Inverse Commutation yes or no!!

bill999

Hi all

I am taking partial retirmment in January and I am considering commuting my lump sum to get a higher pension.

If I commute my lump sum of £22377 this will generate a pension of £1073 per annum. This is a return of 4.8%.

To me it seems a good deal as it is index linked (CPI).

Downside

I 1 will not have the liump sum (luckily I have cash already set aside).

2 If I die early then it is not a good deal - although I am only 56 o hoepfully should live till at least 75.

3 Best savings rate is only 4.7% tied for 5 years.

Can you think of any other downsides?

Regards Bill

sandsy

Have you considered your tax position?
The lump sum is tax free. Depending on your tax band, the income could be subject to income tax which would effectively reduce your return.
For example, if all of the income is taxed at 20%, your net return effectively becomes 3.84% (=4.8 x0.8)

traineepensioner

Hi bill999

An interesting question as I'm considering a similar option.

I'm 53 and also been offered a 20 to 1 commutation rate to convert my lump sum to pension (CPI indexing + spouse protection). Our joint retirement income does mean that we will pay tax on the extra pension but it still appears good value when compared to the indexed annuities for a 55 year old.

I've also been offered an alternative option of converting the pension to extra lump sum, with a commutation rate of 17.5 to 1 ....I always thought that these conversions were supposed to be nil cost to the pension fund so I can't understand the differing commutation rates.:think:

A difficult choice that, I suppose, will depend on individuals circumstances....Good luck whatever you decide. :beer:

zygurat789

sandsy wrote: »

Have you considered your tax position?
The lump sum is tax free. Depending on your tax band, the income could be subject to income tax which would effectively reduce your return.
For example, if all of the income is taxed at 20%, your net return effectively becomes 3.84% (=4.8 x0.8)

The rates are about the same, maybe a bit better in an ISA but the choice is
1. Have the lump sum, invest it and watch inflation whittle it away or
2. Forget about ever seeing the cash and enjoy an indexed income.

You already have savings and indexed pensions so it depends on how long you think will live.

Over to you

kidmugsy

How sound is your pension fund? Don't leave money there if you think it is shakey.

bigfreddiel

kidmugsy wrote: »

How sound is your pension fund? Don't leave money there if you think it is shakey.

that make no sense - the poster is taking his pension in january - so what if the fund is shakey!

bigfreddiel

anyway, getting back tothis thread I have the same conundrum - my lump sum will be approx £25k - this will give me an additional £1040 aprox pension.

That will increase by cpi each year
So if cpi is 2.5% you break even in 20 years
3% 19
4% 18
5% 17 and so on

Now I already have considerable savings and investments so £25k isn't a big deal for me

And if I ake the lumpsum I have to keepit earning at least cpi every year - okay I'mdoing that already so its also no big deal

So i'm also undecided - inverse commutation make life simple - guaranteed income
Lump sum may make a bit more over the years but not that much and its hassle

I keep wavering between the two options and now I'mleaning towards commutation

fj

kidmugsy

bigfreddiel wrote: »

that make no sense - the poster is taking his pension in january - so what if the fund is shakey!

Because if the fund becomes bust your pension could stop. You then depend on the rescue fund - Lord knows how miserable its payouts might be in future.

bigfreddiel

kidmugsy wrote: »

Because if the fund becomes bust your pension could stop. You then depend on the rescue fund - Lord knows how miserable its payouts might be in future.

what - even when yuo've taken your pension?

isn't that true of any financial institution?

my advice in that case is take it all in cash - stick under your matress

disadvantage - no interest
advantage -no tax

fj

kidmugsy

bigfreddiel wrote: »

what - even when yuo've taken your pension?

isn't that true of any financial institution?

fj

If you take your max tax free lump sum, you have the advantage of diversifying: 75% (say) of your money is with the pension scheme, 25% elsewhere. Whether it's worth worrying about a pension scheme going bust depends on the scheme in question, and on your own position. My wife and I are in the same pension scheme, so its ruin would be our ruin. Many couples will not have this lack of diversification to worry about: some will.