Pension commutation rate when taking higher lump sum from DB pension

leosayer

Pat38493 said:

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.  

This is what I really struggle to understand.

In general I have viewed commutation as something to be avoided unless you really need it eg. to pay off debt, property purchase etc.

However it seems that if you're not in that situation and you're making a purely economic decision then the the analysis involved is similar to working out the value of a DB transfer ie. pretty complex with lots of assumptions.

Pat38493

leosayer said:

Pat38493 said:

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.  

This is what I really struggle to understand.

In general I have viewed commutation as something to be avoided unless you really need it eg. to pay off debt, property purchase etc.

However it seems that if you're not in that situation and you're making a purely economic decision then the the analysis involved is similar to working out the value of a DB transfer ie. pretty complex with lots of assumptions.

Probably you also have to look at the macro situation as well according to your personal situation - if you are testing your retirement plan against historical data or monte carlo simulations, you might find that it's better to take your DB pension early even with quite big commutation as it will act a kind of cushion against SOR risk and reduce the probability of you completely running out of money before your SP arrives (i.e. allowing you to retire a bit earlier).  I think this probably depends very much on your personal situation and combination of available assets and pensions.