Commutation Rates

nkb21

When taking a TFLS from a DB pension, is the commutation rate simply the lump sum divided by the amount of pension you give up annually? Also, does the age at which you take the lump sum and the pension, have an impact on the commutation rate?

In my case, I was made redundant at 51 and due to scheme rules, was entitled to take an immediate unreduced pension. I was offered a number of options and permutations but reduced it down to two viable options:
1) £30.5k p.a with no lump sum or
2) £25.5k p.a with £130k tax free lump sum

I took option 2.

So does this mean my commutation rate was 26 (£130k/£5k)? I’m looking around the forums and seeing commutation rates of 11-15 being banded about so wondered if I did quite well in my case or am I not comparing apples with apples?

232607

Yes you are correct in how it’s worked out & yes yours was very good.

Silvertabby

That is indeed a superlative commutation rate.

Way better than the public sector's 1:12 rate.

Audaxer

Yes, 26 is a fabulous commutation rate. If you invested the £130k lump sum you would only need a return of about 3.1% per year to equal the full pension, so you would still have the £130k and the equivalent of at least the full pension.

kidmugsy

Audaxer wrote: »

Yes, 26 is a fabulous commutation rate. If you invested the £130k lump sum you would only need a return of about 3.1% per year to equal the full pension, so you would still have the £130k and the equivalent of at least the full pension.

Maybe the OP could recycle some of his TFLS into his spouse's pension. What a nice little multiplier that might be.

Audaxer

kidmugsy wrote: »

Maybe the OP could recycle some of his TFLS into his spouse's pension. What a nice little multiplier that might be.

That could be a possibility, but I would be concerned that HMRC might view it that he had broken the recycling rules, and if so tax the lump sum at an excessive rate, which I think would be 45%. I know the recycling rule is meant to only apply to putting money into other pensions by the individual, but I would be worried that if significantly increased payments were made to your spouse's pension, that could also be classed as recycling.

Linton

Audaxer wrote: »

That could be a possibility, but I would be concerned that HMRC might view it that he had broken the recycling rules, and if so tax the lump sum at an excessive rate, which I think would be 45%. I know the recycling rule is meant to only apply to putting money into other pensions by the individual, but I would be worried that if significantly increased payments were made to your spouse's pension, that could also be classed as recycling.

The recycling rules are purely based on what happens to your pension. If you happen to give the money to your wife and she chooses to put it in her pension that does not meet the criteria for recycling.


See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 where it lists the criteria for recycling. In particular....

because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be.

Thrugelmir

Audaxer wrote: »

you would only need a return of about 3.1% per year to equal the full pension,

Only need. There's the potential challenge.

Audaxer

Linton wrote: »

The recycling rules are purely based on what happens to your pension. If you happen to give the money to your wife and she chooses to put it in her pension that does not meet the criteria for recycling.


See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 where it lists the criteria for recycling. In particular....

I've read that but I'd still be concerned that they could claim that you had recycled it into your wife's pension.

Audaxer

Thrugelmir wrote: »

Only need. There's the potential challenge.

I was saying you only needed 3.1% return as that is below what is deemed to be a Safe Withdrawal Rate, and that rate of income could easily be obtained from taking natural income in the form of dividends, leaving his capital intact.

Thrugelmir

Audaxer wrote: »

I was saying you only needed 3.1% return as that is below what is deemed to be a Safe Withdrawal Rate, and that rate of income could easily be obtained from taking natural income in the form of dividends, leaving his capital intact.

My personal concern with SWR's is the word safe. As with most things investment related. On a personal level. Expect the unexpected. Don't assume. There's not a given right to a positive return.

Income and capital rentention is a tall challenge. Even the original studies had a run down of capital. Over 30 years the capital would be severely dented by inflation in any event.