that old chesnut (lump sum)

[Deleted User]

Hello all,
I appreciated all opinions and info on my last question re pensions and am hoping for some thoughts/ideas/info re commutation. I have read most of the previous threads , from this site and the web in general, but this is specific to myself.
I may be in receipt of defined benefit pension in near future. The commutation rate for
lump sum is 17-1. In simple terms , if I commute £1000 per annum pension, I will receive £17000 lump sum. I shall still be employed for a year or so and then retired , with only the pension income. I have no need of a large sum and have no debt, but would use some lump sum for home improvements.
Any contribution welcome,

Thanks, Billy

kidmugsy

How's your health? Are you from a long-lived family?

How old are you? Would you welcome having the lump sum to boost your income until your State Retirement Pension begins?

How's the financial health of your pension scheme?

Does commutation affect the size of your widow's pension?

[Deleted User]

kidmugsy,
health.........fine
age............60
income boost....... scheme leveling option
scheme health......large shortfall and scheme closing (replaced with dc)
widows pension......50% full pension regardless.
All relevant points ,which I need to address, in particular the leveling option. It is paid for by giving up part of annual pension, now and forever.
Thanks for input. Billy

xylophone

Is the levelling option available to you if your state pension age is greater than 65?

[Deleted User]

xylophone,
Leveling option paid until my state pension age (66). I have been looking at quotes with varying amounts of leveling but after kidmugsy's point I will now look using lump sum to level instead. I have already had a large amount of illustrations, with different permutations, and I am confusing myself with figures.
Billy

kidmugsy

At age 60 a commutation rate of 17 is neither dire nor wonderful.

Things you might do with a lump sum include expenditures (car, holidays, improvements to the house, modifying the house to suit old age, ....), giving you a good emergency fund, making some further pension contributions for wife and even for self, and of course defraying recurrent costs until the SRP begins at 66.

Commutation is even reversible, not literally but in the following sense. At SRA you (and your wife) can defer your SRP, earning an extra 5.8% pension for each year of deferral i.e. you can convert capital back to annuity-like income (perhaps with better inflation protection). In particular, if your wife looks likely to be short of pension, either during your life or afterwards, this can be a good trick for her.

If by any chance your wife is older than you and has already begun an old-style SRP, then you really must consider deferral for her: the return would be an extra 10.4% for every year of deferral, and it would be largely heritable by you if she should die first. It would be worth your taking a lump sum if only to exploit that opportunity alone.

I took maximum commutation lump sum from my principal final salary scheme. My commutation rate was slightly better than 17 but I was slightly older. I have not regretted it for a moment. But everyone has his own circumstances.

[Deleted User]

kidmugsy,
A very informative reply, providing lots of food for thought. My wife is same age as myself with a very small local govt pension,to come (school dinner lady). Her state pension forecast is almost at £155 per week, at age 66. Mine is slightly less. I shall do more number crunching re options.
Thanks,
Billy

jamesd

thetimewill wrote: »

The commutation rate for
lump sum is 17-1 ... would use some lump sum for home improvements.

Then don't take the lump sum. 17:1 commutation rate means the equivalent of paying 5.88% interest on the money for the rest of your life. You can surely borrow more cheaply than that and also not have to pay the penalty for as long as the rest of your life. For context the actuarially neutral rate used by the Pension Protection Fund is around 28:1.

Credit card deals, mortgage or home improvement loan are all options that are likely to have lower total cost. The mortgage would have the easier to manage monthly payments if you picked a provider who would lend into your 80s.

Deals that offer a boost before age 65 that I've seen have looked to be reasonably fair rather than exploitative but of course this doesn't mean that your particular scheme is fair.

[Deleted User]

jamesd,
Thanks for input. Could you please clarify , in a simplistic way, the commutation rate/5.88% statement.
I don't think I would like to take on debt at this stage of my life.
If I am doing the maths correctly, I give up £1200 appx annual pension now and forever,I receive £6000 appx for 6 years until state pension.
thanks, Billy

bigadaj

thetimewill wrote: »

jamesd,
Thanks for input. Could you please clarify , in a simplistic way, the commutation rate/5.88% statement.
I don't think I would like to take on debt at this stage of my life.
If I am doing the maths correctly, I give up £1200 appx annual pension now and forever,I receive £6000 appx for 6 years until state pension.
thanks, Billy

A commutation rate of 17 means that you get £1 in income for every £17 of lump sum. So for every £100 lump sum it costs you £5.88 in income, so what James is saying is that you could borrow the £100 (or multiple of it) and so long as the interest rate you borrow at is less than 5.88% you would effectively be ahead.

bigfreddiel

bigadaj wrote: »

A commutation rate of 17 means that you get £1 in income for every £17 of lump sum. So for every £100 lump sum it costs you £5.88 in income, so what James is saying is that you could borrow the £100 (or multiple of it) and so long as the interest rate you borrow at is less than 5.88% you would effectively be ahead.

Nice explanation, very easy to understand now.

Thanks fj