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Discussion Starter #1
Hi :

I found this one that is based on the British Pound so you have to convert from Canadian currency . The Pension Annuity Table is the 4th one down. http://www.fsa.gov.uk/tables/


However , it tells me that my 2008 Cash Value of $184,000 will only provide me with $928 month at 60 years of age (10 year guarantee - for single life & no increase) , yet my Termination Statement from last summer (2008) says that I will receive $2044 (not including a possible Bridge Benefit) on my normal retirement date (60 years of age) .

I thought I had a handle on it but I obviously don't .

My pension booklet tells me that I can retire early and the administrator confirmed that my monthly cheque will be reduced by 6%/year from age 60 , or 30% if I retire at age 55 , which means a cheque of $1430/month. So I thought maybe the small amount of Annuity payout was because of this factor , but it still doesn't even come close .

Man , no wonder people go running to FA's to help them out with this stuff . I may still , but I'd like to know what he/she is talking about the next time I see one . The last time I didn't have a clue what he was advising me to do , so I ended up not doing anything .

Any help is greatly appreciated .

G J D Swain
 

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Discussion Starter #2
Found this one .
http://www.moneychimp.com/calculator/annuity_calculator.htm

That was an education and an eye-opener . Played with many different numbers and scenarios but it's not what I was looking for . I was hoping to find a calculator like the one I linked to in my first post so I can try and figure out what my Pension administration is doing when it offers such a low CV .

Thanks
G J D Swain
 

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For current Canadian annuity data, go to Cannex.

I'm getting a 404 error from your link.

You can get information about how your pension benefits are calculated by reading the reports put out by your pension administrators.

As for FAs: very, very few FAs know much about retirement income analytics. You might start with the list of fee-only planners at MoneySense.
 

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Discussion Starter #4
Ahh , this looks good . Canadian money , various options , switchable between calculating how much per month or how much to purchase . Nice .
http://www.retirementadvisor.ca/retadv/apps/annuity/annuity_inputs.jsp

Anyway , for a 30% reduced pension at 55 years of age the CV required is $296,475 - single life - 10 years guaranteed - 3% & 3% return - No cost of living increase , no survivor .

For a full unreduced pension at age 60 it's $374,019 .

Anyone have any idea why the documented CV (Cash Value) I was given last year was only $184,000 ? Have things changed that much since August/2008 as far as purchasing Annuities go ?

I'm still lost .

G J D Swain
 

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Discussion Starter #6
For current Canadian annuity data, go to Cannex.
Thanks . I was there this weekend but missed the link to Annuities at the very top-left . This is good stuff also . Roughly $274,000 CV for me at 55 with $1440/month and $357,000 at age 60 with $2044/month . Still nowhere near the $184,000 CV I was quoted .

I'm getting a 404 error from your link.
I just checked both links again and they both still work for me in 2 different browsers .

You can get information about how your pension benefits are calculated by reading the reports put out by your pension administrators.
Well , actually , I know exactly how they are calculated , but what I'm asking is - why was my Cash Value quote so low ?

I emailed the administrator a dozen times but no reply and she won't return my phone calls either . I asked her to explain how she came up with $184,000 last year and she went MIA and quit answering her phone .

So , I'm asking everyone , in a general manner - what figures would they use , generally , when calculating my CV amount ? I used my monthly income that is in my annual 'Personal Statement of Benefits' to calculate the CV (as I've explained in great detail above in my original post) , and got a different figure completely .

As for FAs: very, very few FAs know much about retirement income analytics. You might start with the list of fee-only planners at MoneySense.
Thanks . I will check that MoneySense link out , for sure .

My FA had estimated $350,000 before the quote using my statement booklet but when I was officially quoted $184,000 weeks later he just said that he had made a mistake . That's a pretty significant mistake , don't you think ? A $166,000 mistake ? Someone please correct me if I'm wrong .

