Commuting pension to lump sum

MMCC

I am about to retire with an annual pension of £27000 and a lump sum of about £71,000. I can commute a max of about £5000 to create an additional lump sum of £60,000.
I would appreciate some experienced expert comment on whether this is my best option at this time. I can commute any amount from nil up to the £5000.

What should I do???

edinburgher

When you mention an amount from £0-5000, I take it you mean £0-5000/per annum?

Do you have any need of a larger lump sum? This would seem to be a fairly simple starting point.

Re. looking for an expert, you typically have to pay for their advice You'll get plenty of suggestions on this forum, but be sure to keep your own counsel, do what works best for you and consult a professional if you think you need to.

Andy_L

For every £1 of pension you give up you get £12 lump sum. To go in the other direction you'd need ~£20 lump sum to buy £1 of pension so purely in those terms its a bad deal.

However a lump sum gives you flexibility (eg buy a new roof or sports car, invest it in a spouses name to use their tax allowances if they don't have theri own pension etc.)

lisyloo

so purely in those terms its a bad deal

How can you say this?

I'm not an expert or experienced in anyway, but I'd be considering several things.

1) Did I have any use for the lump sum? If it's going to be invested can I get a good return? What return do I expect? What tax will I pay? The answer is going to vary here depending on tax status, whether there is a spouse and how sophisticated an investor you are.
2) How long do I expect to live? Now I know this is a tricky one, but some people have relatives who all died at 55 and others have relatives in their 90s. Most of the people I know could take an educated guess on their own mortality. If everyone in my family died at 55, I'd take the lump sum !!
3) Also depends on what other money is available. If plenty is available elsewhere then there may be no need at all for the lump sum.

Andy_L

lisyloo wrote: »

How can you say this?

er because, purely in those terms, it is a bad deal. However, as I expanded upon, the lump sum can have advantages that offset that

zygurat789

Andy_L wrote: »

For every £1 of pension you give up you get £12 lump sum. To go in the other direction you'd need ~£20 lump sum to buy £1 of pension so purely in those terms its a bad deal.

Bearing in mind that your pension is your income for the rest of your non-working life. Look at it this way;
If you had £60,000 you could invest it at 4% to 5% to yield £2,400 to £3,000 or you could invest in a pension giving 8.3% to yield £5,000. I think the latter is better.

Loughton_Monkey

lisyloo wrote: »

How can you say this?

I'm not an expert or experienced in anyway, but I'd be considering several things.

1) Did I have any use for the lump sum? If it's going to be invested can I get a good return? What return do I expect? What tax will I pay? The answer is going to vary here depending on tax status, whether there is a spouse and how sophisticated an investor you are.
2) How long do I expect to live? Now I know this is a tricky one, but some people have relatives who all died at 55 and others have relatives in their 90s. Most of the people I know could take an educated guess on their own mortality. If everyone in my family died at 55, I'd take the lump sum !!
3) Also depends on what other money is available. If plenty is available elsewhere then there may be no need at all for the lump sum.

Yes. The above points are relevant, but in actual fact, in pure monetary terms the 'annuity rate' being offered by not commuting the lump sum (8.33) is absolutely excellent. This, I think, is the key feature and should be the "default" decision fo the OP. To take the lump sum, save/invest it, and hope to achieve 8.33% for the next 25 or so years is pie in the sky.

However, by all means deviate from this technically best action if (a) there is better use/need for the money, or (b) you have good evidence that you are going to live less than your full normal lifespan. And even then, decide whether these features truly 'balance' the loss of an excellent extra income.