Civil Service Pensions - inverse commutation question

Suffolk_lass · 8 December 2018 at 12:37PM

Brynsam wrote: »

...or you could of course contact the scheme administrators direct.

Yes I could, but I like to do my own research before I contact someone else, so that I can check if I have understood things correctly. I prefer this approach, rather than expecting them to explain it, and relying on (administration) staff to understand less commonplace features of the scheme.

hugheskevi · 8 December 2018 at 1:27PM

My objective was to look at boosting my spousal benefits a bit as his DB is likely to be around £8k p.a

Have you considered allocation? You can read more about it on page 6 of this link - https://www.civilservicepensionscheme.org.uk/media/181375/crb-1-april2016.pdf

It is not extremely poor - it is impossible to provide a guaranteed life-long inflation linked income of £540/year (£432 after tax) for £10K in any other way. When planning for retirement it is common to use a figure of 3.5%, and that isnt guaranteed.

I think you also need to take into account that the £10K would be tax free (as you are reducing the lump sum to buy extra pension). Most people will be basic rate tax-payers, so using £10K of tax-free income is a bit different to the normal situation of using £10K of taxable pension income to purchase the annuity.

I think the correct comparison would therefore be to use a figure of £12,500 to adjust for tax differences, assuming a basic rate taxpayer. That makes the percentage 4.32% (£540 / £12,500), but even so that is still a lot better than market rates for an uncapped index-linked payment from age 60 (although noting that the closest comparable annuity would have RPI indexation, rather than CPI, and RPI indexation would lead to a significantly more valuable pension in the second half of retirement).

Yes I could, but I like to do my own research before I contact someone else, so that I can check if I have understood things correctly. I prefer this approach, rather than expecting them to explain it, and relying on (administration) staff to understand less commonplace features of the scheme.

This is very sensible, for two reasons. First, you are far more likely to get the information you need if you can structure the question coherently and understand the relevant technical terms. Second, the quality of administrators is very variable, especially call-centre operatives. If you have a reasonable understanding of the issue you are far better placed to know if the administrator actually knows what they are talking about and understands your question.

Audaxer · 8 December 2018 at 3:02PM

Suffolk_lass wrote: »

Actually the table includes a calculation for spousal benefits too, and a weighting for male vs female member of the pension scheme. For us, the female calculations are 5.18% for just me or 4.97% with spousal benefits too.

You've lost me there as I don't know what these are percentages of, but I'd be interested to find out. Is there a link to the table of spousal benefits you are referring to?

kidmugsy · 8 December 2018 at 4:19PM

Are the OP's figures broadly consistent with the suggestion I saw here once that it's often financially best to take the standard pension/lump sum combination rather than do either commutation or reverse commutation?

As for hugheskevi's point about allocation: hear, hear! I took allocation on one of my DB pensions. I reckoned it was effectively an insurance policy that was good value - not least because I knew more about our health, and our family longevity records, than the pension fund could know.

P.S. If the OP's allocation were effectively paid for by drawing down a bit more from the husband's DC pension than originally intended, then the manoeuvre would boil down to using some of his pension money to buy a deferred index-linked annuity on (I'd guess) decent terms.

Suffolk_lass · 9 December 2018 at 7:49AM

Audaxer wrote: »

You've lost me there as I don't know what these are percentages of, but I'd be interested to find out. Is there a link to the table of spousal benefits you are referring to?

It is the link in post 2 - there are two parts, the explanation for calculation and the percentage table (the latter depends on your age, gender and whether you want any inverse commutation to apply to your spouse). What I did was find my age and gender, apply it to column 4 and then in a blank cell, calculate it multiplied by various amounts of £100 - so e.g. for £10k of lump sum, I multiply the cell that applies to me by 100 (though I can do that particular example in my head!) - so I was thinking of £12,200 to round my TFLS down but the annual uplift is only a bit more than £50 a month for me (and £25 a month for my spouse if I die first).

The standard commutation for my scheme (i.e. taking a larger TFLS) is £1 of pension given up for every £12 increase in the TFLS up to a maximum of 25% of the total pot value. My pension pot is not that big and my prevailing tax level after I stop work will be standard, not higher rate, so I am not going for that (it is a good thing to consider if you are at or around that level, just because of the other things like marriage tax allowance (transfer) tax on interest, and so on)

Suffolk_lass · 9 December 2018 at 8:23AM

Once again hugheskevi, thank you for the link regarding allocation (in post 13). We have had a good chat about this option. We were looking to keep our income as high as possible.