I assumed someone here could easily point out , either the error of my ways , their ways , his ways , etc , but perhaps that kind of info is not available for free ? I find that hard to believe considering it is just a very simple matter .

I would like to get my facts straight here BEFORE I talk to anyone else about anything concerning my financial situation from now on , that's for sure .

Thanks for your help

G J D Swain
 

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Discussion Starter #7
Pensions are not the same as annuities. The commuted value of your pension plan has only a relatively small relationship to the market for annuities.
Market for Annuities ? Hmmm , I'm starting to think that you and I are not even talking about the same thing .

I thought I had read here and elsewhere that the Cash Value is the amount that is required to purchase an Annuity in order to provide the same amount as the pension plan's monthly benefit ? Seemed simple enough a concept .

If that's not correct then maybe I got my wires crossed somehow .

Anyway , I'm sure eventually someone will be able to sort out exactly where I'm making this erroneous assumption that $184,000 cash value is too low for my estimated monthly pension (see above for all the details) .

Thanks for your reply

G J D Swain
 

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I know when my mom cashed out her teacher's pension she was not allowed to convert it all to cash.

A certain portion is kept locked in in case you spend all your dough you will get a subsistance amount.

Maybe that's why the pension administrator gave you a CV of $184000 because a certain percentage must stay locked in.

$184000 is not nearly enough to provide an income of $2000 per month if you were to purchase an annuity.
 

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I think we are talking about different things.

Cash value = based on contributions

Commuted value = essentially, PV of pension with corrections for life expectancy

The commuted value of the pension is not *necessarily* equal to the amount it would take to purchase an annuity, and the cash and commuted values are usually not the same amount.

In addition, some pensions pay a "termination benefit" (not cash or commuted value) if you leave the plan that will:

- differ based on number of years of service + age at leaving the plan
- be neither the cash nor the commuted value

At any rate, you may find it more satisfying to find someone to work with who can actually look at your pension documents...I don't know how helpful we can be talking at such a general level.
 

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Warning!

The two links to calculators given above ( RetirementAdvisor and Annuity Calculator) do NOT generate quasi quotes from annuity providers.

There are simple math calculations using the time-value-of-money equation for the Present-Value-of-an-Annuity. The word 'annuity' here refers to a stream of payments. It is not measuring a financial product where you benefit from the deaths in your cohort and where profit are earned by the insurer, etc.
 

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Thanks, Leslie. I didn't click on any of the calculators.

The terminology in these threads is a confusing. An annuity *is* a product that produces a stream of income for a defined period (including the annuitant's life, or a survivor's life).

HOWEVER, as Leslie has just pointed out (and I referred to obliquely in a comment about the "market for annuities"), when you buy an annuity from an insurance company, a bunch of other calculations come into play (other than TVM calculations) -- including the life tables used by the issuer, the mortality credits generated for annuitants over their lifetime, and profit for the issuer. This is why you will never find an annuity quote that "matches" the lump sum you get from using a TVM annuity financial calculator.

To reiterate: you can't compare annuities sold in the annuity market (the annuity as product) with the annuity function as a financial calculation, which gives you payouts based on the assumptions you enter about duration, interest rates, rates of return, and volatility. This calculation will NOT give you the cash value of an annuity you can buy in the annuities market.

To make things more complicated, there are lots of forms of annuity. The most common one for these kinds of calculations is a SPIA, or single premium immediate annuity (when people do annuity calculations on a financial calculator, they are almost always assuming the annuity is a SPIA). However, most pensions are not like SPIAs, because they have other features (survivor benefits, bridge benefits, etc.)
 

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So, stepping back:

1. If you want to find out what you could get for a lump sum converted to an annuity, go to the Cannex link and look through the free links to find out what insurance companies are offering.

2. If you want to find out what lump sum you would need to generate an income stream in retirement that is equivalent to an expected pension amount, use a TVM annuity financial calculator.

