Converting pension to lump sum - Considerations?

wookie6

Hi,

If your pension scheme allows you to convert some of your pension to a cash lump sum what factors should you consider to determine whether this is the correct thing to do?

Thus far I have come up with the following:

1) How old you currently are and how long you perceive you may live based on any existing conditions / family history.

2) The conversion rate of the annual pension to cash lump sum.

3) Annual savings on tax above the tax free threshold on the figure of annual pension you can bring down through conversion to a cash lump sum.

4) Whether you have a specific need / use for the money that you would take as a cash lump sum?

5) The figure of annual pension your partner would receive were you to die.

6) What earnings you may be able to achieve on a cash lump sum that could offset some of the loses of the annual pension amount used to receive the cash lump sum.

7) Yearly increases in annual pension. I'm not sure exactly what this figure is today?

Are there any other factors that should be considered?

I have read other posts that say if you are younger (say 55) then taking the pension in full is generally the best choice, however is there any general rule for an age and / or conversion rate at when it generally makes more sense to take some / all of the percentage of annual pension allowable as a cash lump sum?

Thanks in advance!

kidmugsy

wookie6 wrote: »

If your pension scheme allows you to convert some of your pension to a cash lump sum what factors should you consider to determine whether this is the correct thing to do?

1) How old you currently are and how long you perceive you may live based on any existing conditions / family history.

OK, but many people who post asking for help on this forum underestimate - often by quite a lot - their (average) life expectancy. They also seem often to have a complete mental block about one crucial attraction of a monthly pension - the reduction of longevity risk. It doesn't matter a hoot if you worry that you might die at 75 - the pension will trundle on until you actually die, even at 110. Helps you sleep soundly.

wookie6 wrote: »

2) The conversion rate of the annual pension to cash lump sum.

12:1 would usually be reckoned rotten; 18 - 20:1 OK; greater than 20:1 desirable. Comments, anyone?

wookie6 wrote: »

3) Annual savings on tax above the tax free threshold on the figure of annual pension you can bring down through conversion to a cash lump sum.

Yeah, though of course it requires you to guess at future tax rates.

wookie6 wrote: »

4) Whether you have a specific need / use for the money that you would take as a cash lump sum?

KEY! Why take a bigger lump sum if you don't know what to do with it? Clearing expensive debt is often a good purpose, or clearing debts of honour within a family. Some people will even clear a mortgage, however cheap it may be. Friends of ours went for max lump sum: it was the only time in their lives that they had had a large capital sum at their disposal. They bought a country cottage.

wookie6 wrote: »

5) The figure of annual pension your partner would receive were you to die.

Check whether your taking a bigger lump sum will reduce your widow's pension. In many schemes it won't.

wookie6 wrote: »

6) What earnings you may be able to achieve on a cash lump sum that could offset some of the loses of the annual pension amount used to receive the cash lump sum.

Wild guess, often, unless you have some particular scheme in mind. What could go wrong in investing in a caravan park in the Maldives?

wookie6 wrote: »

7) Yearly increases in annual pension. I'm not sure exactly what this figure is today?

Depends on the scheme. CPI with an upper limit of, say, 5% may be common. Or upper limit of 2.5% (mean, that!). Or RPI with no upper limit. You just have to check.

wookie6 wrote: »

... is there any general rule for a ... conversion rate at when it generally makes more sense to take some / all of the percentage of annual pension allowable as a cash lump sum?

See answer to (2) above.

marlot

>> 5) The figure of annual pension your partner would receive were you to die.
On my main pension, the spouses pension is unaffected by commutation. Yours may be different.

>> 2) The conversion rate of the annual pension to cash lump sum.
This may change by age. I've been offered 17:1 at 55, 15:1 at 60 or 14:1 at 65.

wookie6

Thanks for the responses thus far....

Quote:
Originally Posted by wookie6 View Post
If your pension scheme allows you to convert some of your pension to a cash lump sum what factors should you consider to determine whether this is the correct thing to do?

