Pension - Higher or lower lump sum

Andy_L

phlebas192 said:

spaniel101 said:

Albermarle said:

Silvertabby said:

Albermarle said:

It is a pity that with such a poor commutation rate, that there is not an option to not take any lump sum at all and get an even bigger pension.

LGPS inverse commutation was phased out many moons ago.  Too expensive. 

As I've said before, over 90% of LGPS retirees go for the maximum commuted tax free cash, despite the poor rate.  Helps keep the scheme affordable, I suppose! 

ADD:  A tiny number of very old deferred records still have reserved rights to inverse commutation.  Even in my time, the cost of adding software that would hardly be used was deemed to be an unneccessary expense, so the calculation had to be done manually,  Our policy was that initial pension quotes would be based on normal/maximum tax free cash options, but we would add that an entitlement to convert automatic lump sums to extra pension existed, and to ask us for the figures.  Again, over 90% of these went for the maximum tax free cash. 

I have learnt something today. I have never heard of inverse commutation before!
I just assumed the baseline for any DB pension, was maximum pension and no lump sum.
Like you say I suppose forcing you to take some lump sum at a poor commutation rate saves some money, although it sounds like very few people would take a maximum pension option anyway.

The Railway pension scheme (RPS - funded) has inverse commutation via Brass contribution (AVC).   Partial Brass fund value @ NRA forms your lump sum (as opposed to reducing your annual pension), any 'excess' Brass can be inversely commuted @ 12:1 to increase annual pension.

I realise this is rather tangential to the thread, but the RPS is a perfect example of what DB pensions could have been if employers had been prepared to look beyond the short term. The Network Rail section of the RPS shows a clear surplus and has done for many years and it has been able to continue to offer such attractive terms as the one you indicate (and, indeed, which I took advantage of - using my AVC funds to buy what is in effect an inflation increasing annuity at a 8.3% rate in 2021 was the easiest financial decision I've ever made). And pretty much any long standing DB scheme should have been able to offer similar terms if they had remained open to new entrants and had been run with the long term in mind.

OTOH, I have friends in a part of the old Britsh Railways which was sequentially taken over to the point that the (closed to new entrants) pension scheme was so fragmented and underfunded that they wanted to impose something like a 80% employee contribution rate even though the privatisation bill was supposed to maintain pension rights. Obviously they couldn't push that through but the resultant bad will meant that really good employees said "sod it" and took early retirement.

Future historians will look back on the DB pension years and be amazed how it ended purely as a result of economically illiterate short term decisions. Good pensions promoted loyalty from employees at minimal cost to the employers but the former were too often seduced by charlatans and the latter by the next 6 month reporting cycle.

Network Rail is part of the Public Sector though