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Commutation factors: At what level would it be foolish to decline TFC?

freewheeler
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Commutation factors: At what level would it be foolish to decline TFC?

#408333

Postby freewheeler » April 30th, 2021, 3:07 pm

I'm considering crystallising a DB pension towards the end of this year, upon reaching 60.
My natural inclination had been to take zero tax free cash (TFC), since I don't have any particular need for it. However, the commutation factor (CF) on offer is 28, which some research suggests is very generous compared to typical pension schemes. The CF on offer ramps down with age, of course, reaching 24 at age 65. I guess it's the age 65 figure that should be used as a basis for comparison when I read such things as "CF of 15 is typical, with 20 being considered the higher end of the range".

So, it's left me wondering: For a 65 year old (say) who doesn't particularly need the TFC, how high would the CF need to be before it became foolish to turn down the TFC deal?

Some specifics to illustrate my case, in case it helps:
  • At age 60, receive a pension of £11,260.56 a year, or
  • a tax-free PCLS of £60,695.98 and a pension of £9,104.40 a year.
  • Or, at age 65, receive a pension of £15,344.64 a year, or
  • a tax-free PCLS of £80,087.86 and a pension of £12,013.20 a year.
  • "The commutation factors for the Scheme are:
    55 = 32.19, 56 = 31.39, 57 = 30.59, 58 = 29.78, 59 = 28.97, 60 = 28.15, 61 = 27.33, 62 = 26.51, 63 = 25.69, 64 = 24.86, 65 = 24.04"
Best I could come up with in trying to answer this for myself was to see what size annuity could be purchased with the TFC. According to Aviva's calculator, spending the £60,695.98 at age 60 could buy me (given my personal stuff like alcohol intake and BMI) an annuity of £1,058.64 per year, increasing at 3% per year, reducing to 66% on death for spouse (i.e. chosen similar inflation and spouse benefits as my pension would give).
On this basis, CF of 28 is not sufficient reason to bite their hand off. Plus, there's a small LTA advantage in declining the TFC. OTOH, annuity rates are famously rubbish, so perhaps this isn't a good way to gauge the attractiveness of the offer.

Kantwebefriends
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Re: Commutation factors: At what level would it be foolish to decline TFC?

#411425

Postby Kantwebefriends » May 12th, 2021, 4:55 pm

annuity rates are famously rubbish

What can that mean? They are set in a competitive market.

As far as I can see it usually means

(i) They used to be bigger. Sob!

or

(ii) I have an irrational objection to annuities which I would express irrespective of current annuity rates.

ursaminortaur
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Re: Commutation factors: At what level would it be foolish to decline TFC?

#411475

Postby ursaminortaur » May 12th, 2021, 9:04 pm

Kantwebefriends wrote:annuity rates are famously rubbish

What can that mean? They are set in a competitive market.

As far as I can see it usually means

(i) They used to be bigger. Sob!

or

(ii) I have an irrational objection to annuities which I would express irrespective of current annuity rates.


The comparison should be with something that gives you similar benefits to the DB pension that you are giving up which would generally mean a comparison to some kind of indexed joint life annuity rather than a level single life annuity. (Of course if you are single the joint life provisions of the DB scheme would be irrelevant to you anyway so you might then look at comparing with an indexed single life annuity).

Comparing with drawdown isn't really appropriate as it doesn't provide a guaranteed increasing income unlike an indexed annuity or a DB scheme.

Note though that this is just for comparison purposes to make sure that the transfer value is fair - once the transfer is complete you can then choose what to do and may well choose to go into drawdown rather than buy an annuity especially if you want to leave some of the remaining pension to your beneficiaries.

freewheeler
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Re: Commutation factors: At what level would it be foolish to decline TFC?

#411866

Postby freewheeler » May 14th, 2021, 10:53 am

ursaminortaur wrote:The comparison should be with something that gives you similar benefits to the DB pension that you are giving up which would generally mean a comparison to some kind of indexed joint life annuity rather than a level single life annuity.


OK. That's pretty much what I did, so reassured to know I'm on the right lines.

Thanks, both.


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