Civil service pension

NedS

adonis10 said:

Would really like a more scientific way to compare the two.

With Alpha, everything is known. You know how much you will accrue each year, and you know that it will increase with inflation each year to maintain your purchasing power in real terms.

With a DC pension, there are 2 unknowns that you will need to estimate - the average growth you will achieve over the period until retirement, and the SWR once you enter retirement, assuming you opt for drawdown and not to purchase an annuity.

michaels said:

I work on DC contributions will grow by 2%pa in real terms (conservative) and would purchase an annuity of about 2.5% (or perhaps an SWR of 3.5%)

But then I value certainty.  You could even say for certainty the DC would need to be invested in index linked govt bonds that lose about 2% pa in real terms and then used to purchase an annuity to give the same value of benefit as the DB.

I took a 33% pay cut in 'nominal' pay to get my hands on alpha but then I also factored in transferring in a decent chunk of DC.

When modelling growth, you will need growth to at least match inflation as that is what Alpha guarantees. You can look at historical averages for the markets you would invest in to get some figures.

Current consensus on Standard Withdraw Rates (SWRs) seems to be around 3.5% withdraw rate. Some feel 4% is risky if relying solely on DC drawdown. In reality one is unlikely to pick a withdraw rate upon retirement and blindly stick with it for the next 30 years, but you need to pick a figure to model your DC drawdown income.

If you are younger, and hence have a longer investment horizon, and are able to achieve growth above inflation over the long term, then a DC pension may well outperform, but your contributions will undoubtedly be higher (thus requiring a higher salary). On the SAME salary, with the SAME contributions, it would be very hard to beat Alpha but I'd be interested to see your modelling.

kassy64

Just reacting to a quote earlier in this thread where a poster mentioned that the 'commutation' rate for a civil service pension (lump sum v annual pension) was poor. I'm in process of taking my csp after 40+ years service (majority in Classic pension which gives 3 x pension anyway) and have taken the max lump sum, which still leaves me a decent annual pension and a nice amount to invest/spend etc
The lump sum is tax free and can be invested, I would need to live beyond approx 15+ years before the additional pension would be better and by then i will be getting the state pension and hopefully wont need much money, whereas having it now has effectively allowed me to retire 2 years early.
Would be interested to hear what is classed as a good commutation rate, and what route you have taken in similar situation.
Thanks

Silvertabby

kassy64 said:

Just reacting to a quote earlier in this thread where a poster mentioned that the 'commutation' rate for a civil service pension (lump sum v annual pension) was poor. I'm in process of taking my csp after 40+ years service (majority in Classic pension which gives 3 x pension anyway) and have taken the max lump sum, which still leaves me a decent annual pension and a nice amount to invest/spend etc
The lump sum is tax free and can be invested, I would need to live beyond approx 15+ years before the additional pension would be better and by then i will be getting the state pension and hopefully wont need much money, whereas having it now has effectively allowed me to retire 2 years early.
Would be interested to hear what is classed as a good commutation rate, and what route you have taken in similar situation.
Thanks

Horses for courses.  Although the public sector commutation rate of 1:12 is deemed to be poor, it really depends on your circumstances as a whole.

When Mr S and I retired from the RAF in our 40s, our joint commuted lump sum meant that we were able to clear our mortgage 19 years early with a nice nest egg left over.  Our mortgage rate of nearly 8% was the prime factor of that decision, even though our mortgage provider tried  talk us into keeping our mortgage and 'investing' our lump sums in the Stock Market.  I imagine that some people on these boards would have done that, but we are not gamblers. 

That said, I'm talking about Term Commutation, as our pensions flat lined until we reached 55 and then were restored to their pre-commutation values before being fully index linked back to our date of leaving.

We wouldn't have commuted if it had been for 'life'.  Nor did I commute my LGPS pension when I fully retired.

kassy64

Silvertabby said:

kassy64 said:

Just reacting to a quote earlier in this thread where a poster mentioned that the 'commutation' rate for a civil service pension (lump sum v annual pension) was poor. I'm in process of taking my csp after 40+ years service (majority in Classic pension which gives 3 x pension anyway) and have taken the max lump sum, which still leaves me a decent annual pension and a nice amount to invest/spend etc
The lump sum is tax free and can be invested, I would need to live beyond approx 15+ years before the additional pension would be better and by then i will be getting the state pension and hopefully wont need much money, whereas having it now has effectively allowed me to retire 2 years early.
Would be interested to hear what is classed as a good commutation rate, and what route you have taken in similar situation.
Thanks

Horses for courses.  Although the public sector commutation rate of 1:12 is deemed to be poor, it really depends on your circumstances as a whole.

When Mr S and I retired from the RAF in our 40s, our joint commuted lump sum meant that we were able to clear our mortgage 19 years early with a nice nest egg left over.  Our mortgage rate of nearly 8% was the prime factor of that decision, even though our mortgage provider tried  talk us into keeping our mortgage and 'investing' our lump sums in the Stock Market.  I imagine that some people on these boards would have done that, but we are not gamblers. 

That said, I'm talking about Term Commutation, as our pensions flat lined until we reached 55 and then were restored to their pre-commutation values before being fully index linked back to our date of leaving.

We wouldn't have commuted if it had been for 'life'.

Yes, I very much agree its a very personal decision. My Civil service pension already comes with a mandatory lump sum of 3 x times annual pension. I have added (commuted) up to the max allowed by HMRC giving me an additional £60k tax free (on top of mandatory amount). To me this gives me so many more options in the next 10-15 years than an extra few hundred £'s per month now which is taxable. Each to their own decision but for me it made sense as I will still get a nice monthly pension.

hugheskevi

kassy64 said:

The lump sum is tax free and can be invested, I would need to live beyond approx 15+ years before the additional pension would be better and by then i will be getting the state pension and hopefully wont need much money, whereas having it now has effectively allowed me to retire 2 years early.
Would be interested to hear what is classed as a good commutation rate, and what route you have taken in similar situation.

