Pension commutation rate when taking higher lump sum from DB pension

dbs

Quote of one of my DB pensions is ;
Max lump sum £56,458 yearly pension £8,468
Min lump sum £48,900 yearly pension £8,938
I am gaining £7558 lump sum but losing £470 yearly pension so after 16 years I will be worse off (470 x 16 = £7,520) but will be less due to missing out of inflation increases.
Is this the correct method of working out the commutation rate would the rate would be 16:1

Doctor_Who

My understanding is it's £7558/£470 = 16.08. So for every £1 of pension you give up you get and extra ~£16 of lump sum. So the commutation rate is 1:16.08.

Marcon

dbs said:

Quote of one of my DB pensions is ;
Max lump sum £56,458 yearly pension £8,468
Min lump sum £48,900 yearly pension £8,938
I am gaining £7558 lump sum but losing £470 yearly pension so after 16 years I will be worse off (470 x 16 = £7,520) but will be less due to missing out of inflation increases.
Is this the correct method of working out the commutation rate would the rate would be 16:1

No. The commutation rate is set by the scheme's trustees, acting on the advice of the Scheme Actuary. You get £xxx tax free cash for each £1 of pension exchanged (given up) at the point of retirement.

Pat38493

Marcon said:

dbs said:

Quote of one of my DB pensions is ;
Max lump sum £56,458 yearly pension £8,468
Min lump sum £48,900 yearly pension £8,938
I am gaining £7558 lump sum but losing £470 yearly pension so after 16 years I will be worse off (470 x 16 = £7,520) but will be less due to missing out of inflation increases.
Is this the correct method of working out the commutation rate would the rate would be 16:1

No. The commutation rate is set by the scheme's trustees, acting on the advice of the Scheme Actuary. You get £xxx tax free cash for each £1 of pension exchanged (given up) at the point of retirement.

Doesn't he mean that because he is getting an additional 7520 TFC for a loss of £470 on the pension, the effective commutation rate is (approximately) 16:1?

From other threads on this topic, it seemed like 12:1 is considered bad, and 20:1 is considered good, so I guess 16:1 is somewhere in the middle?

DavidT67

FYI, a commutation rate of 16 isn't that generous.  I have schemes offering between 28 and 22, dependent on how much earlier than the scheme normal retirement age the PCLS is taken. 

Marcon

Pat38493 said:

Marcon said:

dbs said:

Quote of one of my DB pensions is ;
Max lump sum £56,458 yearly pension £8,468
Min lump sum £48,900 yearly pension £8,938
I am gaining £7558 lump sum but losing £470 yearly pension so after 16 years I will be worse off (470 x 16 = £7,520) but will be less due to missing out of inflation increases.
Is this the correct method of working out the commutation rate would the rate would be 16:1

No. The commutation rate is set by the scheme's trustees, acting on the advice of the Scheme Actuary. You get £xxx tax free cash for each £1 of pension exchanged (given up) at the point of retirement.

1. Doesn't he mean that because he is getting an additional 7520 TFC for a loss of £470 on the pension, the effective commutation rate is (approximately) 16:1?

2. From other threads on this topic, it seemed like 12:1 is considered bad, and 20:1 is considered good, so I guess 16:1 is somewhere in the middle?

1. I read it that it was the logic being queried rather than the actual commutation rate.
2. Depends if the factors are age related.

Neilb1969

DavidT67 said:

FYI, a commutation rate of 16 isn't that generous.  I have schemes offering between 28 and 22, dependent on how much earlier than the scheme normal retirement age the PCLS is taken. 

Typically does the commutation rate fall the nearer you get to a schemes normal retirement age? My wife has been offered a commutation rate of 31 times if taking her pension at 55. Is it a certainty that this rate will fall as she gets closer to the NRA of 60? Many thanks

Pat38493

Neilb1969 said:

DavidT67 said:

FYI, a commutation rate of 16 isn't that generous.  I have schemes offering between 28 and 22, dependent on how much earlier than the scheme normal retirement age the PCLS is taken. 

Typically does the commutation rate fall the nearer you get to a schemes normal retirement age? My wife has been offered a commutation rate of 31 times if taking her pension at 55. Is it a certainty that this rate will fall as she gets closer to the NRA of 60? Many thanks

There is another thread running at the 'mo where I was discussing a pension estimate I received in 2021 for retirement at age 57 in 2026 and at 65 in 2034.  The estimates they sent has a lump sum commutation rate of 40:1 for retirement at 57 and 28:1 at 65.   I was actually questioning these numbers because this seemed "too good to be true" but I never got a clear answer from Mercer at the time so I will just request another estimate soon and see what happens.  If that's really true, I can only imagine there must be something in the pension deeds of my scheme that forces them to provide this rate, but it's not mentioned in the current pension fact sheet.

