DB Pension and TFLS Calculation Question

KevinTHFC

Morning All,

I have received the following figures for a DB pension that I can take in March 2026.

A ) 33,712.18 per year

B ) 23,296.35 per year and £159,508.99 TFLS

C ) Unknown Pension and any TFLS lower than in B

Is there a way to arrive at an approximate salary based on taking TFLS below the allowed 25%, say for 10% or 15% etc?

NoMore

You need to know the commutation factor, which from your figures is about 15.32. This means for every £1 you give up in your Annual Pension you get £15.32 in a lump sum.

So to figure out your Annual Pension based on a particular lump sum its £33712.18 - (Lump sum/15.32)

For example,  a 100k Lump sum you would get approx £27184.

KevinTHFC

Thank you. I make the commutation rate 16.3! 

I calculated that  by dividing the TFLS by the difference between the Pension paid in A and B.  ie 159508.99 / (33712.18 - 23926.35)

How do I calculate the commutation rate correctly?

Many Thanks

NoMore

That’s the way I calculated it as well but may have made a mistake in an entry.  Re done it and your correct, sorry about that. 

daveyjp

 If you want an actual figure you need to contact the pension provider, but in the grand scheme of the figures the approx won't be far out.

I also get 15.3

33712.18 - 23296.35 = 10415.83

159508.99/10415.83 = 15.31

QrizB

KevinTHFC said:

Thank you. I make the commutation rate 16.3!

I calculated that  by dividing the TFLS by the difference between the Pension paid in A and B.  ie 159508.99 / (33712.18 - 23926.35)

You've used 23296.35 in your first post, but 23926.35 in this one.

Which is the correct value?

Cobbler_tone

For a ball park figure you have calculated it correctly. However, you have 3 months and hopefully enough time to get some actual numbers from the scheme administrator.

My (deferred) scheme is really good. I got a quote to see if it matched what shows on the portal, it was exactly the same. The portal allows me to slide the 25% tax free amount to see the impact on the annual pension. It sounds as though that is what you could do with.

Using the 15.3 factor you shouldn't be too far out.

Albermarle

Perhaps more to the point is that whether it is 15 or 16, it is a relatively poor commutation rate.

Although to have a proper view we would need to know the details of the pension when in payment. For example; how much will it increase annually? by RPI? by CPI? by a fixed % ? no increases?
What is the spousal provision ( if you die before them) ?

The better the terms of the pension, the worse that figure of 15 ( or 16) looks.

Also it depends on your wider financial position. If you have no debts, and plenty of cash/investments, then it makes less sense to give up guaranteed income for a lump sum. 

Cobbler_tone

Albermarle said:

What is the spousal provision ( if you die before them) ?

The better the terms of the pension, the worse that figure of 15 ( or 16) looks.

Also it depends on your wider financial position. If you have no debts, and plenty of cash/investments, then it makes less sense to give up guaranteed income for a lump sum. 

On mine the spousal provision is 50% of the full amount and not impacted by taking a cash free lump sum. I think this is common with most DB schemes but worth checking.

Bighitter32

As mentioned, the commutation factor isn’t particularly strong, and in addition to the above points, be mindful of your personal tax position. If not fully considered in estimating the notional payback for TFLS against protected annual pension, you can make an incorrect call.

Cobbler_tone

Bighitter32 said:

As mentioned, the commutation factor isn’t particularly strong, and in addition to the above points, be mindful of your personal tax position. If not fully considered in estimating the notional payback for TFLS against protected annual pension, you can make an incorrect call.

It always come down to a personal decision/situation, like you say sometimes around the tax position.
Some people have plans for the cash, others want the highest guaranteed income.
There is no 'right/wrong' answer, unless someone knows how long they are going to live. It is also the only opportunity most people will ever get to see that much tax free cash. Sounds like the OP is looking at some middle ground.

My rate is 20.3 and I intend to take 25% when the time comes.