Converting pension to lump sum - Considerations?

crv1963

2) For us it is 12:1, not a great rate.


4) Specifically as it does not affect survivors pension in our case taking larger lump sum and clearing mortgage is more peace of mind than smaller lump sum and same survivors pension.


I think that there's more to it than straight forward spread sheets and working out/ guessing mortality. I'd rather have the house paid off and know Mrs CRV is assured a roof over her head than a larger income and worrying about getting the mortgage paid off.


Even though interest rates are low now, they can and do go up eventually, I remember the early 90s and how it all went wrong very fast- so I'd rather have peace of mind, even if this means doing some kind of paid work a bit longer.

hugheskevi

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

I think that is about right. Playing around with spreadsheets, I find that for the following assumptions:

• Inflation of 2% (assume pension gets full CPI increases)
• Returns of 4% (ie cautious investing)
• Taking pension at age 60
• Death at age 89
• Income tax at 20% on all of pension
• Lump sum is invested, compared to a scenario where the surplus from a higher pension is set aside and invested (ie a simple which is better scenario where money is not needed)

Then a commutation rate of 18:1 is about neutral.

If returns are reduced to 2%, consistent with cash deposits which roughly get inflation returns in history, then the neutral rate is 24:1. If returns are increased to 6% then a commutation rate of 14-15 is neutral.

If pension age is increased to 65, with a 4% return a commutation rate of 16:1 is neutral and with a 2% return 20:1 is neutral.

Push pension age higher to 68, and with a 4% return a commutation rate of about 14-15 is neutral with 4% returns, and 18:1 with 2% return.

A scenario where 12:1 is worth considering is where individuals are over the Lifetime Allowance. In that case, they will be paying 40%+ income tax, and taking a 12:1 commutation rate will reduce their Lifetime Allowance charge. Even then, I wouldn't say it is clear-cut (especially if they are mitigating the breach by commencing pension early)

chucknorris

hugheskevi wrote: »

I think that is about right. Playing around with spreadsheets, I find that for the following assumptions:

• Inflation of 2% (assume pension gets full CPI increases)
• Returns of 4% (ie cautious investing)
• Taking pension at age 60
• Death at age 89
• Income tax at 20% on all of pension
• Lump sum is invested, compared to a scenario where the surplus from a higher pension is set aside and invested (ie a simple which is better scenario where money is not needed)

Then a commutation rate of 18:1 is about neutral.

If returns are reduced to 2%, consistent with cash deposits which roughly get inflation returns in history, then the neutral rate is 24:1. If returns are increased to 6% then a commutation rate of 14-15 is neutral.

If pension age is increased to 65, with a 4% return a commutation rate of 16:1 is neutral and with a 2% return 20:1 is neutral.

Push pension age higher to 68, and with a 4% return a commutation rate of about 14-15 is neutral with 4% returns, and 18:1 with 2% return.

A scenario where 12:1 is worth considering is where individuals are over the Lifetime Allowance. In that case, they will be paying 40%+ income tax, and taking a 12:1 commutation rate will reduce their Lifetime Allowance charge. Even then, I wouldn't say it is clear-cut (especially if they are mitigating the breach by commencing pension early)

Interesting, I will be paying 40% tax on all my pension (but I am nowhere near the LTA), so the net computation rate for me would be 20:1. But I still think that I am better off taking 100% pension rather than a lump sum. There probably isn't that much in it, but the pension does give me additional portfolio diversification. By taking all pension my eventual retirement portfolio is probably going to look something like this:

34% equities
30% bonds/cash (mainly bonds)
23% fixed pension
13% investment property

But I am open to suggestions, nothing is cast in stone.

marlot

LHW99 wrote: »

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

Given that a DB pension is valued at 20x the starting annual amount, any commutation factor below 20:1 could help slip below the LTA.

Arguably, the 12:1 I get on my pension makes it a good choice. In practice, taking a reduced pension a year or two early seems a better option to me.

As with everything, that's just based on my personal circumstances. If I wanted to keep working, or I had a mountain of expensive debt then commutation might be the better option.

ianthy

chucknorris wrote: »

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).

QUOTE]

At this point in time we are both aged 55 and we have been landlords for more than 20 years. I don't see it as being particularly troublesome, I estimate I spend 5-6 hours a month on average. We have 3 long term rental properties in London and SE UK with the longest tenant in situ 10 years and shortest 4 years and 2 short term lets outside the UK. I look on it as Effort V Reward and yes I know some landlords can have very difficult tenants/properties but to date we have been fine.

Our plan is to restructure one of the short term lets - it's a villa in Italy with land, pool etc and replace it with an apartment in our 'golden years'. What is left can be dealt with by our estate, we have no kids but plenty of interested parties.

chucknorris

ianthy wrote: »

chucknorris wrote: »

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).

QUOTE]

At this point in time we are both aged 55 and we have been landlords for more than 20 years. I don't see it as being particularly troublesome, I estimate I spend 5-6 hours a month on average. We have 3 long term rental properties in London and SE UK with the longest tenant in situ 10 years and shortest 4 years and 2 short term lets outside the UK. I look on it as Effort V Reward and yes I know some landlords can have very difficult tenants/properties but to date we have been fine.

Our plan is to restructure one of the short term lets - it's a villa in Italy with land, pool etc and replace it with an apartment in our 'golden years'. What is left can be dealt with by our estate, we have no kids but plenty of interested parties.

We are in a similar position, many tenants stay on for years, longest ever was about 12 years, and current longest is about 6 years. I think the route of the problem is that we want to spend the winters in Spain and/or the Algarve, but another major issue is that we still have £3m equity to take out and spend. This is despite releasing £1.3m equity last year, which obviously still needs to be spent. If we had planned to keep over £4m equity tied up until our 80's, there would be no chance of spending it, especially as our stock market investments are quite large too. Not to mention running the risk of having no time to avoid selling in a downturn.

Triumph13

Two key, and generally interrelated, factors:

1. Your appetite and capacity for risk. If you are massively risk averse and would keep the lump sum in cash, then unless the commutation rate is excellent you'd generally be better off with the pension. If you're comfortable with 100% equities then you have good odds of coming out on top at a much lower commutation rate.
2. The relative utility of the pension foregone and the lump sum received. If the remaining pension still more than covers your expected spending, then a lump sum to get your kids on the property ladder or buy a holiday home may well be a better option even at low rates. If the pension only just covers your needs then it becomes much less attractive!