Urgent Commutation Advice Please

lightspeed

Hi

I am writing on behalf of my mum who is about to make an application for ill-health retirement. Whether this is granted remains to be seen as a final diagnosis is yet to be made but she is now at a point of finalising the application and the question of commutation has been mentioned.

I realise that much of this decision is down to personal circumstances but we would appreciate some impartial advice:

she currently has a 92K mortgage @ 6.09% which is due to end in June 2010 with about 40K in savings.

If she was to retire now @57yo - her pension would be 11290pa and 33870 lump sum plus half of the remaining 3 years contributions as an enhancement (@60 she would have got 13037pa and 39111 lump sum).

There is obviously going to be a shortfall when combining her savings and pension lump sum of approx 18K which she would be able to fund with her annual pension.

I believe the commutation rate is 12:1 and was wondering (long term) if it would be sensible to convert £1000 of the annual pension which i assume would reduce the enhanced annual pension to approx 10200pa giving her enough money to live off month to month while almost clearing her remaining mortgage.

There is no reason to believe that she wont have a long retirement so drawing on her annual pension will be important for many years to come i imagine.


Any advice would be appreciated

EdInvestor

Is she also due to receive her state pension and if so how much is it?

lightspeed

Hi

Yes but not until she is 62y/o

I have not got the exact amount to hand but i recall it being in the region of 5K pa

many thanks

lightspeed

£4716 at present to be exact @ 62y/o and 2 months

many thanks

MikeJones_2

Hi lightspeed,

Sorry to hear of your mum's ill health.

Might I ask a few questions just to clarify the situation, as having read your post there are a few things that are not clear?

Is the scheme a defined benefit scheme (e.g. such as a final salary scheme) or a money purchase scheme?

Is she still actively employed at the place where the pension is coming from (i.e. is she an 'active member' of her pension scheme or is this a 'preserved pension')?

The pension figures that you have quoted - are they 'enhanced' because she is applying for ill health retirement?

Or are they the 'normal' pension figures which she would receive simply because she has applied to have her pension benefits before her Normal Retirement Date?

Do you see the difference (subtle, but not clear from your post)?

What is her marital status and is anyone dependent upon her or financially interdependent.

If you don't want to divulge the information, at least you may be able to guess where I'm coming from in respect of why I've prompted them.

We can make educated guesses from some of the info you posted - but that's not the best approach given that this is a once in a lifetime transaction.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a 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.

lightspeed

Hi Mike

Not a problem:

- It is a final salary scheme.

- She is still actively employed by the education establishment

- The figures quoted are "estimates" form the Teacher Pensions for Early Retirement without enhancement (11290pa and 33870 lump sum) - if she retired at 60 she would recieve 13037pa and 39111 lump sum. The ill health enhancement would be maximum half of the difference so i am told.

- She is single, living independently with no dependents.

She is tied into her mortgage until June 2010.

Many thanks for your time.

lightspeed

Hi

Out of interest...if ill-health is not granted, would my mother be able to purchase/pay (buy extra credits) the extra into her pension to increase to that @60y/o - or would this not be beneficial due to her age.

many thanks in advance

MikeJones_2

Hi lightspeed,

lightspeed wrote: »

Out of interest...if ill-health is not granted, would my mother be able to purchase/pay (buy extra credits) the extra into her pension to increase to that @60y/o - or would this not be beneficial due to her age.

I don't think that's an option that would be financially viable to consider given her age but might be worth her asking for details just in case.

In respect of your originally question about the feasibility of commuting some of the pension for extra cash - I think that's too much of a judgement call for a forum like this without knowing quite intrusive details about your mother's personal (financial) and physical situation.

I'd recommend a chat with an IFA for that - and there's a cost factor in that to be considered but probably worth the time and effort to find out (when she has the decision on the ill health issue).

Personally, because she is single and no financial dependants (and no interdependents), and the fact she has a health issue, I'd engage an IFA to do a full pension analysis. I'd request the IFA to ask for a transfer value as well (at a hypothetical date such as 1st October 2009 - if the TPA will provide one under these circumstances) and look at all of the options available including transferring out (ill health, enhanced annuity, single life status etc).

There may be no mileage in this and the eventual outcome might be to stay put, but I'd want to know if it was me.

Mike

lightspeed

Thanks for the reply.

I have spoken to an IFA and I have spent sometime today looking at the numbers and TBH it appears that the overall best solution would be to comutate or convert the maximum amount possible for several reasons:

1) Its tax free

2) If she chooses, It will pay off the mortgage with money to spare for a rainy day or it can be saved.

3) On a monthly basis, the difference in her disposable income when nothing is converted (with a mortgage) and when the max is converted ( mortgage could be paid off) is about £30pm which is not worth debating over.

Many thanks for your help.