Pension - lump sum or bigger yearly pension

andyt8

Any general advice on whether to take the biggest lump sum with a lower yearly pension or to buy extra yearly pension at the expense of the lump sum.

The conversion rate is around £20,000 for an extra £1000 per year, ie 20:1 or 5% as I see it.

Thanks..

dunstonh

Any general advice on whether to take the biggest lump sum with a lower yearly pension or to buy extra yearly pension at the expense of the lump sum.

Not any more. The generalisation went since the changes in 2006 and low interest rates became the norm.

It has more to do with risk profile, requirements, other investments/income, lifestyle, health, spouse provision etc nowadays as to which option is likely to be best.

MikeJones_2

Hi andyt8,

I penned a light-hearted blog about tax free cash a couple of year's ago and it's still relevant now. See:

- 10 reasons why you may not want to take that cash lump sum from your pension

I hope it gives you food for thought beyond your question about the commutation rate?

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.

andyt8

Thanks MikeJones - I'm off reading your blog.

mbarge

But surely...?

Tax free cash is TAX FREE..
your pension is TAXABLE

....if you want the higher pension then take the cash and invest it in a Purchased Life Annuity - more tax efficient.

dunstonh

Tax free cash is TAX FREE..
your pension is TAXABLE

Tax is part of it but not the only part. If the person just sticks the cash in a bank account earning 2-3% and pays tax on it instead of getting an income rate of around say 7% (equivalent) plus indexation, that could be better. Plus, it ceases to be tax free unless they keep it in a tax free wrapper.

....if you want the higher pension then take the cash and invest it in a Purchased Life Annuity - more tax efficient.

More tax efficient but unlikely to beat an scheme pension.

hugheskevi

But surely...?

Tax free cash is TAX FREE..
your pension is TAXABLE

....if you want the higher pension then take the cash and invest it in a Purchased Life Annuity - more tax efficient.

So would you take a tax-free lump sum at a commutation rate of £2 lump sum for every £1 of annual income given up?

How about a commutation rate of £5? £10? £20?

DB schemes often offer poor commutation rates, so you may well be better off taking the taxed annual income than the tax free lump sum. In the OP, a commutation rate of 20 is mentioned, which isn't bad compared to the schemes which offer 12 to 1.

andyt8

Thanks for posts and advice. So commutation rate of 20 is good for converting toward cash lump sum. There is another recent thread where the teachers rate was 12 and I guess that favours keeping the annual pension more as the cash realised won't buy much annuity.

zygurat789

Surely there is a significant difference if the pension concerned is either a flat single life pension or an index linked with a spouce's pension?

LindsayO

zygurat789 wrote: »

Surely there is a significant difference if the pension concerned is either a flat single life pension or an index linked with a spouce's pension?

which has to be further complicated by the likely move from RPI to CPI

andyt8

Thanks for replies - its index linked with 50% continuing to spouse if I die first.