Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • chiny
    • By chiny 12th Jan 18, 3:57 PM
    • 87Posts
    • 28Thanks
    chiny
    Actuarial magic
    • #1
    • 12th Jan 18, 3:57 PM
    Actuarial magic 12th Jan 18 at 3:57 PM
    One of my pensions is about to mature and I have the final numbers.

    If I take the pension as 100% annuity, then the percentage of the "standard lifetime allowance" is x%.

    If I take the pension as as a 25% lump sum and a lesser annuity, the percentage of the "standard lifetime allowance" is 0.49% lower.

    My mind says this means the 100% annuity must be worth more £££ but I asked the experts. The pension company says it is too difficult for the non-expert. My expensive financial advisor isn't answering at all.

    Is there a answer understandable to the non-expert ? Or is all buried in the actuarial arithmetic and the law/practice/other says the two options are equivalent ?

    Any answer is to assuage my curiosity, the decision is made on the basis of expert advice
Page 1
    • AnotherJoe
    • By AnotherJoe 12th Jan 18, 4:27 PM
    • 7,892 Posts
    • 8,485 Thanks
    AnotherJoe
    • #2
    • 12th Jan 18, 4:27 PM
    • #2
    • 12th Jan 18, 4:27 PM
    Dont take this as gospel but i think the following is the reason.
    The reason for the difference is the artificial 20x multiplier used on the annuity to calculate lifetime allowance.

    eg suppose you choice is
    £10k a year plus £100k. LTA = 20x10 + 100 = 300.
    Or instead 9k a year plus £75k. LTA = 20x9 + 75 = 255.

    In your case its just a coincidence they are very close though i suppose it probably also means your payback period is about 20 years, eg after 20 years the lower initial sum but higher annuity would overhaul the higher sum and lower annuity.

    What you need to focus on is the payback period / catch up time. They can vary between 12 years (terrible, dont do it) up to 40 to 50 (most likely a good idea to strongly consider)
    • TcpnT
    • By TcpnT 12th Jan 18, 4:43 PM
    • 50 Posts
    • 28 Thanks
    TcpnT
    • #3
    • 12th Jan 18, 4:43 PM
    • #3
    • 12th Jan 18, 4:43 PM
    Doesn't make sense to me. I can't see why an actuarial calculation should come into it.

    The amount crystallised for the purposes of the LTA calculation is "The total amount used to purchase the lifetime annuity, including any related dependant's annuity." The value of a lump sum for LTA purposes is just the the numerical value. Whatever the combination of annuity and lump sum taken the total value for LTA purposes will add up to the same original value of the DC pot and should therefore result in the same LTA percentage.

    Seems very straightforward to me but perhaps I'm missing something - would love to hear a definitive justification of the difference - if there is one.
    • TcpnT
    • By TcpnT 12th Jan 18, 4:46 PM
    • 50 Posts
    • 28 Thanks
    TcpnT
    • #4
    • 12th Jan 18, 4:46 PM
    • #4
    • 12th Jan 18, 4:46 PM
    You say annuity so I assumed DC pension - but is this actually a DB pension ? If so the explanation given by AnotherJoe is correct
    • dunstonh
    • By dunstonh 12th Jan 18, 4:51 PM
    • 90,347 Posts
    • 57,129 Thanks
    dunstonh
    • #5
    • 12th Jan 18, 4:51 PM
    • #5
    • 12th Jan 18, 4:51 PM
    Can you clarify... is this an annuity or a scheme pension?
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Silvertabby
    • By Silvertabby 12th Jan 18, 5:32 PM
    • 2,120 Posts
    • 2,816 Thanks
    Silvertabby
    • #6
    • 12th Jan 18, 5:32 PM
    • #6
    • 12th Jan 18, 5:32 PM
    Makes perfect sense if this is a DB scheme.

    The LTA for the tax free cash plus reduced annual pension is lower than the LTA for the standard pension because you haven't taken the commutation factor into account.

