Hi In part iii) of Q 32.9 the ans states that restrictions are Min amount that can be commuted and Max amount that can be commuted along with others. Pls explain these 2 restrictions on exercising the option as I am not v clear about it.
The question is about an option in a DB pension scheme for an individual to commute (or 'convert') some of their pension entitlement into a lump sum payment. The points that you mention can be explained as follows: It might be a good idea to have a minimum amount of pension that can be commuted (out of a larger pension), otherwise the admin costs incurred in doing the commutation aren't really justifiable. Say that we have two individuals who each have a pension entitlement of £10,000 pa. If one asks to commute just say £50 pa out of that much bigger pension into a (very small) lump sum, and the other asks for £2,000 pa to be commuted, these requests will both cost the scheme the same amount to process, but in the former case there is little fundamental benefit to the member. So the former isn't really justifiable in terms of admin cost and effort. It also might be the case that a restriction is put in place to have a maximum amount that can be commuted, in order that individuals don't give up all of their pension entitlement. There might be felt to be a need to ensure that the individuals continue to receive at least some pension to live on, rather than taking it all as cash and potentially spending it too quickly. However, the above might be waived if the pension amount they are entitled to is very small. If that is the case, then the individual might as well be allowed to take it all as cash. The pension amount isn't significant enough to make a difference to their ability to cover their living costs, and in this case it is cheaper from an admin perspective for the scheme to pay a single lump sum than to keep paying a very small pension amount each year. Hope that helps clear this up?
