pension commutation

philc9

I'll retire next year, at 61.

My basic pension willbe £18500, with a lump sum of £56k. I have the option to swap £1 of pension for£12 on the lump sum, up to a limit of a £15k pension and £100. Should I dothis?

My mortgage is paidoff, and I have no significant debts. I have no immediate need for the capital,and could invest it long-term.

At first glance, itlooks as if I only need to live for twelve years into retirement for the higherpension option to come out ahead. But a higher pension means higher tax, sowouldn't this push the break-even point back by several years?

mania112

Can I ask -

The statement of £18.5k pa PLUS £56k lump sum is option 1.

Option 2 is to take even more cash at a rate of 12:1?

bigadaj

Tax will be a consideration but more importantly is the pension index linked and if so to what.

The commutation factor effectively means that the lump sum is returning 8.5% if taken as pension which is far higher than any other risk free investment. In your situation it's probably best to take as much pension as you can, can you reduce your lump sum to increase your pension as this may well be your best option.

For comparison then open market annuities which you might purchase for a defined benefit pot if index linked would give a return of less than 3% if rpi linked, and even less if you want a longer than 5 year guarantee and want a spouse pension.

philc9

thanks guys - yes, the basic offer is £18.5k plus a lump sum of £56k. I have the chance to convert some of the pension into an increased lump sum at the rate of 1:12. I can't convert any of the lump sum into pension.

The pension is index linked - to CPI, I think.

Teaandscones

Are you in particularly poor health? If so you may want to take the maximum lump sum. Otherwise, the higher pension is probably the better deal. The actuaries on my LGPS fund assumed that the average 65 year old will live to 86 (men) and 88 (women) with that increasing by 2 years for those currently 45 years old.

hyubh

Teaandscones wrote: »

The actuaries on my LGPS fund assumed that the average 65 year old will live to 86 (men) and 88 (women) with that increasing by 2 years for those currently 45 years old.

I would have thought the uptake at which pensions were commuted would have itself featured on the actuary's valuation report last year...? The 12:1 rate is fund-friendly by design of course...

kidmugsy

That lump sum is a handy size to see you through to the start of your state pension. It would be poor value to buy more lump sum by spending your pension.

xylophone

You have to take the lump sum so no option there.

A commutation rate of 12:1 is not brilliant - if the choice were mine, I'd opt for the pension offered.

You will become eligible for state pension after 6 4 2016?

The necessary legislation has now been passed, so see

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181237/single-tier-pension-fact-sheet.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf

Teaandscones

hyubh wrote: »

I would have thought the uptake at which pensions were commuted would have itself featured on the actuary's valuation report last year...? The 12:1 rate is fund-friendly by design of course...

The actuary assumes 50% commutation of LGPS built up up to March 2008 and 75% thereafter. The effect on funding is approx 1.5% of pay.

atush

Take the higher pension.

If you have no plans for the capital, the LS on offer of 56K looks sufficient.

hyubh

Teaandscones wrote: »

The actuary assumes 50% commutation of LGPS built up up to March 2008 and 75% thereafter. The effect on funding is approx 1.5% of pay.

How did the assumptions three and a bit years ago fare out of interest?