that old chesnut (lump sum)

[Deleted User]

bigadaj,
Thanks for reply. I'm having a slight mental block so will give some figures if you would apply
the figure re commutation/ 5.88%
no lump sum and annual pension £15947.
lump sum....£50639 plus annual pension...£12636. Do not want to borrow. Thanks

kidmugsy

thetimewill wrote: »

kidmugsy,
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.

Here's a sum worth doing. What size of LGPS pension can your wife expect, and from what age? What would her annual income in retirement be? I ask because it may present you with an opportunity for tax efficiency.

Suppose, for instance, she can expect £8k SRP and £2k LGPS. Those add up to less than the Personal Allowance against income tax (currently £11k p.a.), so there's a gap there that could be filled by her having contributed to a personal pension of some sort, and then drawing down £1k p.a. of income, free of tax (that would be in addition to her 25% tax-free lump sum).

A different way to use that (hypothetical) £1k p.a. gap is for her to transfer to you £1000 of her personal allowance, thus reducing your tax bill by £200 p.a. And a third way would be for her to defer drawing her SRP for a couple of years.

Similarly, if your wife's present annual earnings are below £11k she could exploit unused personal allowance by drawing out of a pension that she could first fill up by using money from your commutation lump sum (or as jamesd might advocate, by using borrowed money). And perhaps also by transferring some of her unused Personal Allowance to you.

Lastly, it's worth establishing whether your wife would be able to increase her SRP to the maximum weekly amount by paying some extra National Insurance Contributions voluntarily.

mgdavid

thetimewill wrote: »

bigadaj,
Thanks for reply. I'm having a slight mental block so will give some figures if you would apply
the figure re commutation/ 5.88%
no lump sum and annual pension £15947.
lump sum....£50639 plus annual pension...£12636. Do not want to borrow. Thanks

Your £50639 lumpsum costs you (15947 minus 12636) i.e. £3311 per year.
So every £100 costs you (3311 divided by 506.39) i.e. £6.54 which is the equivalent to borrowing at 6.54% interest rate.
You say you don't want to borrow but taking a lump sum *IS* borrowing - from yourself, and for the rest of your life.

zagfles

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.

Except that lenders tend to want their money back, no account is taken of capital repayment. Plus there'll be tax to pay on the income, the lump sum is tax free. So it's a bit more complicated than this oversimplified comparison.

[Deleted User]

Thanks to everyone for the latest input. I need to annoy the administrators again with more requests and questions for different illustrations. I have swung from one option to another and I need to step back and begin again, taking all your points on board. Certainly not a simple choice and one I cannot later regret. It has been worthwhile asking for various opinions.
Thanks all,
Billy

bigadaj

zagfles wrote: »

Except that lenders tend to want their money back, no account is taken of capital repayment. Plus there'll be tax to pay on the income, the lump sum is tax free. So it's a bit more complicated than this oversimplified comparison.

So crack on and do a full analysis for the OP based on their personal circumstances, are you suggesting Monte Carlo analysis of potential investment returns for example?

My explanation was effectively how to divide 100 by 17, please feel free to expand upon this.

zagfles

bigadaj wrote: »

So crack on and do a full analysis for the OP based on their personal circumstances, are you suggesting Monte Carlo analysis of potential investment returns for example?

My explanation was effectively how to divide 100 by 17, please feel free to expand upon this.

Calm down;). Dividing 100 by 17 doesn't give you anything like a useful answer. Repayments make a big difference.

For a start, assuming OP is going to pay basic rate tax on the income, the commutation rate is effectively 21.25-1, or about 4.7%

To account for capital repayments, the OP could check how much a repayment mortgage would cost for the amount of the lump sum over the period of his expected life.

http://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator

To account for the annual increases in the pension income, he could use the "real" interest rate, ie the amount by which the mortgage interest rate exceeds the expected rate of increase of the pension.

For instance, say he can get a mortgage at 4%. Expected annual increase in the pension is 2%. Life expectancy 25 years.

Shove the lump sum into the calculator above, use the "real" interest rate of 2%, 25 year term, and compare the annual repayment with the loss in pension after tax due to taking the lump sum.

Using 17-1: £10,000 lump sum reduces pension by £588.24, assuming basic rate tax £470.59 after tax.

£10,000 borrowed at 2% over 25 years costs £42 a month, £504 a year. So he's better off taking the lump sum! Of course tweak the parameters and you'll get a different answer.

[Deleted User]

zagfles,
Thanks for example and method. Another one I will have to work on.
Cheers,
Billy

kidmugsy

zagfles wrote: »

Using 17-1: £10,000 lump sum reduces pension by £588.24, assuming basic rate tax £470.59 after tax.

£10,000 borrowed at 2% over 25 years costs £42 a month, £504 a year. So he's better off taking the lump sum!

So if he feels he'd rather have £10k capital than extra pension income, it might be cheaper to take it as a lump sum than to borrow and repay. When it's that close then I'd begin to look seriously at other factors e.g. the financial health of the scheme.

OP, what's the inflation-protection deal on your pension? RPI linking? CPI linking? CPI linking with a cap at 5% p.a., or 2.5% p.a.? What?

Apodemus

Another option open to the OP might be to take the lump sum and for his wife to pay that in to the LGPS. I've not run the figures (and I am no expert, so may have totally misunderstood how the scheme works) but I think the annual pension payment comes out at about 10% on the lump sum amount (without taking the pension contribution tax benefit into account). The OP might potentially turn his £3,300 loss of pension into >£5,500 pension for his wife. Downside is that this is only for the remainder of the LGPS member's life, with no spouse benefit.