Classic CS pension inverse commutation rate

bluenose1

Noodling wrote: »

Hi bluenose - well, it seems to me (unless I am missing something) that you get back more than the cost of the actuarial buyout cost over those early years when you exercise this option (albeit marginal). Plus it is index linked - without a cap, I think - so I can't see how it would put us at a disadvantage.
I have planned my SIPP inputs and withdrawals around this scenario to max out withdrawals under personal tax allowance ( plus the 25% tax free bit).
For instance, if I tell the calculator my pension is £5k and I want to take it a full 4 years earlier, the BO cost is £18750. Pension received over that time is £20k without any increases for index linking.
Please, anyone, shoot holes in this for me, as I am not far off pulling the trigger, so would be gladly enlightened.

I am by no means an expert, in fact quite the opposite.
I have worked out the sums for me and I think because my income will be over £13,640 per annum if I take my Civil Service Pension before 60 I will lose out on being able to take advantage of using some of my defined contribution pension tax free. Whereas if I leave it until 60 my income will be £7,760, so can make use of personal allowance.
I think if my annual income had been lower than the personal allowance then it may have been advantageous for me to consider.
I think that was what OldBeanz was trying to tell me.
It is all so complicated. I had no idea.

lisalis

Hi Noodling, your situation in Dec 17 was very similar to my current one. May I ask what you did? I have the forms in front of me and would prefer a higher pension than the lump sum. Thank you.

MancJonny

hugheskevi wrote: »

The factors are set out at this link.

For a person aged 56.25 inversely commuting £13,050 the increase in pension would be between £595 and £646, depending on survivor pension and gender. That is a factor between 20 and 22. I'm not sure if there are any limits to the amount you can commute.

The factor rate you mention is dire.

I mentioned it to my PCS rep a few months back and he just fell about laughing - "Who would commute on those terms", etc.

hugheskevi

The factor rate you mention is dire.

To make a comparison, you would first need to inflate the £13,050 to reflect that it is converting tax free income into taxable income.

Assume tax rate of 20%, and £13,050 / 0.8 = £16,312.50. That is then on the same basis as someone with a DC scheme using taxable income to purchase an annuity.

£595 / £16,312.50 = 3.65%.

I doubt an annuity rate of 3.65% for index-linked pension with survivor benefits payable from age 56.25 could be found in the retail market, except perhaps on impaired life basis for someone in ill-health.

Having said that, it isn't massively attractive, but I think it is going too far to say it is dire. For someone wanting to increase the amount of guaranteed income they have it is probably going to be a better option than anything else available.