The cash value of a pension plan cashed out prior to retirement will generally not equal the lump sum you require to produce an income stream in retirement equal to your expected pension amounts (unless you put in some wonky return and duration assumptions). Pension contributions are not the same as deposits to an investment account, and the "return on investment" calculations are not really applicable to the cash value of a pension.

What you are really looking for when you want to compare a pension to a purchased annuity is the implied longevity yield. You can use the ILY to compare returns from alternative investment products, such as mutual funds and bonds, to the implied yield from a lifetime annuity.
 

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Discussion Starter #13
Warning!

The two links to calculators given above ( RetirementAdvisor and Annuity Calculator) do NOT generate quasi quotes from annuity providers.

There are simple math calculations using the time-value-of-money equation for the Present-Value-of-an-Annuity. The word 'annuity' here refers to a stream of payments. It is not measuring a financial product where you benefit from the deaths in your cohort and where profit are earned by the insurer, etc.
Right . The first Link I provided at the very beginning of this thread is to an actual semi-quoted result . I asked if anyone had a link to a Canadian equivalent and Moneygal suggested Cannex . The other 2 links are just interesting toys to play with before looking for an actual product .

Thanks for the reply & the link .

G J D Swain
 

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Discussion Starter #14
I think we are talking about different things.

Cash value = based on contributions

Commuted value = essentially, PV of pension with corrections for life expectancy
Well , unfortunately , my annual benefit statement uses (quote) "commuted (cash) value" when talking about the commuted value . Example : "... an early retirement pension any time after age 55 , or transfer the commuted (cash) value of your pension to a registered locked-in plan at date of termination ."

The actual quote I received was "$184,000 Commuted Value" .

I'm assuming by "PV of pension" you mean 'present value' ?

The commuted value of the pension is not *necessarily* equal to the amount it would take to purchase an annuity, and the cash and commuted values are usually not the same amount.
"necessarily" ? Well , my FA estimated $350,000 commuted value and when the actual quote was only $184,000 he was fine with that . Seems odd to me that such a huge discrepancy was fine with him .

In addition, some pensions pay a "termination benefit" (not cash or commuted value) if you leave the plan that will:

- differ based on number of years of service + age at leaving the plan
- be neither the cash nor the commuted value
My termination benefit is the (quote) "commuted (cash) value" .

At any rate, you may find it more satisfying to find someone to work with who can actually look at your pension documents...I don't know how helpful we can be talking at such a general level.
Well , if by "more satisfying" you mean "are you getting very frustrated yet?" , the answer is "yes , I'm getting very frustrated" . However , as I said yesterday , before I go and see another "Advisor" , either commission-based or fee-based , I'm going to have a very good grasp on exactly what I should expect to hear , first , or at least have a very good general idea of what my options should be .

Thanks again for your reply . It's an uphill learning experience but information is a very good thing , I think . Being a 'mushroom' (kept in the dark and fed a lot of crap) is not a good thing in my opinion .

G J D Swain
 

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Discussion Starter #15
Thanks, Leslie. I didn't click on any of the calculators.

The terminology in these threads is a confusing.
Yes , it can be .

An annuity *is* a product that produces a stream of income for a defined period (including the annuitant's life, or a survivor's life).
Right .

HOWEVER, as Leslie has just pointed out (and I referred to obliquely in a comment about the "market for annuities"), when you buy an annuity from an insurance company, a bunch of other calculations come into play (other than TVM calculations) -- including the life tables used by the issuer, the mortality credits generated for annuitants over their lifetime, and profit for the issuer. This is why you will never find an annuity quote that "matches" the lump sum you get from using a TVM annuity financial calculator.
Right , but I think that goes without saying , doesn't it ? I mean , if you look at the results from the first link I provided for the British Annuity Calculator you see that there is a definite range in the results , from all the providers listed . It seemed obvious that this was due to many factors , based both on common sense and complicated tables , as you point out .