I am one of those women that did their planning based on a retirement date of 60, well over 30 years ago, and although I totally support equalising the retirement age between men and women, I and my plans have been adversely impacted by its' implementation "so close" (in working life and planning terms) to my retirement. Six years is a lot of income to find (£50k over 6 years based on this year's Standard pension)

My reading of the allocation factors spreadsheet here is that I can only do this by giving up income, not lump sum, from my quote. This is my only pension, other than the SP, so we have agreed not to allocate. Any adjustment to change who gets what, and when, costs us, and the benefit levels are relatively modest, so we have concluded that we will stay as we are. We have other things I have not posted about that are reassuring, so this is not our only element to consider.

As kidmugsy suggests might be the case, we have looked at all three options and concluded that the standard allocation is financially best for us. They knew what they were doing when they set up that original pension scheme. I am so fortunate to have the reserved rights to still be in it. Your point about knowing more about your circumstances than a pension scheme is well made. We are both relatively fit (if a little too fat) and enjoy good health most of the time.

I also like the point you are making in your PS paragraph kidmugsy (in post 15 - sorry, I should have multi-quoted!) about "borrowing" from my pot to allocate for DH but the issue for us is that that DC pot we would draw down from is capital, rather than the allocation which is taken by giving up income (running costs).

Thanks to everyone for your comments, this has really helped inform our discussions and decision-making.

kidmugsy · 9 December 2018 at 4:40PM

Suffolk_lass wrote: »

the issue for us is that that DC pot we would draw down from is capital, rather than the allocation which is taken by giving up income.

Many couples find that they are anyway going to get a big income boost when their State Retirement Pensions begin, so that they want to use any DC pots to boost their incomes before that happens. It's true that that compromises their eventual ability to drawdown tax-free if their spouse should die before age 75, so there is a trade-off to consider.

The DC pot is "capital" only if you choose to view it that way. Money is fungible. Heavens, some people might find it worth using mortgage debt to allow them to do an allocation, with a view to clearing everything up after the "pay rise" of their SRPs starting.

If you want to increase your husband's income in case you should die first, you could consider his deferring taking his SRP for a couple of years. He'd get an extra 5.8% for each year of deferral. Would he find an extra 11.6% of SRP worth having? Currently that might be, say, about £1k p.a. depending on his circumstances.

Many people might be wise to withdraw money from ISAs and contribute it to pensions once they are past 55, to take potential advantage of a future tax-free drawdown. Anyway, good luck with all this.

Suffolk_lass · 15 December 2018 at 10:37AM

Thanks very much to everyone for their contributions, I have sent off my choices. I suppose there is a timing element. I boosted my TFLS by about £1450 (so over £17k lump sum) of my annual pension after clarifying that this does not also reduce the widowers element.

I will use this part and a bit more to pay down the remaining mortgage and split the rest of the lump sum for big things we are planning, and some long-term investments. Then for the remaining months DH is working we will continue our "overpayments" (it is interest only) of the mortgage until he goes and then probably clear it with most of his lump sum - or let it continue, depending on what the financial situation looks like. So that is us, done now, for a few months at least!!

Freeman24reverseFpenny · 10 April 2019 at 10:37PM

I took partial retirement from the civil service in 2016, and decided to inversely commute my lump sum, which gave me an additional £2,400 per annum of pension.

What I do find quite interesting is that the old PCSPS classic scheme is the only civil service pension scheme where it's possible to do this. You can't do it with the nearest relation to it, classic plus, and the newer ones don't even have an automatic additional lump sum.

I've also noticed that the latest re-vamped Classic scheme guide makes no mention whatever of inverse commutation, and a search reveals nothing.

I get the feeling that it's not popular in government circles.

penwise · 11 April 2019 at 9:51AM

I am interested in allocations.

Any examples of this.

Also Suffolk lass’ link to spreadsheet gave me a server error.

Can anyone help?

Civil Service Pensions - inverse commutation question

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