PTL Blog

De-Coding Small Lump Sum Exercises

Posted by Alison Bostock on Mar 11, 2016, 11:18:06 AM

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First published in Pension Funds Online, 11 March 2016

Alison Bostock looks at the benefits of the revised Code for Incentive Exercises.

The Code of Practice on Incentive Exercises is a brilliant example of the pensions industry working together to solve a problem.

Many people felt uncomfortable with cash incentives offered to members to transfer out their DB pensions or give up their future pension increases.

When the voluntary Code was first published in 2012, I think it achieved the difficult task of allowing existing good practices to continue more or less unchanged whilst eliminating bad practice.

The Code was popular and well respected by the industry and you can see the evidence of this by the number of organisations that publicly signed up on its website as supporters.

It was therefore something of a curve ball in December 2014 when a 'frequently asked question' was posted on its website confirming its opinion that the Code applied to trivial and small lump sum commutation exercises.

These exercises offer existing pensioners and those eligible to retire immediately the chance to cash out small pensions in return for a lump sum.

After the changes made in March 2014, ahead of Freedom and Choice in 2015, the limits for these lump sums were increased significantly, from GBP 2,000 to GBP 10,000 for Small Lump Sums and from GBP 18,000 to GBP 30,000 for Trivial Commutation.

Some schemes moved quickly to run exercises to offer these payments, although the majority would not have provided financial advice or guidance.

In their minds, they were simply enabling more members to choose to receive a meaningful lump sum rather than a tiny regular income, in the light of a welcome change in legislation.

After the FAQ was published, we found ourselves in a strange situation...

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Topics: Defined Contribution, Pensions, Defined Benefit, dc, decoding, lump sum

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