Teachers Pension - Lump Sum advice please

LandM1

I am 58 and have been finished teaching full time for about 20 months. I do a little supply teaching - 1 or 2 days a week. I have decided to take my pension one year early on my birthday in June as my wife is also retiring. What I cant decide is whether to take the maximum Lump Sum and reduced pension or full actuarially reduced pension and therefore smaller lump sum
Reduced pension £9100 Lump sum £61000
Full pension £11400 Lump Sum £34300.
We have no debts and also have a small income of £700 a month from houses we let out. We have a sizeable amount of saving
My wife will also shortly be taking her pension which should be in the region of £11900 with a lump sum of £35000.We believe that as the last part of her career was in the Local government scheme she will not be able to take a large lump sum.
We are both healthy and have modest outgoings.

What is your advice?

jem16

It very much depends on what you are looking for - income or capital to either spend or leave as an inheritance.

The commutation rate is 12:1 which is not that good if you were thinking of investing it to make up the difference in income. However if you want to splash out on a few things.

zygurat789

jem16 wrote: »

It very much depends on what you are looking for - income or capital to either spend or leave as an inheritance.

The commutation rate is 12:1 which is not that good if you were thinking of investing it to make up the difference in income. However if you want to splash out on a few things.

Could you say, roughly, on average, or as ball park figures what could be considered as good average or poor commutation rates please?

CLAPTON

you are can have 2,300 per annum indexed linked but taxed or cash of 26,700 tax free

if you invested the 26,700 you would 'need ' a return of 8.61% indexed linked to match the income.... virtually impossible to optain in any safe investment.
on the other hand you lose access to the 26,700.

alternatively you could do a cash flow analysis and work out the break even period

i.e. compare the lump sum , with how many years do you wait to accumulate 26,700 with the steady income stream.

whats wrong or right depends upon your attitudes

Andy_L

zygurat789 wrote: »

Could you say, roughly, on average, or as ball park figures what could be considered as good average or poor commutation rates please?

~20:1 is generally considered as "fair" in that thats about the cost of turning a lump sum into RPI linked pension, although it does depend a lot on sex/health/dependants etc.

Richard_DandR

zygurat789 wrote: »

Could you say, roughly, on average, or as ball park figures what could be considered as good average or poor commutation rates please?

Mine was 20 when I took early retirement at 57. My IFA thought that was a good rate so we took it. I didn't need the money so it has been invested to supplement my income until I reach 65.

The spouse pension was unaffected so another advantage as I wasn't reducing this benefit.

Looking further ahead, commutation meant I would probably not lose the higher personal allowance after age 65.

zygurat789

So an RPI pension of £2,600 for a lump sum of £20,300 is a commutation rate of 7.8 to 1 or 12.8% which is good, yes.
I'm just trying to get my head round the terminology

Andy_L

its 7.8 to 1 which is (very) bad as you are only getting £7.8 of lump sum for every £1 of pension given up whilst goint in the other direction you'd need about £20 of lump sum to buy £1 of pension

edit: wait a minute, my head hurts. Rereading your post then, if you can buy £2600 of (RPI-limnked) pension for £20300 then yes, thats a very good deal

zygurat789

Andy_L wrote: »

its 7.8 to 1 which is (very) bad as you are only getting £7.8 of lump sum for every £1 of pension given up whilst goint in the other direction you'd need about £20 of lump sum to buy £1 of pension

edit: wait a minute, my head hurts. Rereading your post then, if you can buy £2600 of (RPI-limnked) pension for £20300 then yes, thats a very good deal[/QUOTE]

Yes you understand about understanding the terminology, so the lower the commutation rate the better the deal (for the pensioner)?

So it looks like a good deal then?

shaunrc

Hi L&M

There are some other factors at play here which essentially come from how valuable your index-linked teachers pension is.

Why not let your wife take her pension and her lump sum and the two of you live off that until you take your pension next year? I know that the reduction in your pension due to taking it a year early probably seems small but adding the indexed-linked element to it means that it will build up over time.

As to the debate over commutation rates then the numbers are as follows. The one you have been quoted favours the index linked pension versus the lump sum i.e the pension is better value. Of course you may still want more lump sum but it is bad value. A fairer number is around 21:1 rather than 12:1 but it does depend a little on individual circumstances.

zygurat789

shaunrc wrote: »

As to the debate over commutation rates then the numbers are as follows. The one you have been quoted favours the index linked pension versus the lump sum i.e the pension is better value. Of course you may still want more lump sum but it is bad value. A fairer number is around 21:1 rather than 12:1 but it does depend a little on individual circumstances.

But what do these figures mean which is good and which is bad?