just retired pension query

lannb100

Hello All,
I've recently retired from local government aged 60.My pension provider has informed me that I am entitled to an annual pension of 5311k plus a tax free lump sum of 17328k.They have also informed me that I can increase my tax free lump sum by 11623k making a total of 28951k,however if I do this my annual pension will be reduced to 4342k. This is known as commutation. Please can you advise me of the best option to take.Your help in this matter would be appreciated.
Thank you.

dunstonh

We cannot advise you as that is in breach of board and FSA rules as the question you ask covers a regulated subject. If you want proper advice, you need to speak with an adviser (and in this case an IFA as its outside the scope of tied agent).

However, we can discuss and comment though.

Usually it is best to bring as much capital out as you can and reduce the income down. The capital can then be used to invest tax efficiently to provide an a growing income. Plus if you have a spouse, they will benefit more upon your death. There are some exceptions to this though which would depend on your personal situation.

EdInvestor

What is the "commutation rate" (ask)?

Also, what state pension will you be getting?

lannb100

Thanks for responses.If I decide to increase my lump sum payment I will receive 12 pounds tax free cash for every one pound of pension that I convert.The maximum tax free sum is 25% of my personal fund.The maximum amount of pension I may convert is 968 pounds this wil provide me with additonal lump sum of 11623k. My state retirement pension is 76 pounds per week.

Paul_Herring

There's a worked example on http://personalfinance.iii.co.uk/articles/articledisplay.jsp?article_id=3972579&section=Pensions&catEnforce=LatestPensions

III wrote:

As an example, Andrew Tully, marketing technical manager at Standard Life, considers the case of someone who has worked for 30 years for one company and had a final salary of £48,000. With many schemes they would receive a pension of 1/80 x 30 x £48,000, which is equal to £18,000, with tax-free cash of 3/80 x £48,000, equivalent to £54,000.

The new formula for calculating benefits is more complex and uses what is known as the 'commutation factor' to determine how much pension income you lose each year for the tax-free cash you take. The trouble is that many schemes have commutation factors that are too low. For example, a fairly typical commutation factor is 12:1. This means that for every £12 of tax-free cash you take your annual pension will reduce by £1.

Based on the above example, if the scheme had a commutation rate of 12:1 at age 65, they would now be able to take a lump sum of as much as £96,435 according to Tully, although this would mean their annual pension would be reduced to £14,465. "Assuming inflation of 2.5% a year, they would only need to live for another 13 years to receive more money over their retirement by choosing to take the income rather than the tax-free cash," says Tully.

Titan

Based on the above example, if the scheme had a commutation rate of 12:1 at age 65, they would now be able to take a lump sum of as much as £96,435 according to Tully, although this would mean their annual pension would be reduced to £14,465. "Assuming inflation of 2.5% a year, they would only need to live for another 13 years to receive more money over their retirement by choosing to take the income rather than the tax-free cash," says Tully

I disagree with Tully,

With very few exeptions, in my opinion, the best thing is to take as much tax free cash as you can, because it is tax free (the income will be taxed as earned income) and because it is best to get the money out of the pension (inflexible) and invest it elsewhere to generate an extra income wich can fill the gap between the £18,000 and the £14,465 and, if needed, can be used in an emergency.

Basically, it gives you more flexibility and choice if you have the money readily available than tied up in a pension.

This is just my opinion, and it's what I'd do.


Titan

kenshaz

Take the larger lump sum ,a bird in the hand is worth two in the bush,who knows what the future holds,you might live until you are 100 ,then you would have been better taking the increased income ,but think about it.

EdInvestor

What other resources do you have in terms of savings and investments?

Your overall pension income is quite low, state and company,but both pensions will be index linked.If you take the bigger lump sum but invest it in cash, then its value will be reduced by inflation.If you put it in investments with a risk element, it should keep pace,but there is a risk.

If you come from a long-lived family and have good health, you might be better to taker the bigger pension.

If you have little in savings,you might however feel more comfortable with a bigger cash cushion.

In the end you're probably best to follow your own instincts as to which route best suits you.

kenshaz

lannb100 wrote:

Thanks for responses.If I decide to increase my lump sum payment I will receive 12 pounds tax free cash for every one pound of pension that I convert.The maximum tax free sum is 25% of my personal fund.The maximum amount of pension I may convert is 968 pounds this wil provide me with additonal lump sum of 11623k. My state retirement pension is 76 pounds per week.

Are you female and in receipt of the state pension?
My occupational pension allows my spouse too receive half of my pension at the rate before commutation on my death,so taking the larger lump sum did not effect that ,will you have the same provision?