To reiterate: you can't compare annuities sold in the annuity market (the annuity as product) with the annuity function as a financial calculation, which gives you payouts based on the assumptions you enter about duration, interest rates, rates of return, and volatility. This calculation will NOT give you the cash value of an annuity you can buy in the annuities market.
Right .

To make things more complicated, there are lots of forms of annuity. The most common one for these kinds of calculations is a SPIA, or single premium immediate annuity (when people do annuity calculations on a financial calculator, they are almost always assuming the annuity is a SPIA). However, most pensions are not like SPIAs, because they have other features (survivor benefits, bridge benefits, etc.)
Right , which is why I always mentioned exactly which type of Annuity I was using as a basis for my posted result .

Thanks again for your reply

G J D Swain
 

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Discussion Starter #16
So, stepping back:

1. If you want to find out what you could get for a lump sum converted to an annuity, go to the Cannex link and look through the free links to find out what insurance companies are offering.
Yes , done , and the result is the same as using the British Annuity calculator (roughly , of course) . That is , the result is much , much lower than what my benefit booklet says my monthly benefit would be , and so I started this thread in order to try and 'double-check' (see my very first post in this thread) my results .

2. If you want to find out what lump sum you would need to generate an income stream in retirement that is equivalent to an expected pension amount, use a TVM annuity financial calculator.
Right . Did that and as I've said previously , something is rotten in Denmark . These numbers are not jiving and my pension administrator will not return my mails or phone calls so that I can be provided an explanation .

The cash value of a pension plan cashed out prior to retirement will generally not equal the lump sum you require to produce an income stream in retirement equal to your expected pension amounts (unless you put in some wonky return and duration assumptions).
Well yes , generally , but I would not expect the difference to be $164,000 worth however . I'm sure that it will be different , of course , but this seems ridiculous to me . (please see the detailed results on the first page of this thread) .

Pension contributions are not the same as deposits to an investment account, and the "return on investment" calculations are not really applicable to the cash value of a pension.
Right .

What you are really looking for when you want to compare a pension to a purchased annuity is the implied longevity yield. You can use the ILY to compare returns from alternative investment products, such as mutual funds and bonds, to the implied yield from a lifetime annuity.
Thanks , but first things first . Perhaps I will look at that sometime just for fun , but not right now . Let me reiterate , right now I am on a mission to determine why my official , documented , commuted value estimate is so damn low .

Thanks again for your reply , your interest and above all , your time . Much appreciated .

G J D Swain
 

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But no one here is going to be able to give you a satisfactory answer. The cash and/or commuted value of a pension taken as a lump sum will be calculated according to the rules of that particular pension, and based on factors specific to you (years of service, age at retirement, number of years to NRA, etc.)

So far, you've tried to estimate your cash/commuted value based on an investment return approach; and based on pricing annuities in the open market. But none of these approaches are appropriate. The estimates you've fooled around with can provide you with interesting benchmarks, and they should help you in making your decision about whether to leave your money in the plan or not, but they don't account for the value upon termination.

The other thing: for what it's worth, I work in this industry (not as an FA, but with pensions and retirement income analytics), which gives me good background knowledge.

However, I am typically responding to posts here while doing things like waiting for software to update, or (on Sunday night) for the jam I was making to reach the gel stage so I could can it and then go to bed.

The level of attention I can bring to this kind of a forum is decent, but my no means the attention I would bring to a work situation. In my view, no one should rely on advice from anonymous internet fora in making pension decisions or other decisions that are both significant and irreversible. (Just in case that isn't obvious, I thought I would state it for my own comfort.)
 

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Discussion Starter #18 (Edited)
But no one here is going to be able to give you a satisfactory answer. The cash and/or commuted value of a pension taken as a lump sum will be calculated according to the rules of that particular pension, and based on factors specific to you (years of service, age at retirement, number of years to NRA, etc.)
Exactly , and as I've said many times , I have the annual personal benefit booklet and all the info anyone would need including age , years of service etc etc . So , whether I'm sitting in someones office with this booklet in my hand , (as I did last year in my FA's office) , or I'm sitting here at home providing that info to someone who is interested , the result should be roughly the same (and roughly is going to be more than good enough to solve this mystery) .