I do not know if it's normal for the commutation rate to get worse for later retirement dates, and I can't really intuitively see why this would be the case although I haven't really put much thought to it.

phynix_uk

As Macron correctly states, the commutation factor is set by the trustees based on actuarial calculations, it's designed to provide an element of flexibility to how you draw the benefit from the pension. Some people need a higher income, some a higher lump sum.

Unfortunately, whilst there are some extremely knowledgeable posters on this site, there appears to be a significant blind spot that I see missed time and time again.

Most people seem to believe that giving up the income means you'll lose out over the longer term due to inflationary increases BUT, they fail to calculate this fairly or take into account all aspects.

Both the drawn pension and deferred pension benefit from inflationary increases so the 'gap' over time is there but not on the level most calculate. In addition to this factor people forget to consider the increased lump sum. If you want to be fair then look at ALL aspects. 

In your example above, if you took the lower income, and stuck the additional lump sum of £7,558 into a savings account earning 4% it would also be increasing by £302.32 per year. 

DavidT67

Pat38493 said:

Neilb1969 said:

DavidT67 said:

FYI, a commutation rate of 16 isn't that generous.  I have schemes offering between 28 and 22, dependent on how much earlier than the scheme normal retirement age the PCLS is taken. 

Typically does the commutation rate fall the nearer you get to a schemes normal retirement age? My wife has been offered a commutation rate of 31 times if taking her pension at 55. Is it a certainty that this rate will fall as she gets closer to the NRA of 60? Many thanks

There is another thread running at the 'mo where I was discussing a pension estimate I received in 2021 for retirement at age 57 in 2026 and at 65 in 2034.  The estimates they sent has a lump sum commutation rate of 40:1 for retirement at 57 and 28:1 at 65.   I was actually questioning these numbers because this seemed "too good to be true" but I never got a clear answer from Mercer at the time so I will just request another estimate soon and see what happens.  If that's really true, I can only imagine there must be something in the pension deeds of my scheme that forces them to provide this rate, but it's not mentioned in the current pension fact sheet.

I do not know if it's normal for the commutation rate to get worse for later retirement dates, and I can't really intuitively see why this would be the case although I haven't really put much thought to it.

If the actuaries have done their calculations fairly and correctly then the commutation rate on PCLS and reduction factor on early retirement annuity ensure that you receive the same overall amount between pension commencement and expected date of death, whether you retire early or at normal date and whether you take a PCLS or not.
At least this is true for my final salary and defined benefit schhemes.

Pat38493

DavidT67 said:

Pat38493 said:

Neilb1969 said:

DavidT67 said:

FYI, a commutation rate of 16 isn't that generous.  I have schemes offering between 28 and 22, dependent on how much earlier than the scheme normal retirement age the PCLS is taken. 

Typically does the commutation rate fall the nearer you get to a schemes normal retirement age? My wife has been offered a commutation rate of 31 times if taking her pension at 55. Is it a certainty that this rate will fall as she gets closer to the NRA of 60? Many thanks

There is another thread running at the 'mo where I was discussing a pension estimate I received in 2021 for retirement at age 57 in 2026 and at 65 in 2034.  The estimates they sent has a lump sum commutation rate of 40:1 for retirement at 57 and 28:1 at 65.   I was actually questioning these numbers because this seemed "too good to be true" but I never got a clear answer from Mercer at the time so I will just request another estimate soon and see what happens.  If that's really true, I can only imagine there must be something in the pension deeds of my scheme that forces them to provide this rate, but it's not mentioned in the current pension fact sheet.

I do not know if it's normal for the commutation rate to get worse for later retirement dates, and I can't really intuitively see why this would be the case although I haven't really put much thought to it.

If the actuaries have done their calculations fairly and correctly then the commutation rate on PCLS and reduction factor on early retirement annuity ensure that you receive the same overall amount between pension commencement and expected date of death, whether you retire early or at normal date and whether you take a PCLS or not.
At least this is true for my final salary and defined benefit schhemes.

I agree that it is their duty to attempt to ensure this.  However there seems to be a lot of subjectivity in the judgements involved there because if you peruse these boards you can see a wide range of early retirement factors mentioned with reductions per year from 4% to 6% per year or more, and a wide range of commutation factors ranging from 12 to about 40 mentioned.