1) How old you currently are and how long you perceive you may live based on any existing conditions / family history.
OK, but many people who post asking for help on this forum underestimate - often by quite a lot - their (average) life expectancy. They also seem often to have a complete mental block about one crucial attraction of a monthly pension - the reduction of longevity risk. It doesn't matter a hoot if you worry that you might die at 75 - the pension will trundle on until you actually die, even at 110. Helps you sleep soundly.

For me this is the million dollar question... Sure, you may go on to live until 110, however there is a case to be made that the longer you live, generally the less money you will need. If you take part of your pension as a cash lump sum then its not as if you won't have any annual pension after that.

Perhaps after a period equivalent to your conversion rate 12 years (12:1), 18 years (18:1) etc you may be quite happy with say 20% less of your pension to live off, whilst you have the knowledge that if you were to die before this time partner would we left with the lump sum along with your widows pension.

Zanderman

wookie6 wrote: »

.... Sure, you may go on to live until 110, however there is a case to be made that the longer you live, generally the less money you will need....

I'm not sure I see that case! You may be less 'active' the older you are but that doesn't necessarily mean you need less income.

The one thing you can be sure of as you get older is that you'll need more help and care - especially if you become very infirm. And care is very expensive.

The way things are at the moment you might get such care free if you have little money - though even now you might prefer a higher standard of care than that.

But the way things are going you may find that 'free' care gets scarcer, so you may need every penny.

Silvertabby

!!!8220; 2) The conversion rate of the annual pension to cash lump sum.
Originally posted by wookie6 !!!8221;

12:1 would usually be reckoned rotten; 18 - 20:1 OK; greater than 20:1 desirable. Comments, anyone?

Posted by kidsmugsy

wookie is LGPS, and so is looking at 1:12

!!!8220; 7) Yearly increases in annual pension. I'm not sure exactly what this figure is today?
Originally posted by wookie6 !!!8221;

Depends on the scheme. CPI with an upper limit of, say, 5% may be common. Or upper limit of 2.5% (mean, that!). Or RPI with no upper limit. You just have to check. Posted by kidmugsy

LGPS is CPI uncapped.

LHW99

Just wondering - does the LTA reflect in any way on a decision to take an enhanced lump sum?

The_Doc

The lump sum becomes part of your estate and so potentially subject to IHT. Just something to consider. If you take the PCLS, best spend it!

ianthy

I took the max PCLS as it helped to diversify my investments/income. I added another BTL property which more than replaced the income lost as pension.

chucknorris

ianthy wrote: »

I took the max PCLS as it helped to diversify my investments/income. I added another BTL property which more than replaced the income lost as pension.

Would you happy being a landlord when you are in your late 70's/80's? I know I wouldn't, I'm 60 now and last year I sold one property, leaving me with 3.5 investment properties. My outline plan is to sell another 2 sometime in the next 5-6 years, and sell the last 1.5 proprieties when I am in my early 70's, simply to keep some diversity in my portfolio. I've been a landlord for 27 years, so I'm a bit fed up with it, and I want my retirement to be freer of the hassle than it has been earlier. Also I want to leave plenty time to avoid selling in a recession, and time to spend the equity before death (we don't have children).

Back on topic, my computation for taking a lump sum is 12:1, although when tax is taken into account that becomes 20:1, but that is still 5%, so I would rather keep the pension than take a lump sum. It also retains diversity to my portfolio as my pension (both DB and state) is only going to be about 23% of my portfolio, so I would rather keep it at that level, rather than see it reduced.

Malchester

I have considered this issue as I receive a deferred LGPS pension later this year (at 60 as that is what the scheme says I have to do and it would be silly to delay it even if I could). The TFLS I can choose has quite a wide range. With a conversion factor of only 12:1 it is a no brainer to take the minimum lump sum and largest pension especially as I am still working, don't need the money and will probably live another 20 years or more (but who can say)