    If you are in the public sector then the factor is a not-so-generous 1:12.
    Last edited by Silvertabby; 12-01-2018 at 5:35 PM.
    • chiny
    • By chiny 12th Jan 18, 5:37 PM
    • 87 Posts
    • 28 Thanks
    chiny
    • #7
    • 12th Jan 18, 5:37 PM
    • #7
    • 12th Jan 18, 5:37 PM
    Once upon a time, this was a DB pension. The company ceased trading (not went bust) and later tired of running a pension scheme. So, it offed the pension scheme to an assurance company in what, if I recall correctly (it was many years ago) was called a Section 32 buyout.

    The assurance company uses words like "buying an annuity" when writing to me but these words may well be boilerplate, used to everyone.

    So, er, I don't know whether this is still a DB pension but it does have a contractual monthly payment (if taking 100%) with a GMP element that is subject to escalation.

    The original company (my employer) was not in the public sector.
    • ffacoffipawb
    • By ffacoffipawb 12th Jan 18, 5:37 PM
    • 2,399 Posts
    • 1,564 Thanks
    ffacoffipawb
    • #8
    • 12th Jan 18, 5:37 PM
    • #8
    • 12th Jan 18, 5:37 PM
    Dont take this as gospel but i think the following is the reason.
    The reason for the difference is the artificial 20x multiplier used on the annuity to calculate lifetime allowance.

    eg suppose you choice is
    £10k a year plus £100k. LTA = 20x10 + 100 = 300.
    Or instead 9k a year plus £75k. LTA = 20x9 + 75 = 255.
    Originally posted by AnotherJoe
    Surely the lower pension should have a higher PCLS / TFC ?

    Otherwise nobody would take the second option, so a pointless comparison?
    • Silvertabby
    • By Silvertabby 12th Jan 18, 5:43 PM
    • 2,120 Posts
    • 2,816 Thanks
    Silvertabby
    • #9
    • 12th Jan 18, 5:43 PM
    • #9
    • 12th Jan 18, 5:43 PM
    Once upon a time, this was a DB pension. The company ceased trading (not went bust) and later tired of running a pension scheme. So, it offed the pension scheme to an assurance company in what, if I recall correctly (it was many years ago) was called a Section 32 buyout.

    The assurance company uses words like "buying an annuity" when writing to me but these words may well be boilerplate, used to everyone.

    So, er, I don't know whether this is still a DB pension but it does have a contractual monthly payment (if taking 100%) with a GMP element that is subject to escalation.

    The original company (my employer) was not in the public sector.
    Originally posted by chiny
    Still sounds like the commutation factor. Can you ask your pension provider for confirmation?

    Briefly, exchanging pension for tax free cash comes at a cost - and is one of the things to think about when deciding to take the cash or not. As an alternative, can you take less than the full 25%?
    • xylophone
    • By xylophone 12th Jan 18, 6:15 PM
    • 24,011 Posts
    • 14,020 Thanks
    xylophone
    http://www.financialadvice.net/s32_buy_out_plan/zone/1288
    • AnotherJoe
    • By AnotherJoe 12th Jan 18, 8:46 PM
    • 7,892 Posts
    • 8,485 Thanks
    AnotherJoe
    Surely the lower pension should have a higher PCLS / TFC ?

    Otherwise nobody would take the second option, so a pointless comparison?
    Originally posted by ffacoffipawb
    Your right I dashed that off and made a mistake.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

5,223Posts Today

9,442Users online

Martin's Twitter
  • RT @clq: @MartinSLewis You hit that one right out of the park. It might be the Tweet of the Century. I don't think anyone can do any Batter?

  • You've run-out of puns. That's a bit of a googly, maybe I can help break your duck, though it is s sticky wicket, t? https://t.co/nJT51NpXfO

  • RT @richlaing: @MartinSLewis Obviously spot poll but interested in the fact that 9% would opt out of donation. Interested to hear reasons w?

  • Follow Martin