Commutation factors lower with later retirement age

Pat38493

Hi,

Is it normal that commutation factors would get lower (worse) for retirement estimates at older ages with a DB pension.

I received 3 estimates from Mercer (strangely I received each of them weeks apart, with one of them being delivered by the post and the other two by email even though the request was made using the same form at the same time).

The commutation factors were
Age 55 - 23.1
Age 57 - 22
Age 65 - 18.2

I suppose this seems plausible as the number of years of inflation protection you are surrendering is more if you retire early?

Linton

Pat38493 said:

Hi,

Is it normal that commutation factors would get lower (worse) for retirement estimates at older ages with a DB pension.

I received 3 estimates from Mercer (strangely I received each of them weeks apart, with one of them being delivered by the post and the other two by email even though the request was made using the same form at the same time).

The commutation factors were
Age 55 - 23.1
Age 57 - 22
Age 65 - 18.2

I suppose this seems plausible as the number of years of inflation protection you are surrendering is more if you retire early?

Yes - I dont think it is a coincidence  that (23.1/18.2)^0.1=1.024 which should be close to the market assumptions on long term inflation.

Marcon

Pat38493 said:

Hi,

Is it normal that commutation factors would get lower (worse) for retirement estimates at older ages with a DB pension.

I received 3 estimates from Mercer (strangely I received each of them weeks apart, with one of them being delivered by the post and the other two by email even though the request was made using the same form at the same time).

The commutation factors were
Age 55 - 23.1
Age 57 - 22
Age 65 - 18.2

I suppose this seems plausible as the number of years of inflation protection you are surrendering is more if you retire early?

It's not so much inflation protection, it's actual years of pension payments. Assuming you are going to die at the same age whatever age you retire, and assuming that age is (say) 80, if you retire at 55 you're swapping 25 years of future pension payments for cash, whereas retiring at 65 you are only swapping 15 years.

jimi_man

Yes the police pension worked in this way. At the time I retired about 6-7 years ago, the commutation at 48 was around 23 and at 60 was 15 or so I think. More now. 

It’s one of the reasons why when people on here quote commutation rates of 20 and above being ok and below that being poor (for example), it’s actually completely meaningless without the context of age. 23 at age 48 is pretty poor, but 23 at 60 it’s not too bad. 

NoMore

Yes its usual, here's the commutation factors for my DB pension, I just asked my pension administrator for them so I could write a spreadsheet to calculate my own pension.