A fair price?

BobQ

http://www.telegraph.co.uk/finance/personalfinance/pensions/9758667/Workers-could-get-62000-lump-sum-in-exchange-for-state-pension-benefits.html

Is this a good deal?

CLAPTON

one needs to know what the pension loss is before saying whether the one-off payment is fair.

hugheskevi

The 'exchange rate' quoted is £20 capital value per £1 of annual income. That is based on the lifetime allowance calculation.

That compares to a rate of 12:1 typically used in public service pensions which is considered poor value if you are an average person. But that is an exchange of taxable income for untaxed income whereas this would (presumably) be an exchange of taxed income for taxed capital. If you added 20% to the 12:1 exchange rate, that would make it 15:1.

Private sector Defined Benefit commutation rates can get above 20:1, but between 15:1 and 20:1 would be usual.

Using a comparable annuity rate (RPI indexed, 50% spouse benefits) the rate would be about 3%, which would equate to an exchange rate of 32:1. But as RPI is higher than CPI, that rate is too high.

So based on all that, 20:1 seems to be about the right order of magnitude. But for some (single people with low life expectancy) it would be a very good deal, whereas for others (couples, in good health with no need for capital) it may not be so good.

But it is all academic - there is a vanishingly small chance that the Govt. will decide to bring forward billions of pounds of expenditure in the current economic climate.

kidmugsy

hugheskevi wrote: »

there is a vanishingly small chance that the Govt. will decide to bring forward billions of pounds of expenditure in the current economic climate.

I suppose they could issue people with something corresponding to a special index-linked gilt that would become tradable at some fixed time in the future - that would keep down the administrative complications, and leave some future government to cope with the fall-out. They might get that away at a discount, since people seem to prefer capital-in-hand to perpetual income.