Why Optimizing Your BP Pension Comes Down to Timing

After decades of hard work, your retirement is just around the corner. The next few months require thoughtful planning and decisions that can affect your long-term financial future. This new chapter is a significant time in your life. You may not have considered why the actual date you choose to retire and take your pension benefit can be substantial. If you are thinking of retiring soon, you may have good reason to look carefully at how this could augment your pension benefit.

As a BP employee, it's essential to understand the savings and investment options available to you and the various effects they can have on your pension. The BP Pension Retirement Accumulation Plan (RAP) presents two options: annuity and lump sum payout. In our recent webinar, "5 Benefit Elections that can Impact Your Taxes After Leaving BP," we described these options and why your benefit start date is critical.

How are segment rates currently impacting BP professionals


A few months can be all it takes to affect the total pension amount you receive significantly. In this article, we'll explain how your RAP lump sum is calculated and distributed using historic examples, so you can select a retirement date that's strategic and profitable.


What data is used to calculate your BP pension?

BP bases your pension on your last date of employment and benefit start date. The IRS regularly releases spot segment rates that are used to calculate the RAP lump sum — and have an inverse relationship with a lump sum pension. When interest rates increase, lump sum pension values will decrease, and vice versa.

While other factors are involved in calculating your pension, it's helpful to review recent interest rates to estimate how your lump sum might be affected. How rates are trending could be a definitive — and lucrative — factor in the date you choose to retire.

Note, if you were a participant in the BP RAP before January 1, 2014, your lump sum pension is determined by the segment rates. If you became a participant after 2013, your lump sum is simply the balance of your cash pension account.


How does BP calculate the lump sum amount you should receive?

The calculation is pretty complex, but the following charts will give you an idea of the rates used to calculate your BP RAP pension lump sum and how they can affect your total pension funds.

Once BP employees choose the date they would like their pension to begin, BP refers to the rate from four months prior to calculate the pension disbursement.

For example, if you retired and began taking your pension in June 2022, BP would have used the rates posted for March 2022 (four months before your retirement month).

Segment Rates for BP Retirement June 2022_Blog Graphic_BP Timing Pension Lump Sum Graphics_BP_WJA_2022_10_1600x900

If you plan to retire this November, BP will use the rates posted for August 2022.

Segment Rates for BP Retirement Nov 2022_Blog Graphic_BP Timing Pension Lump Sum Graphics_BP_WJA_2022_10_1600x900

The segments refer to distinct periods of pension distribution:

  • The first segment rate is used to discount (calculate the present value) the first five years of pension cash flow.
  • The second segment rate discounts years six through 15 of pension cash flow.
  • The third segment rate discounts years 16+ of pension cash flow.

Together, these rates and terms are used to calculate the lump sum pension value.  


Why do segment rates matter for the BP pension?

As shown above, making a slight adjustment in your retirement date, or electing a month with historically lower segment rates, can significantly impact your lump sum pension calculation. These differences could mean waiting longer to retire and begin taking your pension.

Consider this example:

  • Your estimated monthly RAP benefit is approximately $12,084.
  • Your pension cash balance is approximately $1,975,206.
  • You retire at 65.
  • The life expectancy BP uses to calculate your pension is age 87.9.

Below is your estimated lump sum based on the month you choose and using the segment rates listed above. (This includes the five percent annual crediting to your pension benefit.)

Lump sum in June 2022: $2.215 Million*

For a November 2022 retirement, the example changes slightly due to the continued annualized crediting of 5% and looks something like this:

  • Your estimated monthly RAP benefit is approximately $12,234.
  • Your pension cash balance is approximately $2,000,000.
  • You retire at 65.
  • The life expectancy BP uses to calculate your pension is age 87.9.

Lump sum in November 2022: $2.061 Million*

What a difference two months can make — approximately $154,000!

*Reference example is based on assumed actuarial factors and actual 2022 segment rates. Actuarial Factors for the BP RAP pension will likely vary. You should obtain specific illustrations from your NetBenefits portal.

BP Pension November 2022 with Segment Rate_Blog Graphic_BP Timing Pension Lump Sum Graphics_BP_WJA_2022_10_1600x900

How can you plan strategically to select the most advantageous pension calculation time frame?

You can evaluate various trends to help you plan the best date for your retirement, including reviewing rates published by the Treasury Department.

