Financial Mess - Need to avoid rash Pension decision!

jem16

Ribin wrote: »

Thanks for the comment. If 11.58% is dire, what is the norm?

I don't know if there is a norm - it depends on the scheme.

Public sector commutation rate is 12:1 which has always been considered dire.

15:1 looks a better bet with 20:1 great.

redbuzzard

The actuarial reduction for taking it early, on the other hand, looks comparatively reasonable at about 4% p.a. I think mine is 6%.

xylophone

Your income needs seem modest and would be amply met by the actuarially reduced pension?

Would you feel content and relaxed (your wife too) if you took the pension now and did not have to worry about finding work (although you could if you found something suitable)?

Having peace of mind would preserve your health?

You are both entitled to state pension in due course?

hugheskevi

citricsquid wrote: »

The average UK male has a life expectancy of 79 with women having a life expectancy of 81, if we assume you will be the average:

You need to be using cohort life expectancy - a male aged 57 in normal health is expected to live to 86 years of age.

Your commutation rate appears to be 11.58% as you are giving up £7330 of pension to have £84,900 extra lump sum. Pretty dire rate really.

Wouldn't the OP (at age 60) be giving up £7,330 of pension to have £108,500 extra lump sum?

Public sector commutation rate is 12:1 which has always been considered dire.

Indeed. Using the added pension calculator for Civil Service set for a male reaching age 60 tomorrow, it would cost £21 for every £1 of income purchased. A buy at 12, sell at 21 is quite a buy-sell spread

Interesting to note the 12:1 commutation rate is going to continue in the post 2015 schemes - quite how sacrificing £1 of income payable from age 60 is deemed to be the same value as £1 of income payable from age 65 (or whatever State Pension age may be), I'm not sure. Why it isn't set actuarially is a mystery to me.

jem16

hugheskevi wrote: »

Wouldn't the OP (at age 60) be giving up £7,330 of pension to have £108,500 extra lump sum?

Yes you're quite correct. I read that wrongly and got the figures a bit mixed up.

At least a commutation rate of 14.8:1 is a bit better.

kidmugsy

Jem, you might like to check: I get the commutation rate to be about 15. At that rate, in our OP's shoes I'd be tempted to take a bit of lump sum for the reasons others have already explained, especially as it seems that he can use his wife as a tax shelter i.e. gift her the money so that the interest it earns her can be tax free: all that's required is to complete an R85 form for the bank/building society.

A good way to look at drawing the pension early is this. For 3 years approx you get £20825 that you wouldn't otherwise have had = £62625. You pay for this getting an annual income lower by (£23600 - 20875) = £2725. Now how many years from age 60 are required to balance these out? (£62625/£2725) = 23 years. So, roughly, it will be even steven by age 83. That implies to me that it is perfectly sensible to consider taking your pension early, especially for a chap with a poor health record. Anyway, OP, best wishes for the success of your decision.

Oh, one last thought. Giving up an index-linked pension to take a lump sum could be compared with an alternative, as follows. Once you have a regular income, say £20875 p.a., you may be eligible for a mortgage loan: you'd need to check. Then you would have some capital that way, at the cost of paying off the loan. But with help 6 years away from your wife's pension, with help from (say) some part-time work, and with help eventually from two State Pensions, that might not be too intimidating. Of course, if you hate the idea of going back into debt, then reject the suggestion immediately. But the suggestion takes advantage of current low interest rates; the combination of (say) a fixed rate mortgage and an inflation-linked pension might give you comfort.

jem16

kidmugsy wrote: »

Jem, you might like to check: I get the commutation rate to be about 15.

Not sure what you want me to check?

£108,500/7330 = 14.8021 which is what I recalculated in Post 16. As you say this is about 15.

We seem to be in agreement, do we not?

hyubh

hugheskevi wrote: »

Interesting to note the 12:1 commutation rate is going to continue in the post 2015 schemes

2014 in the LGPS case...

quite how sacrificing £1 of income payable from age 60 is deemed to be the same value as £1 of income payable from age 65 (or whatever State Pension age may be), I'm not sure. Why it isn't set actuarially is a mystery to me.

Yes, yet another layer of complexity is just what the 'reformed' schemes need...

From an LGPS fund POV (whaddaya mean there's others...?), the question about the so-called 'dire' commutation rate should be about the (in)elasticity of demand with a view to making the rate worse. (Says he, looking to do some number crunching on the very topic next week...)

hugheskevi

Yes, yet another layer of complexity is just what the 'reformed' schemes need...

A single rate reviewed at each scheme valuation (say, it could be less frequently) is a layer of complexity? I guess it could be the straw that breaks the camel's back, but in the world of pensions it would be one of the last things I'd be classifying as complicated.

It is a simple fairness vs simplicity trade-off, and I think this ranks as pretty simple. Particularly when in other parts of the agreement you get things like SPA=NPA links, but with the opportunity for actuarial buy-out via a higher contribution rate but only up to 3 years, subject to not reducing NPA below 65. That is introducing unnecessary complication.

Other complicated are things like members understanding the calculation of the annual allowance or the results from having a large number of definitions of final salary , GMP calculations or where there are large number of tranches of pension due to regulatory and scheme changes.

Things that can trivially be put into easy to understand ready reckoners (eg early retirement, added pension, etc) cannot be seriously argued against on the grounds of it all being too complex.

From an LGPS fund POV (whaddaya mean there's others...?), the question about the so-called 'dire' commutation rate should be about the (in)elasticity of demand with a view to making the rate worse. (Says he, looking to do some number crunching on the very topic next week...)

A nice way of saying you will be looking at just how much of a member's tax free lump sum the employer/fund can appropriate to maximise benefit to the employer/fund before too many members refuse to take the lump sum.

It is a shame when members are seen as something to be exploited, but it is all too common in pensions

kidmugsy

jem16 wrote: »

Not sure what you want me to check?

Your earlier erroneous one: as the time stamps suggest, I was writing my post when your one admitting to the error arrived.