012

Axa Wealth is urging advisers to scrutinise tax-free lump sums due to concerns some defined-benefit scheme members are being offered less than half the value of the pension they are giving up.

Research from the Office for National Statistics, published in October last year, found most public sector DB schemes offered a commutation rate of between 12:1 and 14:1 during 2010. This means £5,000 of pension income would be converted into a lump sum of between £60,000 and £70,000.

In private sector schemes with a normal pension age of 65, male commutation rates of 14:1 or more were available in schemes representing 34 per cent of members in 2010, while female commutation rates of 14:1 or more were available in schemes representing 40 per cent of members.

Writing in this week’s Money Marketing, Axa Wealth head of retirement planning Andy Zanelli says a commutation rate of 25:1 would be needed to replace the pension income the investor is likely to be giving up.

He says: “I find it ironic that the FSA and others are taking a very keen interest in the whole area of transfers from a DB scheme but have no interest in looking at this.”

Evolve Financial Planning director Jason Witcombe says: “The rule of thumb is people should not take the lump sum unless there is a pressing lifestyle need as receiving the income is usually better value.”

Better Retirement Group director Billy Burrows says: “Individuals need to ask themselves would they be able to reinvest and get this income on comparable terms?”

Link to Zanelli piece in Retirement Strategy


News and expert analysis straight to your inbox

Sign up


    Leave a comment