Please help me make sense of this commutation factor table

JDK1971

I have a deferred DB pension, and am weighing up whether I might want to take the lump sum or not.  I understand that people often look at the commutation factors to judge if a scheme is offering a generous term, so I decided to ask my provider for the details, and this is what they sent me!  I can’t make head nor tail of it.  In effect, I wanted to know what the commutation factor is for taking a PCLS at 62. Can anyone shed any light on this for me please.

NedS

The table is split into two sections for Factor A and Factor B

Factor A is where only your pension is commuted. Factor B would also commute your spouses 50% pension upon your death (they'd get 50% of the reduced value). If you chose Factor A, then your spouse survivors pension would still receive 50% of the original unreduced amount upon your death.

Within Factor A and B, there are then separate columns depending upon the indexation your pension receives (0% increases, inflation capped at 5% or inflation capped at 2.5%).

Do you have a spouse?

What inflation linkage does your pension have?

For example, if you don't mind commuting your spouse's survivors pension, and you have inflation capped at 5%, then for age 62 you would read across to the 5% column under Factor B for a commutation factor of 20.24, so for every £1 of annual pension you give up, you'd receive £20.24 lump sum. Give up £1000/year of pension, and you'd have £20,240 lump sum.

If you have amounts of pension entitlement with different inflation linkage, then you'd perform the calculation twice (or more) for each individual amount.

JDK1971

Thanks @NedS so I’m on the 2.5% increases column.  Do you think these commutation values are good bad or indifferent?  I’d be looking at 16.78 to retire at 62.

FIREDreamer

JDK1971 said:

Thanks @NedS so I’m on the 2.5% increases column.  Do you think these commutation values are good bad or indifferent?  I’d be looking at 16.78 to retire at 62.

They are not terrible, not fantastic, probably fair value I would say.

Tommyjw

To follow, Factor B should be ignored completely as it is only for taking your benefits as a trivial commutation (quickly - all pension benefits under £30k) 

The factors look a little bit under what i'd be used to looking across the more common ages, but not by much really. Not much use comparing as you can't change it!

af1963

If it helps to see a couple of ballpark figures: it's 12x for many public sector schemes ; 21x at age 65 a couple of years ago for a friend of mine in a private scheme which has 3% annual increases. 

michaels

I assume the lump sum is tax free whereas the amount if taken as pension will form part of taxable income.

Sarahspangles

michaels said:

I assume the lump sum is tax free whereas the amount if taken as pension will form part of taxable income.

Yes, within limits.

However taking a lump sum just so you can put it in a bank account and look at it may not make sense.

If you take £100k but have no ISA allowance available, and get 4% interest of £4k, you pay tax on £3k, assuming this is the only interest you receive and you’re a basic rate tax payer. If inflation is also running at 4% the net buying power of the £100k decreased. Whereas left in the pension it may have been inflation proofed at 4%. Or not, depending on that scheme. We’ve just gone from a high inflation, low interest period to a lower inflation, higher interest period. So the impact on two pensioner taking a lump sum a couple of years apart could be very different.

Some schemes that have a spouse or dependents pension also reduce the benefit proportionally. And what’s left of the lump sum may now be part of the estate and subject to IHT.

There are so many variables, some requiring a crystal ball, that every decision needs to be looked at individually.