  • Segment rates correlate with U.S. Treasury rates. Therefore, when Treasury rates are on the rise, segment rates will increase accordingly. And, as mentioned, rising interest rates mean a lower pension calculation.
  • By looking back over 12 months and reviewing predictions, you may be able to understand which direction rates will head in the future. For example, if rates have trended upward during the past several months, pension calculations are negatively affected.
  • Time your retirement date to take advantage of the best rate/pension scenario. The look-back window allows you to start your benefit at the most financially appealing time. For example, if you intend to retire during the winter, you can review rates from August 2023 or September 2023 to determine if and when it's financially advantageous to retire.

Segment Rates and 10 year treasury - Oct 21 to Oct 22_BP Timing Pension Lump Sum Graphics_BP_WJA_2021_6_1600x900


How Does the RAP Pension Interest Credit Affect this?

In addition to the incredible value the BP RAP Pension has in its company funding is the 5% interest credited to the cash balance account for employees who began working for BP before 2016. This 5% far exceeds prevailing interest rates in the current fixed-income market. As a result, some BP professionals with whom we work have expressed concern over "cashing in" for the lump sum and losing this benefit. However, the prevailing interest rates' leverage could be far more beneficial.

Just by example, we looked at the lump sum comparison between June  2022 benefit inception and the November 2022 benefit inception above. We saw a $154,000 change in benefit based on interest rates – a 7.47% loss in value on the lump sum.

During that same five months, BP would credit the cash balance account of your pension with 2.08% interest [(5% annual crediting ÷12 months) x 5 months]. That's a big difference over five months.

What's the outlook on segment rates, and how should you choose your retirement date?

Several factors affect the direction of interest rates and segment rates in particular. In addition to U.S. Treasury rates, another major influence is the short-term Federal Funds Rate established by the Federal Reserve. The Fed completed its first federal fund rate increase in the first quarter of 2023. Since then, the Fed has raised rates in each of their 5 meetings so far this year. These rate increases impact everything from mortgage costs to savings accounts, but the hope from the Fed is that raising rates will also affect rampant inflation. The latest inflation numbers available in September put U.S. inflation at 8.2%, and the Federal Reserve announced that they’d target raising rates to 4.4% by the end of 2022. 

Let’s consider another example of what may happen going forward and compare what happens to a BP professional who has the option of retiring in November of this year, but defers another year until November 2023.

If, the individual defers to a November 2023 retirement, the assumptions change to the following:

  • Your estimated monthly RAP benefit is approximately $12,909.
  • The continued annualized crediting of 5% brings the cash balance to $2,102,000 by November 2024.
  • You retire at 65.
  • The life expectancy BP uses to calculate your pension is age 87.9.

To calculate the lump sum value, BP would use the segment rates from August 2024. While we don’t know the 2024 rates yet, we can make a reasonable hypothesis that rates will rise another 1-2% based on historical data regarding inflation, what the Fed has announced, and the rate at which interest rates have risen this year. For our example, the hypothetical segment rates are as follows.

Segment Rates BP retirement hypothetical_Blog Graphic_BP Timing Pension Lump Sum Graphics_BP_WJA_2022_10_1600x900
The lump sum calculation for this BP professional retiring in November 2024 results in only $1.955 million if we're only looking at the hypothetical segment rates. That’s a difference of over $105,000!

However, BP will not give its employees a pension value less than their cash balance. At just 5% crediting, the cash balance used for the employee’s actual lump sum would climb to $2.102 Million. At $2.102 million, the lump sum is still almost $41,000 less than if they retired in 2023. However, if long-term segment rates rise to 5.78%, the pension cash balance would likely increase as well since 5% is the minimum crediting for pre-2016 employees.

BP Pension Calculation - pension crediting_Blog Graphic_BP Timing Pension Lump Sum Graphics_BP_WJA_2022_10_1600x900

While we cannot be entirely sure where rates will go, all indications are that they are going up, quickly. Therefore, keeping an eye on these rates may help you determine the best date to retire and accept your pension benefit to maximize the lump sum payout.

Segment rates are rising quickly, and could continue to do so. So it's crucial to be keeping an eye on these rates to determine which retirement date can maximize your lump sum pension amounts.


Making your lump sum election is not your only decision regarding retirement planning. There are many factors involved in deciding when to retire and how you elect your benefits. Our expert wealth advisors provide experienced counsel to BP professionals and executives. We provide clarity and confidence so you can make the best overall choices for you, your family, and your legacy. Allow us to guide you through your savings and investment options, so you're financially prepared for your retirement.



Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein. Willis Johnson & Associates is not a CPA firm.