Defined benefit commutation

david78

Can someone please check my reasoning for calculating the maximum Pension Commencement Lump Sum (tax free cash) for a defined benefits scheme (needed for spreadsheet).

Pension before commutation is P pounds.

Commutation rate is R pounds tax free lump sum for each £1 of pension given up (in my case R = 10).

Maximum tax free cash T must be 25% of total pension benefit so

T = 0.25*(T + 20*(P - T/R))

So must have ... by rearranging

T = 20*P/(3+20/R)

This formula gives 5*P when R = 20 and 4*P when R = 10.

Your_Hero

The formula is
Max. PCLS = Pension / [(3/20) + (1/ comm factor)]

So based on your commutation factor = 20, and = 10, it is 5*P and 4*P respectively as you've stated.

kidmugsy

david78 wrote: »

Commutation rate is R pounds tax free lump sum for each £1 of pension given up (in my case R = 10).

Golly, are you thinking of commuting at a rate of 10? Is your health poor?

david78

Your_Hero wrote: »

The formula is
Max. PCLS = Pension / [(3/20) + (1/ comm factor)]

Ah thanks. I can re-arrange 20*P/(3+20/R) = P/(3/20 + 1/R) same as you.

david78

kidmugsy wrote: »

Golly, are you thinking of commuting at a rate of 10? Is your health poor?

I am not - I am aware its poor value. Just trying to understand all the options.

One issue is the poor commutation rate means the value of pension + lump sum is smaller than the value of pension alone, which I could use to mitigate tax on pension savings above the £1.25M lifetime limit.