Planit:UK Defined Benefit Pension Plans Case Study

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This case study is specific to financial planning in the United Kingdom, so has fixed values rather than indices by country. For a similar case study applicable to other countries, please see Planit:Case Study on Calculating and Entering Defined Benefit Pension Plans, Planit:Malaysian Civil Servant Pension Case Study or Planit:Entering Other Revenues Case Study.

The Pension Plan is one of the most critical numbers that you input into your calculations and projections for your clients. With many variations and factors going into their calculations, it is important to be able to quickly calculate the pension plan amount without hassle. With benefit pensions there is a Defined Benefit Pension Calculator for an accurate estimate of the annual benefit and possible lump sum amount your client can receive.


Example Problem One:

David and Debbie O’Connell are going to receive defined benefit pensions on their retirement at age 67. David has been an architect for five years with a current salary of £30,000. Debbie is an economic advisor, working for the government over the last seven years for £45,000 annually.

After looking over the details of their pension structures, you find Debbie’s pension has a 1/60th accrual rate and a 12:1 commutation factor. She does not want any lump sums on her retirement. David has a 1/80th accrual rate and a 10:1 commutation factor. He would like an £80,000 lump sum on retirement.

The O'Connells have an inflation assumption of 3%, mortality assumption of age 90, and are currently age 38 and 40 respectively.

Solution Using the Defined Benefit Pension Calculator:

On the Pensions and Other Revenues screen, you will enter the client’s defined benefit pensions and lump sum amounts, but first you must calculate the pension amount:

Open the [ UK Defined Benefit Pension Calculator]. In this calculator spreadsheet tool, the yellow boxes indicate where data entry is necessary.

  1. In the Current Age field, enter Debbie’s age of 38
  2. Her Current Salary is £45,000.
  3. Set the Retirement Age to 67.
  4. For % Inflation enter the O’Connell’s inflation assumption of 3.0%
  5. Even though the Accrual Rate is 1:60, simply enter the 60 within the field.
  6. The Current Years of Service with Employer is seven as Debbie told you.
  7. Enter Today’s Date in the form MM/DD/YYYY
  8. You can enter the Commutation Factor as 12, but since she is not electing to take a lump sum amount, this will not affect her calculations.
  9. Record the value of the Annual Pension Without Lump Sum for later entry into the Pensions and Other Revenues screen.

File: uk5.jpg

After calculating the amounts of Debbie’s Benefit Pension, we can leave the Pension Calculator Spreadsheet tool, and return to the Pensions and Other Revenues screen.

  1. Click Add above the existing revenue streams
  2. Enter an appropriate Description such as Debbie’s Benefit Pension
  3. The Owner drop-down list can be set to Spouse.
  4. In the Amount Per Year field, enter the amount you recorded from the Pension Spreadsheet Calculator: £63,627.27.
  5. Set the From Year to start at her retirement or at her age 67, 29 years from now.
  6. Set the To Year to Debbie’s assumed mortality or age 90, 52 years from now.
  7. The Index Rate can be set to 0%, since the inflation on Debbie’s salary was already accounted for in the pension calculator, and the annual pension will not increase.
  8. Since the pension is fully taxable on receipt, the Percent Taxable can remain at 100%
  9. The Amount on Death should be 0%
  10. The Amount on Disability should both be set to 100%.
  11. The Model As option should be set to Start During Retirement since only the start year will be pushed back in the event that retirement is delayed.
  12. The Additional Increase field allows you to identify if the value of the pension will increase annually if the retirement is delayed, since the client will be working longer. Here we have estimated about 2.0% based on the 1/60th accrual rate and increase in salary, but you could elect to include a different amount.
  13. Click Save to return to the summary Pensions and Other Revenues

File: uk6.jpg


You must also add David’s defined benefit pension and lump sum amount:

  1. Re-open the UK Defined Benefit Pension Calculator
  2. In the Current Age field, enter David’s age of 40.
  3. His Current Salary is £30,000.
  4. Set the Retirement Age to 67.
  5. For % Inflation enter the O’Connell’s inflation assumption of 3.0%
  6. Even though the Accrual Rate is 1:80, simply enter the 80 within the field.
  7. The Current Years of Service with Employer is five as David told you.
  8. Enter Today’s Date in the form MM/DD/YYYY
  9. You can enter the Commutation Factor as 10.
  10. Even though the calculator will return a value for Maximum Lump Sum, David said he wanted only £80,000 so change this Maximum Lump Sum to 80,000.
  11. Record the value for Annual Pension After Lump Sum for entry into the Pensions screen.

File: uk7.jpg

After calculating the amounts of David’s Benefit Pension with a £80,000 lump sum, we can leave the Pension Calculator Spreadsheet tool, and return to the Pensions and Other Revenues screen.

  1. Click Add above the existing revenue streams
  2. Enter an appropriate Description such as David’s Benefit Pension
  3. The Owner drop-down list can be set to Client.
  4. In the Amount Per Year field, enter the amount you recorded from the Pension Spreadsheet Calculator: £18,655.47.
  5. Set the From Year to start at his retirement or at his age 67, 27 years from now.
  6. Set the To Year to David’s assumed mortality or age 90, 50 years from now.
  7. The Index Rate can be set to 0%, since the inflation on David’s salary was already accounted for in the pension calculator, and this annual pension will not increase annually.
  8. Since the Pension is fully taxable on receipt, the Percent Taxable can remain at 100%
  9. The Amount on Death should be 0%
  10. The Amount on Disability should both be set to 100%.
  11. The Model As option should be set to Start During Retirement since only the start year will be pushed back in the event that retirement is delayed.
  12. The Additional Increase field allows you to identify if the value of the pension will increase annually if the retirement is delayed, since the client will be working longer. Here we have estimated about 2.0% based on the 1/80th accrual rate and increase in salary, but you could elect to include a different amount.
  13. Click Save to return to the summary Pensions and Other Revenues

File: uk8.jpg

You must also add the lump sum amount David will take out on his retirement.

  1. Click Add above the existing revenue streams.
  2. Enter an appropriate Description such as David’s Retirement Lump Sum
  3. The Owner drop-down list can be set to Client.
  4. In the Amount Per Year field, enter the £80,000 amount you used in your calculations.
  5. Set the From Year to start at his retirement or at his age 67, 27 years from now.
  6. Set the To Year to the same year, since this lump sum is a one-time revenue.
  7. The Index Rate can be set to 0%, since David indicated he wanted this flat amount.
  8. The Lump Sum on retirement is tax protected, so the Percent Taxable should be 0%.
  9. The Amount on Death should be 0%.
  10. The Amount on Disability should be set to 100%.
  11. The Model As option should be set to Defer with Retirement since both the start and end year of the revenue will be delayed with retirement.
  12. Click Save

File: uk9.jpg

Go to the exercise to test your knowledge on Defined Benefit Pensions Plans

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