# Calculating PCLS comm factor

When you look around the internet, trying to find out how to calculate PCLS comm factors, all you get is how to calculate the PCLS and reduced pension (which I can do with my eyes closed). However, I haven't been able to find out how to calculate the CF itself.

I am scratching my head on how to work it back; I have the unreduced income, the PCLS and reduced income amounts, and I would have thought it would be a (fairly?) simple calculation to work out what the CF actually is?

Or is it? Are there any maths geniuses who can help me?

## Comments

• Not sure if you are overthinking it? If you know the pension given up I always just divide cash by pension to get commutation rate. i.e, if full pension £20k pa and reduced pension £15k pa and tfc is £80k, £80k/£5000 (pension given up)= 16. Is that what you mean?
• Thanks - that's exactly what I'm looking for • Hmm I'm not sure about that? If the full pension is £20k p.a., reduced pension is £15k p.a. and commutation rate is 16, then the tax free cash would be c£94k (not £80k).

• Best to get the commutation rates direct from the Scheme Andy as they'll also vary according to age and slice type etc. as I'm sure you've come across

• The commutation factors given by the scheme were completely different to those used on the early retirement quote, and I had to play around with the TVC to ensure the figures on there were correct (and matched the numbers on the quote). I had already found the CF through trial and error, and when I ran the calculation as above, it matched the number I was looking for

• > @PPWow said:
> Hmm I'm not sure about that? If the full pension is £20k p.a., reduced pension is £15k p.a. and commutation rate is 16, then the tax free cash would be c£94k (not £80k).

Interested how you make £94k? Commutation rate should be how much cash you get per pound of pension given up, so if you give up £5000 of pension and commutation rate is 16 that is £80k surely?
• @PPWow said:
Hmm I'm not sure about that? If the full pension is £20k p.a., reduced pension is £15k p.a. and commutation rate is 16, then the tax free cash would be c£94k (not £80k).

I've just done this quickly, and I agree with PPWow's figures:

We all know the calculation for TFC is:

Maximum TFC = (20 x pension before commutation) / (3 + 20/CF)

So in this case if the CF was 16, the calculation is:

(20x20,000) / 3+(20/16) = £94,117

To get the commutation factor, you just need to turn it around:

3+(20/CF) = (20 x pension before commutation) / Maximum TFC

Using this one as the example

(400,000 / 20000) / (£94,117 = 4.25

4.25 - 3 = 1.25

20/1.25 = 16

CF = 16

@PPWow is right about the CF factors too, they're scheme specific and depend on age, scheme type etc. Also, if the pension is being taken early, there's likely to be early retirement reductions (depending on how early it's taken) and changes to the commutation factor as a result.

To make sure you have the right commutation factor, particularly for someone retiring before the normal scheme retirement age, you really need to get this from the scheme trustees or administrators to make sure it's accurate.

@Andy_Schleider - 'The commutation factors given by the scheme were completely different to those used on the early retirement quote, and I had to play around with the TVC to ensure the figures on there were correct (and matched the numbers on the quote). I had already found the CF through trial and error, and when I ran the calculation as above, it matched the number I was looking for'

I would be really careful doing this as playing about with the TVC may get the answer you're looking for but if you don't have the figures from the scheme, there's no way of knowing if you really have the right answer!

• Aah, I wasn’t basing it on max tfc - I was just making up some illustrative figures for working out commutation factors. You don’t have to take max tfc you know!
• I know, but that's not how you work out the commutation factor! Always best to check with the scheme, I think • Thanks all, this is interesting- I admit I am rusty on DB with my original exam being G60!

I get my calc is not the full way of calculating it, but if I have all the other data points except commutation factor algebra should mean I can reverse calc the comm factor my way. If I have a quote from the scheme that giving up £5k of £20k pension would give me £80k tfc (not full commutation) how is the commutation factor not 16 I.e it is a bodge calc to reverse calc my way and I realise it isn’t ideal, but doesn’t it give the right answer in this example IF I have all the other data points?
• I have a headache. I can't see how @Calvert76 calculations don't work. Do they work if the lump sum is below Max TFC?

• edited March 5

Try this one (real example):

Max Pension - 30,912
or
Lump sum - 142,671
Pension - 21,401

I know the CF, but what would you calculate this as?

(I should say i'm not questioning anyone's methods here, i'm just an interested bystander!)

• I would say 15, and it works back the other way too (using 15 as the CF)

• @Andy_Schleider said:
I would say 15, and it works back the other way too (using 15 as the CF)

Was that using the shorthand method or the full-fat method?

• edited March 5

If you use the full method with these figures, I get a CF of 12.381:

Tax Free cash - £142,671
Divided by 20 times pension - (20 x £30,912) = £618,240
= 3+(20/CF) of 4.615392
minus 3 = 1.615392
Divide that by 20 = 12.381

Reversing it back the other way, it gives tax free cash of £142,671.

If you use that method with a CF of 15, it gives tax free cash of £133,952.

I'm not sure there is a 'short hand' way of working out the CF - that formula is the one given in everything I have ever seen about calculating the CF, so it's the one I always use. Does anyone have a link to the other method of calculation so I can check my understanding of it - I just want to make sure we get to the right answer!

• edited March 5

Using 12.381 as the comm factor, I got £133,952 PCLS and £20,093 reduced income.

There are a couple of calculations for this. The 'easy' way is: max pension x CF / 1 + (0.15 x CF). This gives you the PCLS. To get the reduced income you divide the PCLS by the CF and deduct from the original max pension income amount.

The 'other' way is (20 x max pension) / (3 + (20 / CF)). Again, this gives the PCLS, and you get the reduced income the same way as shown above.

Using yet another way: (20 x max pension x CF) / (20 + (3 x CF)) gives the same result

Examples 1 and 3 are taken from my AF7 study text

• The CF is 15.

*plays Eastenders theme tune

• 30912-21402 * 15 = £142,650 (is the shorthand method I would use, which evidently doesn't work out perfectly)

• @Andy_Schleider - I've seen those before, aren't they formulas for working out the max tax free cash? I'm not even sure what question you're wanting answered now!

• @Andy_Schleider said:
Using yet another way: (20 x max pension x CF) / (20 + (3 x CF)) gives the same result

This is the correct way.

@arongunningham yours is 15 (oh, you confirmed it!)

max PCLS / (scheme pension - reduced pension) = commutation factor.

142,671 / (30912 - 21401) = 15

Then reversed back using the correct HMRC formula

(20 x 30,912 x 15) / (20 + (3 x 15) = 142,671

You can only work out the CF if you have the maximum pension and the maximum PCLS and corresponding reduced pension. You also need to bear in mind that there are frequently different CFs for different slices of benefits and once that's in play you've got no chance of doing anything other than getting the composite.

If you don't have the inputs above, and you don't know that there is only one CF, then your CF output is just the ratio of PCLS:SP based on what is happening. It is A commutation factor, but it isn't THE commutation factor the scheme is using to determine the maximum PCLS a client is entitled to.

Also, producing a TVC chart with PCLS figures is not part of the rules (19.1.3A(1)R) and I would advise against doing it. PCLS should form part of your APTA, not your TVC.

Benjamin Fabi FPFS
Chartered Financial Planner
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