Life expectancy for Civil Service males aged 60 is 27.3 years and for females 29 years.

The Pension Protection Fund sets commutation factors to be actuarially fair, and currently pays 31.59 commutation rate at age 60. 

I'd say a commutation rate of 20 or maybe slightly above would be reasonable, and 25 or higher good.

Personally I save into a DC pension in addition to DB pension to smooth income between minimum pension age and State Pension age and so not require a lump sum from DB scheme.

kassy64

hugheskevi said:

kassy64 said:

The lump sum is tax free and can be invested, I would need to live beyond approx 15+ years before the additional pension would be better and by then i will be getting the state pension and hopefully wont need much money, whereas having it now has effectively allowed me to retire 2 years early.
Would be interested to hear what is classed as a good commutation rate, and what route you have taken in similar situation.

Life expectancy for Civil Service males aged 60 is 27.3 years and for females 29 years.

The Pension Protection Fund sets commutation factors to be actuarially fair, and currently pays 31.59 commutation rate at age 60. 

I'd say a commutation rate of 20 or maybe slightly above would be reasonable, and 25 or higher good.

Personally I save into a DC pension in addition to DB pension to smooth income between minimum pension age and State Pension age and so not require a lump sum from DB scheme.

Interesting reading thanks, however not sure why civil servants (male) should live an extra 7 years beyond the UK average.
I have worked shifts for most of my life, so you can probably knock a few years off that figure as well. My reckoning is that with accounting for income tax then I would not benefit (from taking the pension) until I'm in my mid 70's and getting state pension also and probably will have enough. the main reason for taking the commuted lump sum at civil service rates (1:12) is it give my wife and I the opportunity to really enjoy life/retirement for the next 15 years, beyond that if I'm still around the annual pensions will be ample to live on comfortably. I calculated that the additional pension if i hadn't commuted to lump sum would be about £220 less tax so about £180 per month which is barely noticeable but to have an extra £60k (on top of the mandatory lump sum) in the bank opens up all sort of opportunities. Its an individual decision i suppose.

Been having a look around and it seems that a commutation rate of 1:12 is the going rate across the public sector !

drummersdale

Similar to your position @kassy64 I have 41 years in the CS pension (most in Classic) and have plumped for a larger lump sum for many of the reasons you have quoted - I know it gets frowned upon often in this forum - given the 12:1 commutation rate - but a lot of people would be more than happy with that option. Plus some of the pension I have “given up” will be restored when next years CPI rate is applied - hopefully 10-11% inflation will eventually fall to more reasonable levels whilst my pension will have been uplifted in perpetuity. My wife retires in around 4-5 years when she will also get her lump sum - which hopefully we can “bank” or use to tide us over until state pension age although I expect we would have around £40k per annum in CS Pensions between us which should be more than adequate.

NedS

kassy64 said:

Interesting reading thanks, however not sure why civil servants (male) should live an extra 7 years beyond the UK average.

Average life expectancy is linked to how healthy, wealthy and educated you are. The extra 7 years life expectancy is based on assumptions around average wealth, health and education for civil servants compared to society as a whole.

kassy64 said:

Been having a look around and it seems that a commutation rate of 1:12 is the going rate across the public sector !

It is. But as highlighted above, that does not mean is represents good value. The general rule of thumb is don't commute DB pension for lump sum if you don't need the extra cash (many just see the large £££ signs and...). However, if you have a good reason to take the extra cash and do not need the higher inflation-linked income then you have that option.

hugheskevi

kassy64 said:

hugheskevi said:

kassy64 said:

The lump sum is tax free and can be invested, I would need to live beyond approx 15+ years before the additional pension would be better and by then i will be getting the state pension and hopefully wont need much money, whereas having it now has effectively allowed me to retire 2 years early.
Would be interested to hear what is classed as a good commutation rate, and what route you have taken in similar situation.

Life expectancy for Civil Service males aged 60 is 27.3 years and for females 29 years.

The Pension Protection Fund sets commutation factors to be actuarially fair, and currently pays 31.59 commutation rate at age 60. 

I'd say a commutation rate of 20 or maybe slightly above would be reasonable, and 25 or higher good.

Personally I save into a DC pension in addition to DB pension to smooth income between minimum pension age and State Pension age and so not require a lump sum from DB scheme.

Interesting reading thanks, however not sure why civil servants (male) should live an extra 7 years beyond the UK average.

UK average male life expectancy for a 60 year old male is 24.3 more years (cohort life expectancy in 2022), so Civil Service is only 3 years above average.

hyubh

kassy64 said:

hugheskevi said:

kassy64 said:

The lump sum is tax free and can be invested, I would need to live beyond approx 15+ years before the additional pension would be better and by then i will be getting the state pension and hopefully wont need much money, whereas having it now has effectively allowed me to retire 2 years early.
Would be interested to hear what is classed as a good commutation rate, and what route you have taken in similar situation.

Life expectancy for Civil Service males aged 60 is 27.3 years and for females 29 years.

The Pension Protection Fund sets commutation factors to be actuarially fair, and currently pays 31.59 commutation rate at age 60. 

I'd say a commutation rate of 20 or maybe slightly above would be reasonable, and 25 or higher good.

Personally I save into a DC pension in addition to DB pension to smooth income between minimum pension age and State Pension age and so not require a lump sum from DB scheme.

Interesting reading thanks, however not sure why civil servants (male) should live an extra 7 years beyond the UK average.

hugheskevi beat me to it (which is fair enough, you were responding to his own post ). Are you conflating life expectancy at birth vs. life expectancy at age 60...?