Commutation Factor

littleboo

Hi All,

I plan to take my DB pension in about two years at 60. Looking at the pensions modeller, the difference between the standard annual pension/lump sum and annual pension with max lump sum is £3564 p/a and £82692 lump sum. 82692/3564 = 23.2  So 23.2 is the commutation factor? I think that would considered "good"? I know there are reasons why the standard benefits, or somewhere between the standard and max can be beneficial, but just trying to understand if the commutation factor is generous or not. Thanks in advance.

Gary1984

It's more generous than a lot of schemes but probably not very generous compared to what you'd need to pay an insurer to buy benefits equivalent to those you'd be giving up.

Do you actually need the cash for a specific reason? Or do you have poor health that would reduce the like timescale you'd be drawing the pension. If not then maybe best opting for the higher pension, but it's all down to personal circumstance.

leosayer

Depends how you measure good.

The rate is better than I will get from my DB scheme and that from my wife's LGPS scheme.

However it may not look such good value if you compare to the annual pension you might get if you bought an equivalent annuity with the £82692 lump sum.

Ultimately, the true value can only be derived from your own circumstances, eg. what will the lump sum be used for and how does it fit into your overall retirement plans?

littleboo

Thanks for the responses. I was trying to understand if 23 was a reasonable figure as a staring point, if it was terrible, then that's a consideration to rule it out. I don't envisage having any particular need for the higher lump sum at the moment, but I'm not expecting to draw the pension for another couple of years so things could change.

cloud_dog

Mine (private DB) used to be 12 and was increased a couple years ago to 16.

L9XSS

cloud_dog said:

Mine (private DB) used to be 12 and was increased a couple years ago to 16.

Last time I looked mine was 12, suffice to say I’m taking all pension at 60. 

zagfles

It's probably better than most schemes but worse than index linked annuity rates. But there is the advantage of it being tax free. How good it is will also depends on the details of the scheme, for instance what's the inflation protection, is it CPI or RPI, what's the cap? Also whether the spouse benefit is reduced by the tax free cash, a lot of schemes don't reduce the spouse benefit.

Albermarle

littleboo said:

Thanks for the responses. I was trying to understand if 23 was a reasonable figure as a staring point, if it was terrible, then that's a consideration to rule it out. I don't envisage having any particular need for the higher lump sum at the moment, but I'm not expecting to draw the pension for another couple of years so things could change.

It can  depend on your other planned sources of income in retirement.
If for example you had a separate DC pot invested in the markets , or other large investments or savings, it could make more sense not to take the lump sum, and get the maximum guaranteed regular pension income possible.

Marcon

zagfles said:

It's probably better than most schemes but worse than index linked annuity rates. But there is the advantage of it being tax free. How good it is will also depends on the details of the scheme, for instance what's the inflation protection, is it CPI or RPI, what's the cap? Also whether the spouse benefit is reduced by the tax free cash, a lot of schemes don't reduce the spouse benefit.

It's only the member's own pension which is commuted, unless the whole pension is commuted on grounds of triviality.