Defined benefit TFLS

Justso65

Hi

I have always been led to believe that for a DB pension it is adviseable to take any TFLS and a reduced pension than a full pension and no TFLS.

So I have done some fag packet calculations. 

If I take my pension at 65 I can either have a pension of £19600 with no TFLS or £13577 with a TFLS of £90500.

My initial calculations were based on the reduction in pension as a proportion of the TFLS.  So that came up with around 15 years to get out of my full rate pension what I would get with the reduced rate plus TFLS.  However, I then realised this does not take into account tax on the difference between reduced and full as well as interest/investment earned on the TFLS over that time.

Now, my spreadsheet skills are pretty basic but what I did was take the difference in pensions minus 21% (Scottish) tax to get the in my hand amount of the difference.  This equates to about £4700 (ish).  So now I would need around 19 years of full pension to make up taking the reduced rate and TFLS.  I have not taken into account any interest/investment return on the TFLS but that would obviously increase those 19 years.

So now from 65 I'm approaching or passing 85 before I get the same amount from a reduced rate + TFLS or full rate.

So my quesions are.

1.  Are those calculations in the ball park area of how many years of pension I would need at full rate to match the reduced rate + TFLS.

2. Would anyone usually take the full rate instead of reduced + TFLS.

Once I get to 90 the full rate comes out as more over those years but by then I'll either be pushing up daisies or not being as active and having as much spending power.

I'm not one to take the TFLS and blow it on fast cars and fast women.  I would invest it and use it to fill the gap created by the reduced pension.  I would also have the TFLS for any unforeseen expenses or to blow quickly on fast cars and women if I got a terminal diagnosis.  I think I'm talking myself into reduced + TFLS here but I'm interested in anyone else's thoughts/experiences.

P.S.  I also have a significant DC pension I would be drawing from and a full state pension 2 years after retirement.

JS.

Tommyjw

Do you know how the £19600 and £13577 pa pensions increase once in-payment?

That helps see whether you could 'beat' returns i nthe market or not, but also whether the offer for cash is a good one or not. Your Commutation factor is ~15 so you get £15 of cash for every £1 given up, which is on the low end. However, if the pension your given up is non-increasing pension that doesnt increase annually, it's not as bad as if you're giving up pension that increases by up to 5% per year for example.

bjorn_toby_wilde

You haven’t mentioned how the pension increases once in payment and for me that’s another big factor.

If, for example, the scheme was fully index linked like a local government or NHS scheme then you would be giving up an inflation proof income. Personally I wouldn’t do that unless there was a very good reason to do it.

If, on the other hand you had a private sector DB pension like one of mine; 30% increasing by CPI capped at 5%, another 30% capped at 2.5% and the rest at the discretion of the company (who have never approved an increase yet), then it’s a whole different ball game. I took the lump sum on that one because the commutation rate was very good.

Cobbler_tone

This pops up a lot. Totally horses for courses. You could take your full pension and pop your clogs in 12 months time, hopefully not! 
The commutation factor is pretty poor.
It sounds as though you have other streams of income.

The only sure way of knowing on any spreadsheet whether you will be financially better off or not, is from knowing your 'end' date.
If you have absolutely no need for the lump sum, or have lump sums/savings elsewhere, I personally would max the pension at that rate, or at least wouldn't opt for the full lump sum. Even more so if your intention is to invest it to try and match the gap in 'lost' income. 

As above, not forgetting that the respective pensions will probably have growth, with that gap growing once they start compounding.

cloud_dog

I am in the same (similar) boat as yourself, and will be taking the full PCLS for the DB scheme.  The spouse's pension is based on the full benefit, not the reduced amount post PCLS, so that is another thing to bear in mind.

Cobbler_tone

cloud_dog said:

I am in the same (similar) boat as yourself, and will be taking the full PCLS for the DB scheme.  The spouse's pension is based on the full benefit, not the reduced amount post PCLS, so that is another thing to bear in mind.

It is always a personal decision based on (hopefully) understanding the wider picture of your finances and all schemes are different.
I know my bro took part of his lump and an increased pension for higher guaranteed income.

I guess financially one of the biggest deciding factors is the commutation factor. I think most people's eye light up too when tax free wonga is on the table! 

The point on the spousal element (not being impacted either way) seems to be a common theme.

Moonwolf

In answer to your 2nd question "Would anyone usually take the full rate."

I have significant DC and DB pensions and I am not taking the maximum PCLS.  I have three bits of DB pension which I could commute some to cash in all of them. In fact I only have one that I will take a PCLS from, and that is because there is no choice.

If I need cash I have my DC pension.  I intend to draw down flexibly but mostly UFPLS style so I can always take extra TFLS from that if I need cash.

On the other hand, a guaranteed income is valuable and in my case it is a 12:1 commutation rate which is poor, I certainly won't need to live that long to be better off.  If I invested the cash, all I would be doing is getting the same growth as I get from my DC scheme which I am drawing less from as I have more pension.

 

jimi_man

One thing to bear in mind is that judging the commutation rate (15:1 in your case) on its own is only half the picture. It needs to be judged in context with age to assess its value. As an example my one was offering 22:1 which might sound good but I was 51 at the time which made it poor value so I didn’t take it. At age 65, 15:1 is better though not amazing, but not dramatically poor either. 

Another way of looking at is that by not taking the TFLS you have effectively invested £90k and you are getting £6000 interest a year, which is a rate of 5.3% after tax. Constant, as long as you live. Presumably that £6000 a year has some form of index linking too which will add to that 5.3%. 

Conversely if you need a lump sum (you want to buy a boat, holiday home etc) then that’s a good reason to take it. 

However you say that you don’t and have no real need for a lump sum and you have a significant DC pension. Personally I wouldn’t take it in those circs but then I’m not you. Your choice! 

Also I cannot state this strongly enough, to have a steady income (salary if you will) that plops into your bank account every month without fail, no matter how long you live and without any transferring funds, spreadsheets, drawdown calculations, watching your capital go down, investment risk or worry is a feeling that cannot be bettered. To reduce that figure by taking a lump sum would detract from that IMO.  

Phossy

To answer Q1 - Yes, 19 years to 'break-even' (=15/.79) based on todays money based on 21% tax rate. I think a lot of folks forget the impact of tax. I wouldn't get hung-up on different peoples views of what is a good or bad commutation rate - work out what is good for you.. 

Q2. I plan to take the full tax free amount for many reasons, though primarily to help me bridge to State pension age and spend as I want in my 'early' retirement years. If something should happen to me then I want that money available to my family, not 'lost' to the system. My break even point is after 22 years. I also think that if I choose to invest it, I stand a good chance of beating the rate I'd get if I left it in the DB pension; my DB is capped at 5% and over the last 8 years I am down more than 10% on the increase in CPI. 

Nebulous2

I'm in the LGPS and by an anomaly of transferring my pension in I didn't have any automatic lump sum. The commutation rate for the LGPS is only 12:1, the pension is fully indexed by CPI, and I was stopping work at 59. My priority was to maximise income so I chose not to take a lump sum at all. 

It's a personal decision as much as a monetary one, a gamble on how long you'll live. Channelling Dirty Harry;  "Do you feel lucky?" 

I've been a wage slave all my life, and enjoy that monthly drop into my bank account. It gives me some sense of security knowing all of my needs and quite a bit of my wants are met every month. 

daveyjp

Higher monthly income also helps if you ever need credit.  If you are looking at taking an increased lump sum payment it can be worth doing some sums as to whether it is better value to borrow the extra amount you need and pay it back over the first few years of retirement. 

 Your monthly loan payment will remain the same, but your income will increase over the loan period.