Commutation factor

Pat38493

I asked for retirement estimates for my DB pension a while ago.

The commutation factor listed in their pension fact sheet is 15 plus or minus 0.24 for each year retiring before or after 65.

However if I take the lump sum divided by the difference in the annual amount quoted, it is more like 28.

Could there be some valid reason for that or should I be questioning their calculations?

Marcon

Pat38493 said:

I asked for retirement estimates for my DB pension a while ago.

The commutation factor listed in their pension fact sheet is 15 plus or minus 0.24 for each year retiring before or after 65.

However if I take the lump sum divided by the difference in the annual amount quoted, it is more like 28.

Could there be some valid reason for that or should I be questioning their calculations?

Please could you paste the numbers you've been given?

Pat38493

Marcon said:

Pat38493 said:

I asked for retirement estimates for my DB pension a while ago.

The commutation factor listed in their pension fact sheet is 15 plus or minus 0.24 for each year retiring before or after 65.

However if I take the lump sum divided by the difference in the annual amount quoted, it is more like 28.

Could there be some valid reason for that or should I be questioning their calculations?

Please could you paste the numbers you've been given?

It's a deferred pension deferred 31/05/2008 value 16402.11

The value was adjusted to £16828.59 on GMP equalisation in November 2021.  However the last retirement benefits estimate that I have is from 7th July 2021 so I assume it is from pre-GMP equalisation.

My NRA would be January 2034.

The estimates I was given for NRA
Pension £28239.72
or
Pension £22873.92 and "maximum tax free cash lump sum" of £152492.02

In the pension fact sheet it says 
"Cash Commutation
Commutation factors 15.0:1 at age 65 +/- 0.24 for each year earlier/later than age 65 at retirement
Factors are interpolated for complete months"

My question is - are these numbers plausible?  If I goolged on how commutation works, I got the impression that if the difference between my pension with lump sum or without is 5365.80, and the cummatation factor is 15.0, that would result in a lump sum of £80487 and not £152K.

Hopefully I am wrong and it's more complicated than I think, and the numbers from the pension admin are correct - just trying to check it out.

Dazed_and_C0nfused

Are you sure this scheme doesn't have a standard PCLS payable with the standard pension?

And any commutation is simply adding to that rather than starting from a PCLS of £0

Pat38493

Dazed_and_C0nfused said:

Are you sure this scheme doesn't have a standard PCLS payable with the standard pension?

And any commutation is simply adding to that rather than starting from a PCLS of £0

Actually I don't know.  How would I know that from the information I have?

There is a section in the pension fact sheet:
Tax Free Cash
Did the scheme adopt post A day rules - A Day basis
Is protected grandfathered cash payable - no
Is tax free cash payable in addition to pension or by commutation of pension - none
Will trustees allow UFPLS to be paid - yes
UFPLS Limit - one

There is also a very old pension booklet which seems way out of date, which talks about the "valuable option of exchanging part of your pension for a cash lump sum" and discusses that the cash lump sum is 3/80 multiplied by the years of service and the pension reduction is to divide the lump sum by 10 and deduct this amount from the pension payment.  If this rule actually overrides the "commutation" comment, what's not clear is how this is calculated when the pension is deferred (which is an effective commutation of 10 isn't it?)

Marcon

Best bet here seems to be asking the scheme to explain the calculation.

Pat38493

Marcon said:

Best bet here seems to be asking the scheme to explain the calculation.

I will write to them - the lump sum figure they have given that is stated as maximum tax free lump sum says “this includes any cash that you must receive by right” but since there is an option to not receive any at all, I don’t see how this can be relevant.

Also - the lump sum doesn’t correspond to 25% of the pension without lump sum multiplied by 20, nor does it correspond to 25% of a recent CETV estimate so I don’t know how that is calculated either.

Albermarle

nor does it correspond to 25% of a recent CETV estimate so I don’t know how that is calculated either.

The CETV is completely separate from the calculation you are querying , so not relevant.

By the way , a commutation rate of 15:1 is not great whilst 28:1 is very good .

NoMore

AIUI DB pension PCLS rarely correspond to 25% of anything, so don't get hung up on that, its the scheme rules for the PCLS that you need to check.

For instance my DB pension max lump sum calculation is the Annual Pension divided by (3/20 + 1/commutation rate) and then the Annual pension is corrected for taking this lump sum by taking away the lump sum divided by the commutation rate from it.

You can then take any amount of PCLS up to the calculated max and just use the second formula to work out your adjusted pension for that lump sum.

I have no idea if this is standard or just my particular scheme, but its an example of why 25% tax free cash in DB schemes are meaningless.

Pat38493

Albermarle said:

nor does it correspond to 25% of a recent CETV estimate so I don’t know how that is calculated either.

The CETV is completely separate from the calculation you are querying , so not relevant.

By the way , a commutation rate of 15:1 is not great whilst 28:1 is very good .

Yes I have wrote to them to request clarification, but they usually take weeks to respond - it is Mercer.

I hope that I don’t find out their calculations are wrong but on the other hand, I can’t see how such a generous apparent commutation could be applied unless there is some right to cash in the rules that is not mentioned in the fact sheet.

If I look at the estimate they provided me for retirement at age 57, the apparent commutation rate if I calculate it is 41!

What I can say is that the NRA figure without lump sum seems quite plausible - if I do a rough calc of 2.5% growth per year from 2008 to 2034, this figure seems believable.

The reduction in pension for early retirement at 57 also looks a bit dodgy to me when I look at it against the ERF factors in the fact sheet.  They are quoting pension of £18.5K without lump sum in 2026, which seems quite high for taking an £28k pension 8 years early?

If it turns out the numbers are wrong, this will seem quite puzzling to me - aren’t they supposed to be overseen by the FCA or something so shouldn’t these kind of calculations be double and triple  checked, given that I could be making big life plans based on such data?  I have never had my payroll dept make a mistake calculating my salary in 30 years and my bank has never made a mistake on a bank statement so it’s a bit puzzling that pension admins could send you wrongly calculated estimates.

Albermarle

They are quoting pension of £18.5K without lump sum in 2026, which seems quite high for taking an £28k pension 8 years early?

Looks within the normal range - around 4%pa reduction.

 but they usually take weeks to respond - it is Mercer.

You have my sympathy