Help!-Lump sum or bigger pension?

Ian_W

deebster wrote: »

Bear in mind also that you may be asked to sign a disclaimer saying you will not 'recycle' this tax-free cash (incidentally, now known as a Pension Commencement Lump Sum), which basically means re-investing it in a tax-efficient manner (ISA etc). I have been made to get these signed for the last year or so. I don't see anyone actually physically checking to see if it is happening, but just like anything else a little south of the law, don't get caught.

Perhaps the reason it's not being policed is that your interpretation of it - particularly as regards ISAs - is WRONG?
There's a simple explanation of recycling from the NHS pension scheme HERE or a more complex one, including HMRCs guidance note, from Steve BEE, Scots Life pensions guru HERE.
Neither of them mention ISA's - only recycling by investing the commencement lump sum in the same or another registered pension scheme.
The reason AFAI can see is that the lump sum itself attracts immediate tax relief when paid into another pension, having already had it once when paid into the pension originally. So the same money would get double tax relief.
In an ISA the lump sum receives no tax benefit, tax benefits only apply to any interest or capital gain that the savings or investments make once they're ISA'd. So tax benefits relate to gains not to the lump sum itself - ergo, no double tax relief.
It's a complicated area, as most tax stuff is so if you can link to something showing that lump sums invested or saved into ISA's are considered recycling I will withdraw these comments and apologise. However the HMRC note sums up recycling thus:

Devices that are designed to boost the amount of the pension saving in a registered pension scheme through the artificial generation of tax relief funded by the pension commencement lump sum have become known as “recycling”.

nicks5359

as Micheal Ready said civil service pensions do use a ratio of £1pension for £12 lump sum.in your case £1 to £20 is good.if you were just going to spend the money you would have to live for 20 years to make it worthwhile not taking the cash.
take tha cash echange it for gold, you have the threat of your pension privder going down the pan, as you do with a savings account.

MikeJones_2

Hi nicks5359,

nicks5359 wrote: »

...you have the threat of your pension privder going down the pan, as you do with a savings account.

Just to clarify, where members of a defined benefit type scheme (such as a final salary scheme which is one type of defined benefit scheme) take their pension benefits at their Normal Retirement Date (NRD), then as pensioner members in receipt of benefits they rank as the highest priority should the sponsoring employer fail.

Essentially, pensioner members beyond NRD are very highly protected - above and beyond all other members.

If the sponsoring employer did fail, then the Pension Protection Fund is there to pick up the pieces, and once again pension members receive very favourable treatment in how they are compensated. The PPF does have its critics and anyone concerned about their pension scheme would do well to read the FAQs on its website.

Mike

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.

MrChips

A commutation factor of 18.75 is very generous actually and bordering on cost neutral. Most commutation factors favour the scheme rather than the member, often significantly. After tax is taken into account, cash is definitely the better deal from a purely number crunching point of view.

However, as already stated, you should consider whether the remaining pension will be enough for you to live comfortably on, or whether you would feel the lump sum would be more useful to you now.

cyclonebri1

Redemption wrote: »

I assume your pension will be index linked? If so taking the bigger pension is the totally safe option.

Remember that it it is hard to do much better than inflation with safe savings after tax. You probably can do a BIT better if you work at it but it is also possible that within a few years we could have a period of High Inflation when "safe" savings will not keep up.

Also, if you have a significant sum in the bank it is always tempting to spend it which of course will reduce future income.

If you want to be totally safe, why not take enough lump sum to buy the maximum holding of Index Linked savings certs (which, come what may will do a LITTLE better than inflation) plus enough for this and next tax years cash ISA (tax free so should do better than inflation).

Of course, if you feel like chancing your luck even a little, putting some or all of the lump sum into the stockmarket via unit trusts COULD do a lot better than inflation - but might do worse!!

It all comes down to how you feel. A compromise would be 1/3 in each.

Hope this helps

but you do still retain the lump sum


that may not be a bad idea unless you really want to leave it to the kids/cats home

just an alternative view;)

Tr@cker

A ratio of 18.75 doesn't look that good to me. My figures are similar to the OP's as an employee of Royal Mail except i am taking voluntary redundancy with an enhanced pension at the age of 56.

My figures are 34k lump sum as the standard option with £11,400 pension or a maximum sum of 64k with a pension reduced to £9,700 per annum.

Being a bit younger i thought putting all or some of the lump sum back into the pension was always the better option as i'd soon get through the cash whereas the index-linked pension is for life.

But i was reading that some schemes have ratios as low as 10:1. I wasn't really expecting POSS (our occupational scheme ) to be that good but putting back say, 20k doesn't now look so attractive.

I fully expect to find another job even in the recession.

Acromion

Just developing some of the arguments above in a slightly different context would it be true to suggest that if you are in the fortunate position of having a total pension income of more than about £43000 then the argument for taking a larger lump sum becomes more positive? Because higher rate income tax of 40% cuts in around that level, if you can take out a larger lump sum - even at 12:1 - it may make sense if that reduces the pension below the higher tax threshold. Particularly if you have a non earning spouse to whom the lump sum can be transferred and invested with tax of 0 - 20%.

markr007

Most people take the cash, but if you ask an Actuary (chief number-crunchers who set these commutation factors) they will tell you it usually costs the scheme more if you don't take any. And whatever costs the scheme more in turn usually means more for you.

Agree, however there are three different costs here, funding costs, actual scheme costs and the costs of replacing the pension to the member.

Generally speaking commutation factors that aren't set out in the scheme rules are set with the best estimate of actual costs in mind, albeit with a little bit of prudence to ensure benefits above expectations aren't paid out (factors are reviewed irregularly and this is an option after all). However, with the tax-free nature of the cash the factors normally do at least provide a lump sum in line with expected actual costs to the scheme.

However, schemes are funded are prudent assumptions so when members take cash it improves the funding position (if it hadn't already been assumed to happen).

Finally, if a member were to take their lump sum and try and replace the pension given up they would be unlikely to be able to do so as the costs of purchasing it with an insurer would be much higher due to even more prudent assumptions, contribution to profit and contribution to expenses of paying pensions.

As an example:

Commutation factor might be 15
Best estimate of actual scheme cost might be 17
Funding cost might be 19
Insure cost might be 21

As for how much it is worth to an individual, this as mentioned above is dependent on:

1. Tax status
2. Need for an increasing pension
3. Need for a certain level of pension
4. How much you value cash now over cash later
5. Risk aversion
etc.

18.75 seems pretty good factor but I'm a little suspicious of it. Are you sure the 60k is exclusive of any lump sum you are entitled to as of right. I believe royal mail is a pension plus cash on top scheme.

:-)

stodgy88

i have been offered by royalmail (IN POSS) AROUND 12-1 FOR PENSION TO LUMPSUM ,NOT THE 18-20 TIMES OFFERED TO MICHAEL READY AND [EMAIL="TR@CKER"]TR@CKER[/EMAIL] (BOTH WITH SAME SCHEME )ANY IDEAS WHY THIS WOULD BE -THANKS

stodgy88

just read royalmail pension guide and its £12 lumpsum to £1 pension ,so how michael ready and [EMAIL="tr@cker"]tr@cker[/EMAIL] got the figures quoted i dont know --- HOPE IM WRONG_