Pension/investment advice

Deneb

MK62 wrote: »

So the choice would come down to option 1 vs option 3.
After you account for the unavoidable extra income tax on option 1, the commutation rate on option 3 is about 27:1, which is pretty good tbh.

Option 3 means commuting £6,105 of annual pension for a lump sum of £131,432. I make that a rate of 21.53:1 which is good, but not as good as 27:1

Audaxer

Deneb wrote: »

Option 3 means commuting £6,105 of annual pension for a lump sum of £131,432. I make that a rate of 21.53:1 which is good, but not as good as 27:1

I work it out as 21.53:1 as well, which is a very good commutation rate.

Just wondering, is there any cap on the CPI increases for that DB pension? If CPI was for example 10%, could the pension still rise by that percentage?

MK62

I did say "once you account for the unavoidable income tax" on that extra £6105 pension

The £131432 lump sum figure is tax free......that's the amount which will land in his bank.
The £6105pa extra pension is not tax free....only £4884 of that will end up in his bank.....the other £1221 will be snaffled up by HMRC.

So in net terms.....the commutation rate is 131432/4884=26.91.

Deneb

Not seen commutation rates expressed in net terms before. I think that just obfuscates the numbers.

The scheme commutation rate of around 21:53 (the pension figures quoted by the OP are rounded, so we can't say exactly without looking up the tables) are fixed by his age at the date of retirement and will be constant whichever option he takes.

In option 2, he would give up roughly £6,455 annual pension for a pre-tax lump sum of around £139,000 applying the scheme commutation rate. I make that an amount lost to tax will be around £3,000, but it is certainly penal as the excess lump sum is treated as an unauthorised scheme payment under HMRC rules I believe.

I think we can agree that option 2 is not a good option.

If he has decided that he wants to take a lump sum of £65K, the commutation rate determined by option 3's figures would indicate he will need to commute approximately £3,019 of his pension, leaving him with an annual pension of £22,800.

Deneb

Audaxer wrote: »

Just wondering, is there any cap on the CPI increases for that DB pension? If CPI was for example 10%, could the pension still rise by that percentage?

No cap for the 1987 scheme. I don't know about the subsequent schemes as they didn't apply to me.

There used to be a table on the NARPO website, showing the annual increases applied to the police pensions since their inception. It seems to have disappeared following a website redesign. I wish I had saved a copy now, but there were certainly several instances of increases well into double figures.

That's one reason I emphasised the value of the index linking. Not likely to see a repeat of that imminently I suspect, but who knows what may happen again in the future. The OP can hopefully look forward to drawing his pension for many years to come. We certainly have a fair number of pensioners in my own force who have been drawing their pensions for longer than they served.

Deneb

The current commutation factors appear to be here:

https://www.gov.uk/government/publications/police-pension-scheme-1987-in-england-and-wales/factors-for-commutation-of-pension-to-lump-sum

The rate is between 21.8:1 and 21.43:1 for a 53 year old, depending on exact age in months.

The slightly higher rate we've calculated can be explained by the rounding apparent in the pension amounts that the OP has posted. Either the estimate he was provided with has been rounded to leave off the pennies, or he has done similar when posting here.

OP, you should be able to make a pretty good estimate of the various options from that table.

For instance, if your commutation factor is 21.8:1 (aged 53 but less than 53 years and 1 month) you will receive £21.80 lump sum for every £1 of annual pension that you choose to commute (give up). A 65K lump sum will reduce your annual pension by £2,981.65 (65,000 / 21.8).

At 53 years and 11 months the amounts would be £21.43 per £1.00 pension commuted or £3,033.13 reduction for a £65K lump sum.

MK62

Deneb wrote: »

Not seen commutation rates expressed in net terms before. I think that just obfuscates the numbers.

On official commutation figures I would agree.
As the scheme would have no idea of each member's tax position, they have little option but to give the gross figures - but each member then has to do the math with those figures to see how it will actually affect them in practice.

For the OP, the official commutation figure might be 21:53:1......or put the other way he would be commuting £6105 for a £131432 lump sum.
However, if he elected to keep the full pension and take no lump sum, he would never actually see that extra £6105 arrive in his bank.......he would only actually get £4884, no matter which way you slice the pie......the income tax is unavoidable.

So, in terms of what he would actually get delivered into his bank account, available for him to spend......it's £4884pa vs a lump sum of £131432.

Audaxer

MK62 wrote: »

I did say "once you account for the unavoidable income tax" on that extra £6105 pension

The £131432 lump sum figure is tax free......that's the amount which will land in his bank.
The £6105pa extra pension is not tax free....only £4884 of that will end up in his bank.....the other £1221 will be snaffled up by HMRC.

So in net terms.....the commutation rate is 131432/4884=26.91.

That's true which makes it a really good commutation factor. Therefore if the OP took the lump sum and invested it he would only need a return of 3.72% to get £4,884 per year. This is very achievable with an income portfolio of funds or ITs which could produce dividends of around 4%, and you would also be retaining the capital with the prospect of growth over time. As the OP has plans for £75k of the lump sum, I think with such a good commutation factor it would still be worth taking the full lump sum and investing the balance.

Trinity_Phil

More excellent replies, guys...my pension provider has sent me a commutation table and I will be 53 and 8 months in February, so the table states that my commutation rate will be 21.53, so Deneb and MK, you are spot on

Trinity_Phil

Okay...so me and the wife went on the pre-retirement course and found it very interesting with inputs/handouts from various speakers and are now working our way through the documentation provided, but we have a question regarding the 3 pension options listed above.
Why is option 2 not considered by most of you to be a good option ??
I accept that I will have to pay £2,962 in tax upfront but will be getting £4,578 additional lump sum over option 3, which I can then invest with the remainder of my lump sum, whereas option 3 only gives me an extra £350 p.a. on my pension (which obviously will also then be subject to tax).
What are we missing ??