Tax Free Cash from a final salary scheme at young age?

claret_2

I am interested on thoughts on my situation as follows

I have been retired on ill health grounds at age 42, with a final salary scheme with a the tax free commutation factor of 15, the pension is indexed.. My life expectancy may well be 10 to 15 yrs shorter than the average due to health issues. I have to decide now whether to take any tax free cash. .

I have a repayment mortgage of £220000 which is affordable, although I had to place £70k of this total on interest only basis, without a repayment vehicle recently due to the rate increase on my new 2 yr fixed rate mthe of 6.09%

I have £12k on credit card debt and a share portfolio which has dropped from £50k to around £10k

My initiall thoughts was to take all my pension as income as i have been living on half pay for several years and the full pension without taking any tax free cash is of a similar annual amount. In fact without the employer having to pay Ni contributions it works out approx £3000 higher a year.

Hence my dilemma, being young to be retired do I use this £3000 to take tax free cash of £45000 and use that to clear my credit cards and pay of a small amount of my mortgage or do I take the max tax free cah of £125000 to clear both my credit cards and a lump of my mortgage

I am assuming that witha commutation factor of 15 implies that after 15 years taking TFCash starts to work against me?

Any thoughts would be greatly appreciated

MikeJones_2

claret wrote: »

I have been retired on ill health grounds at age 42, with a final salary scheme with a the tax free commutation factor of 15, the pension is indexed.

In my experience a commutation rate of 15:1 is good for someone aged 42, reflecting perhaps the fact that you have taken your pension on the grounds of ill health.

It sounds like you don't entirely understand the concept of commutation: where part of a pension fund is converted into a lump sum payment at the time benefits are due to commence, thereby reducing the amount available for payment as a pension.

The commutation rate is simply the conversion rate which determines how much of the pension fund will be exchanged to provide the agreed lump sum (e.g. 10:1, £10 of lump sum for each £1 of pension given up, 15:1, £15 of lump sum for each £1 of pension given up, 20:1, £20 of lump sum for each £1 of pension given up).

claret wrote: »

My life expectancy may well be 10 to 15 yrs shorter than the average due to health issues. I have to decide now whether to take any tax free cash...

I can't help you here, I'm afraid, as I don't know anywhere near enough about your complete personal situation, even though you've outlined your immediate circumstances/predicament.

I'd really recommend you see an IFA who would look at your entire position and be able to make specific recommendations which would best suit you.

claret wrote: »

I am assuming that with a commutation factor of 15 implies that after 15 years taking TFCash starts to work against me?

No, this is not correct, as I have explained what commutation is above.

I hope this helps in the limited way I can.

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

claret_2

Mike, Thankyou, that was very helpful. I have now seen an IFA and he is suggesting taking the full tax free cash, but points out the disadvantages of no rpi on the tfc and advantages of flexibility.
Having read the various articles on this site and the IFa report, unless im missing something there seems to be no right or wrong answer.

All things considered, I am thinking to go somewhere down the middle, taking say £62000, clearing the credit cards and placing £50000 in a high interest online savings account.

MrChips

A commutation factor of 15 will nearly always imply a life expectancy greater than this. The number will reflect life expectancy, but will also factor in expected investment returns on the pension scheme's assets. Taking as example a pensioner with 20 years life expectancy - if there was no investment return it would cost £20 to provide a pension of £1pa. However if the scheme gets investment returns on the money it is holding, it may only cost, say, £15 in the long run to provide £1pa.

In the opposite direction, most pensions receive annual increases once they are in payment which acts to increase the cost, but as long as the expected increases are lower than the expected investment return, a commutation factor will always be lower than the life expectancy.

Getting back to your situation, it sounds very complicated and is definitely above the level that could be resolved on a simple forum. You need to seek independent financial advice to help find the best solution for you.

MrChips

Apologies - drafted that response before I saw your reply. It sounds like you are heading in the right direction.

MikeJones_2

Hi Claret,

If you wanted to do some more light reading, this short article expresses the opinion that any scheme members considering commuting a large lump sum ought to first take independent financial advice (note the links within the article don't work, but it was the sentiment of the article that I thought worth pointing to):

Actuarial profession issues warning on commutation factors

Regards,

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

claret_2

Thanks Mr Chips
Certainly has been a mind boggling decision, have ended up to a certain extent sitting on the fence, by not choosing all cash or all income.
Wasnt comfortable with taking any investment risk on the tfc and with interest rates falling leaving tfc at approx 50% of allowable total seemed logical

claret_2

Hi Mike, thankyou, had a read. Must say was very uncomfortable taking full TFc. The amount of £62000 i am thinking of taking as tfc is more comfortable to me and gives me the ability to clear the credit cards and leave some flexibility without hugely damaging the compound impact of RPi indexation on my pension income.