Commuting Pension Formula

irri_tant

I’ve been offered VR from work.

I’m looking for the formula to work out how much I would get as a lump sum and pension should I choose to commute say 10%, 11%, 12% etc, rather than just the 25% figure they quote all the time.

25% commute = £129,500 plus pension of £15,860

FatherAbraham

irri_tant wrote: »

I’ve been offered VR from work.

I’m looking for the formula to work out how much I would get as a lump sum and pension should I choose to commute say 10%, 11%, 12% etc, rather than just the 25% figure they quote all the time.

25% commute = £129,500 plus pension of £15,860

Unless you tell us what the pension would be with zero lump sum, we have no chance of calculating the commutation rate.

Warmest regards,
FA

dunstonh

You mention 25% which suggests your pension is a money purchase scheme. So, working out the income rate is easy as you just adjust it pro-rata as the income rate would be the same figure applied to a different value.

if it is a defined benefit scheme then there is no 25%. A commutation factor is used to calculation an equivalent scheme pension relative to the lump sum taken. You would need to ask administrators for the commutation factor. or you can check the scheme booklet or it may say it with the documents supplied for the retirement income figures.

RichandJ

dunstonh wrote: »

You mention 25% which suggests your pension is a money purchase scheme. So, working out the income rate is easy as you just adjust it pro-rata as the income rate would be the same figure applied to a different value.

if it is a defined benefit scheme then there is no 25%. A commutation factor is used to calculation an equivalent scheme pension relative to the lump sum taken. You would need to ask administrators for the commutation factor. or you can check the scheme booklet or it may say it with the documents supplied for the retirement income figures.

If it is DB you also need to find out whether there are different commutation factors for different tranches of pension (for e.g. Pre & Post April 1997) and whether one tranche is commuted before another. Easiest way is to ask the administrator.

dunstonh

If it is DB you also need to find out whether there are different commutation factors for different tranches of pension (for e.g. Pre & Post April 1997) and whether one tranche is commuted before another. Easiest way is to ask the administrator.

Do you sometimes look back and wonder what happened to the objective of pension simplification and how it was lost by the time we got to A Day?

FatherAbraham

FatherAbraham wrote: »

Unless you tell us what the pension would be with zero lump sum, we have no chance of calculating the commutation rate.

I must've been asleep when I wrote that.

If a 25% lump sum of £129,500 leaves a residual pension of £15,860 p.a., this implies that taking no lump sum gives a pension income of £21,146,67 annually.

The commutation rate looks like 4.1%.

Each £1000 of lump sum taken reduces the annual income by £40.

Each £100 of annual income taken reduces the lump sum by £2449.56.

Warmest regards,
FA

RichandJ

dunstonh wrote: »

Do you sometimes look back and wonder what happened to the objective of pension simplification and how it was lost by the time we got to A Day?

All the way back to the old pre 87, 87-89 & post 89 IR regimes. What a piece of 'work' was the old IR manual. Thick as a brick, although not quite as thick as the old Polis pension 'guide' & written in almost impenetrable civil service-ese.

As soon as I saw the word 'simplification' used by politicians (they brought us SERPS & GMPs don't forget) I knew it would be a dog's breakfast & subject to further political interference. And thus it has proved. Reductions in AA & LTA for eg, easy enough for DC schemes but a royal PITA for DB.

When I were a lad, pension was X times Y over Z & no mucking about with pre/post this that or the other tranches*, or less using an easy formula if you wanted cash.

* ok, I'll accept pre/post 85 reval for pre 86 leavers as being in there & the change from 5 to 2 years for preservation. God, what a sad pensions geek I am.

Stochasticity

FatherAbraham wrote: »

I must've been asleep when I wrote that.

If a 25% lump sum of £129,500 leaves a residual pension of £15,860 p.a., this implies that taking no lump sum gives a pension income of £21,146,67 annually.

How is this worked out?

Maximum PCLS for a DB scheme is usually calculated as:

Max PCLS = (Pension before commutation x commutation factor) / (1 +0.15 x commutation factor)

The values you've quoted don't fit with that.

I make it that you can't calculate the commutation rate knowing just the pension and max PCLS, as per your first answer.

atush

Until the OP tells us what kind of pension they have, we can't help.

they aren't sure if it is FS/DB or MC?

irri_tant

atush wrote: »

Until the OP tells us what kind of pension they have, we can't help.

they aren't sure if it is FS/DB or MC?

Pension scheme is as follows.

Defined Benefit (“DB”)
Pension of 1/60th of final salary for each year of service
Risk lies with scheme sponsor

Zelazny

I tried some maths geekery on the initial numbers and they simply don't work unless there was a grandfathered lump sum (or something has changed in the laws - entirely possible, it's been a while since I did Pensions admin).

The "value" of the benefits taken must be such that the PCLS makes up 25% or less of the benefits taken. For this calculation, you use Pension x 20 to get a "value" for the pension element. Looking at the OP, the "value" of the remaining pension is:

£15,860 x 20 = £317,200.

Thus, the maximum cash sum that should be applicable is:
£317,200 / 3 = £105,733.33.

Hence we can't work this one out - the data in OP doesn't add up.