Larger annual pension or smaller and larger lump sum?

Annie1960

BobQ wrote: »

Can someone explain, if you commute a lump sum to pension how is the tax free aspect of the lump sum addressed?

The tax-free aspect only applies to the lump sum, and if you do an inverse commutation like I did you lose it as your pension income will be taxed in the normal way.

However, you will get increases in line with inflation with the monthly pension.

In my opinion, having worked in the Civil Service for many years, hearing other people before me discuss this, and looking into it myself (I went to see an IFA before deciding), the main way to decide is to take the lump sum (or some of it) if you have a purpose for it, and inverse commute to extra pension if it would just be sitting in an account doing nothing.

kidmugsy

jamesperrett wrote: »

I'd agree with Acquinas that there are multiple inflationary pressures - not only from currency devaluation but also from Saudi Arabia's decision last year to limit oil production and nudge the oil price up.

There are also multiple deflationary pressures. China's remarkable growth spurt may be slackening, the US shale drillers may be about to undermine Saudi's pretensions, the eurozone may be about to plunge even deeper into recession, the ageing of populations in Europe, Japan, and China continues to be deflationary, etc etc. No economist is capable of predicting which of these forces will dominate.

If you suspect that inflation is a monetary phenomenon then you may think that the crucial thing will prove to be the Central Bankers' keen desire to promote inflation: they may lose control and succeed far more than they intended. The chances of that happening have precisely nothing to do with Brexit.

GDB2222

12:1 is a shockingly bad commutation factor. It's a disgrace!

For comparison, an index-linked annuity at age 55 will cost around 50:1 at the moment. That's for a fully RPI linked pension, whereas public sector pension schemes are CPI linked.

BoxerfanUK

I think certainly if it's the PCSPS 'Classic' scheme then inverse commutation is a lot worse than 12:1

I would stick with the std pension and 3 times lump sum.

Not everyone has actuarial reduction @55. I had reserved rights with std pension age of 55 so no reduction.

Acquinas

Commodities priced in dollars in the main. As with oil. Sterling depreciation will do at least as much damage as tariffs. But, a simple case study might be this. A kilo of French Brie currently, say, £10. Factor in sterling deprecation and that's £12. Revert to WTO tariffs (i.e. end of single market) and that's £13.20. Now I want my wages to go up. So we have a wage/price spiral that could go on for years as it did in the 70s. All the flag-waving and Spitfire avatars are not going to change that.

kidmugsy

Acquinas wrote: »

Commodities priced in dollars in the main. As with oil. Sterling depreciation will do at least as much damage as tariffs.

What was the annual rate of UK CPI price inflation last month? About 2.3% was it? It was 2.2% in Germany and 2.7% in the US according to my newspaper. Brexit clearly works its magic all around the world. Heap big juju!

maximumgardener

To OP ....most people would take the larger guaranteed pension / smaller tax free lump sum

so thats "Route 1" ...if you can make that work for you.

As always ...it really depends on your own personal circumstances.
e.g. if you had poor health you may choose another option!

Silvertabby

To OP ....most people would take the larger guaranteed pension / smaller tax free lump sum

Posted by maximumgardener

I'm a retired LGPS administrator. From experience, between 85% and 90% of LGPS pensioners take the maximum lump sum despite the poor 1:12 commutation rate. I suppose that in many cases the maximum lump sum is an amount of money they had only ever seen in their dreams.

kidmugsy

Silvertabby wrote: »

From experience, between 85% and 90% of LGPS pensioners take the maximum lump sum despite the poor 1:12 commutation rate. I suppose that in many cases the maximum lump sum is an amount of money they had only ever seen in their dreams.

Motorhomes don't pay for themselves you know.

More seriously, has there ever been a time when it would have been rational to accept 1:12? I mean, if you took the commutation now and then tried to invest it to beat what it would have returned if left in the scheme you're very unlikely to come out the winner, in my judgement. So people ought logically be taking the lump sum only if they have something compelling to spend it on. I hope they are not wasting money clearing mortgages in an era when you can borrow more cheaply that at any time in history.

I suspect that it would be more rational to buy the motorhome on tick and use the bigger pension to pay off the loan. Or buy the motorhome with an increased mortgage and pay off the mortgage using the bigger pension.

jamesd

£300 a month on the mortgage is £3,600 a year. The higher pension is £4,170 a year. Taking the higher lump sum to repay the mortgage starts out by making you worse off by the £570 a year difference between those two. For as long as the mortgage lasts. Then you're the full £4,170 a year better off by not repaying the mortgage.

Taking a bigger lump sum to pay off the mortgage and make yourself worse off doesn't look like a good move.

Using the base lump sum to do it also doesn't look like a good move but that does depend on what you would do with the money instead. The £3,600 a year in mortgage payments is 7.5% of the £48,000 owed on the mortgage. You should be able to make more than that with peer to peer lending. Even the lowest risk end like Zopa and RateSetter would pay around 3-6%. Before tax. So in addition to the basic £570 a year better off if you were to invest much of the smaller lump sum you could expect say £1,800-£2,500 net income on top.

What you might consider doing to increase your non-mortgage spending ability is to look into extending your mortgage term. That could reduce your monthly expenses and increase what you have now, deferring some of the cost until later, ideally when you have the extra income from your state pension coming in.