Early Retirement

sharpj

Can someone expand further on what they mean by commutation rate and 1 12?

The lump sum difference is 28,000 and pension difference around 2,500 per year.

AlanP_2

At a 1:12 commutation rate 2.5k would convert to £30k so that rate is just over 1:11.

It is simply the factor / ratio between £ of annual pension and £s of lump sum.

1:12 is typical in public sector schemes, private sector can often be better.

sharpj

AlanP wrote: »

At a 1:12 commutation rate 2.5k would convert to £30k so that rate is just over 1:11.

It is simply the factor / ratio between £ of annual pension and £s of lump sum.

1:12 is typical in public sector schemes, private sector can often be better.

Ok thanks well the difference in lump sums is 28k, having done rough calculations on gov.uk the higher pension pays just over £150 more per month, obviously more tax in a higher amount.

So just over 11 years to even out, but in 2025 he gets state pension also.
Is that state pension not one of the main factors, given that starts well before that 11 year evening out timescale?

sharpj

Can someone confirm if I am checking the calculation right?

Higher pension is 21,339 per year lower pension 18,879 per year, based upon tax code 789L which is due to change in April this year as some money owed is paid off.

Off gov.uk tax using 'estimated take home pay' for tax and ni figures are approx. £1422 against £1283 monthly
Only shows a difference of £139 per month

Times that by 12 = £1668 (again that's a rough figure), which in itself seems odd as the difference between the 2 yearly pension amounts is £2460 - why the big difference then, cant be all down to tax?

So that to me shows more than 12 years to = the difference in the lump sum of £28,000

I have tried same check on https://www.thesalarycalculator.co.uk/salary.php and it comes up with similar figures

I do understand the 1:12 ratio now, and that works out just over 1:11 on the £28,000 difference on the £2460 difference between the 2 amounts, however based on the tax checks I have done the actual difference in receipt is more like £1668 approx. Which obviously will take longer to equal the £28,000 lump sum difference.

So it will take around 17 years for that monthly pension difference to equal the higher lump sum.

The net amount also appears to increase when he reaches state pension age in 2025.

Or am I talking nonsense?

saintalban

Have you factored in annual index linking eg CPI or RPI increases into your calculations for the pension? That might help introduce an earlier break even element in taking the larger pension instead of the lump sum.

sharpj

saintalban wrote: »

Have you factored in annual index linking eg CPI or RPI increases into your calculations for the pension? That might help introduce an earlier break even element in taking the larger pension instead of the lump sum.

I haven't a clue what those are and how to check them to be honest.

I would assume the pension difference each month would be the same for each amount?

Reluctantpensioner

One quick test you can make: take the value of additional lump sum, then look to see what annuity that would buy. How does it compare with the reduction in pension?

Linton

sharpj wrote: »

....
Off gov.uk tax using 'estimated take home pay' for tax and ni figures are approx. £1422 against £1283 monthly
Only shows a difference of £139 per month
....

You dont pay NI on pensions.

sharpj

Linton wrote: »

You dont pay NI on pensions.

okay so assuming I am right with my earlier 17 year bit then taking the lower pension higher lump sum doesn't seem so bad?

Linton

sharpj wrote: »

okay so assuming I am right with my earlier 17 year bit then taking the lower pension higher lump sum doesn't seem so bad?

err no - if your calculations assumed that NI was paid then they are too pessimistic as regards the total net income. As a crude calculation the number should be 12/0.8 which is 15 years to payback rather than 17. If you assume inflation of 2%/year the breakeven point falls to around 13 years.

13 years is a lot less than life expectancy.