So far, you've tried to estimate your cash/commuted value based on an investment return approach; and based on pricing annuities in the open market. But none of these approaches are appropriate. The estimates you've fooled around with can provide you with interesting benchmarks, and they should help you in making your decision about whether to leave your money in the plan or not, but they don't account for the value upon termination.
Right , but as I've said many times , there is a $164,000 discrepancy here between what my FA said the ballpark Commuted Value should be , and what it turned out to be .

Simple question "why?" .

The other thing: for what it's worth, I work in this industry (not as an FA, but with pensions and retirement income analytics), which gives me good background knowledge.

However, I am typically responding to posts here while doing things like waiting for software to update, or (on Sunday night) for the jam I was making to reach the gel stage so I could can it and then go to bed.

The level of attention I can bring to this kind of a forum is decent, but my no means the attention I would bring to a work situation. In my view, no one should rely on advice from anonymous internet fora in making pension decisions or other decisions that are both significant and irreversible. (Just in case that isn't obvious, I thought I would state it for my own comfort.)
Well , first of all , I very much appreciate any and all help and information I can get . Secondly , as I've said many times , I will eventually get another FA or hire someone , but first , before I do I want to get my ducks in a row , before I go blindly into another advisor's office , with my pants down around my ankles and not even knowing it .

I certainly did not at any time ask for someone to tell me what I should do , or ask someone to give me advice on what I should do , yet I am getting the same advice over and over ("go see a Pro") .

All I'm asking , is for someone to take the numbers I already have (age ,years of service , monthly benefit amount etc etc etc , and crunch the numbers and see what they get for a commuted value amount . Then compare that to what my FA suggested it might be and to what my pension administrator estimated it actually is .

It's child's play . It may very well turn out that my FA was dyslexic and that the PA was 100% right . Or it may turn out that the FA was 100% right and the Pension Administrator simply made a mistake .

Either way they can't both be right and I want to try and figure out which one is right and which one is way out in left field .

Perhaps I should just start another thread and try this again from another angle . This thread has been informative but it doesn't look like the actual help I'm asking for is coming this way anytime soon .

Thanks again very much for your reply .

G J D Swain

PS : I should point out that I'm not going to provide the name of my FA or even what city he works in , or the name of my pension administrator or what company she works for . This information will not be disclosed at any time .

Also , what kind of jam are you making ? Home made bread too ? I remember the good old days when my mother and aunts would go out and pick wild strawberries and blueberries and apples and make the most delicious jams and home made breads , on a wood-fired stove ! (yes , I'm that old )
 

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Discussion Starter #19
An interesting .PDF and CV Formula

To muddy the waters even further , here is an excellent .PDF explaining a lot of the in's & out's of commuted value computations and the reasoning behind some of the final results . Also some of the possible pro's & con's involved in the decision making process for people on the cusp of a final CV transferring decision . It's very interesting , until we get to the actual formula on the last page .

http://www.advisor.ca/images/other/ae/ae_0706_pensionpaths.pdf

To me , her formula values do not make any sense to me . I mean , I'm sure it's a great simple little formula , but for instance , why is the 'C' factor (Discount for 15 years) displayed as '2.10' ? Is there another chart she is not showing us ?

Same with the 'B' value (present value at 5.25 percent of 1 for a term of 19 years) being displayed as '12.17' ? No idea why .

This looks like a usable formula for my needs but it is unusable to me without an explanation of how these plugged in values are arrived at . The math is a snap , of course , but it appears one can't get there from here without further clarification of the factors used .

Another wall , it seems .

Does anyone else have a similar formula or link that they are willing to share ?

Thanks

G J D Swain
 
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