Commutation rates...

worn_out

just an example...

£10,700 lump sum = £1,000 deduction from annual pension.

An annuity can be had for £10,700 paying approx £640.pa

So when you're paying for a lump sum is costs you £1000, but when you want the annuity yield it's only £640.

That's a heck of a difference.

Does anyone know if there is any regulation of commutation rates or is it just another one of those take is or leave scams ?

saver861

These are different scenarios though. Commutation is bad value in most cases - sounds like your rates are even worst than most.

Annuity rates very poor in any case - as partly reason for pension changes.

So either option not good for most people .... not sure I'd say it was a scam but if its that poor why would you even consider it?

dunroving

saver861 wrote: »

These are different scenarios though. Commutation is bad value in most cases - sounds like your rates are even worst than most.

Annuity rates very poor in any case - as partly reason for pension changes.

So either option not good for most people .... not sure I'd say it was a scam but if its that poor why would you even consider it?

What about reverse commutation? I'm thinking of for example a final salary scheme that allows commutation (pension sacrifice) to increase the lump sum, and also allows reverse commutation (sacrificing lump sum to gain higher pension).

Are the same rates typically applied for both? For University Superannuation Scheme, I could only find a table of "commutation rates" and wondered if the same factors applied to reverse commutation.

Presumably if so, a poor commutation rate would be a good reverse commutation rate?

[ETA: I found this previous thread on MSE indicating that the commutation and reverse commutation rates for USS are the same (see Post 20). As a single person, sacrificing spousal benefits for the reverse-commuted portion isn't a big deal for me. The reverse commutation rate at age 65 (17.058) is approximately equivalent to an index-linked annuity at 5.8%, which is pretty good. Even at age 60 (CR of 19.622) it gives an equivalent annuity rate of 5.1%.

jamesd

It's a take it or leave it thing. Depends on the rules of the specific pension scheme.

For those reaching state pension age before the flat rate comes in there's the option of deferring that to increase it by 10.4% a year. For those reaching state pension age the rate is 5.8% a year. Both are pro-rated for partial years and are better deals for those in normal good health than normal annuities.

You have a particularly bad commutation rate, one of the worst I've seen. If you need a lump sum for some reason you might consider using a mortgage, even equity release type that allows repayments, then optionally repaying it from the higher income.

hyubh

dunroving wrote: »

Are the same rates typically applied for both? For University Superannuation Scheme, I could only find a table of "commutation rates" and wondered if the same factors applied to reverse commutation.

Presumably if so, a poor commutation rate would be a good reverse commutation rate?

IIRC the USS uses the same actuarially-neutral (in practice variable by age and sex) rates for both, though you can confirm by looking at the scheme rules. By the same token one wouldn't expect an actuarially-neutral rate to be anything like the one quoted by the OP however.

dunroving

hyubh wrote: »

IIRC the USS uses the same actuarially-neutral (in practice variable by age and sex) rates for both, though you can confirm by looking at the scheme rules. By the same token one wouldn't expect an actuarially-neutral rate to be anything like the one quoted by the OP however.

No, I'd love a reverse-commutation rate of 10.7%!

hyubh

worn_out wrote: »

Does anyone know if there is any regulation of commutation rates or is it just another one of those take is or leave scams ?

Why do you think this a 'scam' in need of government regulation? If the commutation rate is particularly poor from the member's point of view then it's probably deliberately so to (partly) offset the generosity (and therefore cost) of the standard pension benefits. In a small way the LGPS' 12/1 rate helps prevent spiralling increases to your council tax, for example...

worn_out

The thing about the quoted commutation rate is that it is 'take it or leave it', and fixed purely at the whim of the scheme trustees or actuaries...with no accountability to any regulatory body (which when you think how much regulation there is maybe a bit surprising).

I could decline the tax free lump sum and have a higher pension for sure, but having spent decades looking forward to pension time this deal doesn't feel so good,especially when I see rates around at 14-16 . 10.7 is the lowest I've seen.

The only other consideration is that the £1,000 'lost' pension, after tax, would be £800 (if that's one way to look at it...) .

I'll be taking the lump sum on offer anyway because I can afford to forego the bit of lost pension, but not everyone would be in that position.

I've no idea how commutation rates are calculated,but obviously every scheme seems to be able to use their own rules. presumably depending on the funding of the scheme at a point in time. Whether the trustees would ever explain to me their workings I don't know, but I've asked for an explanation, especially, as I have said earlier, when comparing to annuity rates the difference seems enormous.

zagfles

They're generally a rip-off, but there might be an element of selection for instance people in poorer health/lower life expectancy would be more likely to choose the lump sum.

kidmugsy

worn_out wrote: »

fixed purely at the whim of the scheme trustees or actuaries...with no accountability to any regulatory body (which when you think how much regulation there is maybe a bit surprising).

Oh, why not cut out the middle man? Just have a big red telephone on George Osborne's desk, so that anyone can give him a buzz and Georgie will decree the commutation rate that he feels like, depending on how much he enjoyed breakfast.

saver861

worn_out wrote: »

The thing about the quoted commutation rate is that it is 'take it or leave it', and fixed purely at the whim of the scheme trustees or actuaries...with no accountability to any regulatory body

Pensions did have a high lump sum and poor annual pension. The changes balanced that to give a better annual pension while reducing the lump sum part. The commutation still gives people an option albeit at poor rates - however, for those retiring late or in poor health etc commutation might be a better route.

worn_out wrote: »

I'll be taking the lump sum on offer anyway because I can afford to forego the bit of lost pension, but not everyone would be in that position.

Even for people in that position it still might be better to go about it a different way. At 10.7 that really is a very low rate and, other than poor health conditions etc, it is almost invariably a lose situation, even allowing for the tax element. I'd suggest it would be worth taking a deep look at other options to achieve the same thing.

worn_out wrote: »

Whether the trustees would ever explain to me their workings I don't know, but I've asked for an explanation, especially, as I have said earlier, when comparing to annuity rates the difference seems enormous.

It would be interesting to see how/why they have come to such a low rate as 10.7 for sure.