Good commutation? Bad commutation?

Silvertabby

Albermarle said:

The 2 DB schemes i have been in (lgps and british steel) both offered 12x (if i remember correctly) commutation tax free. a very poor deal, yet from memory most people jumped at it. 

Many lower paid workers see the tax free cash as a kind of retirement bonus and the large majority take it even when it is not the right decision financially for most of them .

Although I guess if you had a big credit card bill/overdraft/ large mortgage it could still make sense, although I suspect it is mainly spent on holidays and home improvements .

This.  I would say that over 95% of lower paid LGPS workers go on to take the maximum tax free cash option, with no regard for the poor commutation rate.

I expect that, in most cases, this was a sum of money that they could have only dreamed about.

rickenbacker330

I took my max amount last year at 55. The rate was good (48.4) and the pension I gave up would have attracted 40% tax if taken as income. At the time I thought it was a no-brainer and I'm still pretty sure it wasn't a completely mad thing to do. Others may think differently though.

zagfles

rickenbacker330 said:

I took my max amount last year at 55. The rate was good (48.4) and the pension I gave up would have attracted 40% tax if taken as income. At the time I thought it was a no-brainer and I'm still pretty sure it wasn't a completely mad thing to do. Others may think differently though.

48.4x is way above what most offer, about 4 times. With most it's 10-15x, completely different.

waveydavey48

I can take mine in a years time when I am 60. I asked for an illustration 18 months ago and at that time the rate was over 34. I know the advice on here is to not take it unless you need the cash. I don't, and would just stick the £80k in mine and my wife's ISA (VLS 60). I would welcome opinions, if that does not amount to gatecrashing the thread, (apologies to OP if it does.)  

SMcGill

The points made here about generating a tax free lump sum from a DB pension also apply in the other direction. I looked into commuting my DB tax free lump sum into pension income and the rate was nearly 30.

£30 tax free pounds to buy £1 taxable income p/a. Meh.

Albermarle

SMcGill said:

The points made here about generating a tax free lump sum from a DB pension also apply in the other direction. I looked into commuting my DB tax free lump sum into pension income and the rate was nearly 30.

£30 tax free pounds to buy £1 taxable income p/a. Meh.

Put like that it looks unattractive but if the pension is inflation linked it looks significantly better .

jimi_man

Silvertabby said:

Albermarle said:

The 2 DB schemes i have been in (lgps and british steel) both offered 12x (if i remember correctly) commutation tax free. a very poor deal, yet from memory most people jumped at it. 

Many lower paid workers see the tax free cash as a kind of retirement bonus and the large majority take it even when it is not the right decision financially for most of them .

Although I guess if you had a big credit card bill/overdraft/ large mortgage it could still make sense, although I suspect it is mainly spent on holidays and home improvements .

This.  I would say that over 95% of lower paid LGPS workers go on to take the maximum tax free cash option, with no regard for the poor commutation rate.

I expect that, in most cases, this was a sum of money that they could have only dreamed about.

The same in the Police - I didn't take it and was regarded as a slight oddball. Whilst the rate was slightly better (dependant on age but 21:1 for a 51 year old) you were giving up the pension for far longer. 

green_man

jimi_man said:

Silvertabby said:

Albermarle said:

The 2 DB schemes i have been in (lgps and british steel) both offered 12x (if i remember correctly) commutation tax free. a very poor deal, yet from memory most people jumped at it. 

Many lower paid workers see the tax free cash as a kind of retirement bonus and the large majority take it even when it is not the right decision financially for most of them .

Although I guess if you had a big credit card bill/overdraft/ large mortgage it could still make sense, although I suspect it is mainly spent on holidays and home improvements .

This.  I would say that over 95% of lower paid LGPS workers go on to take the maximum tax free cash option, with no regard for the poor commutation rate.

I expect that, in most cases, this was a sum of money that they could have only dreamed about.

The same in the Police - I didn't take it and was regarded as a slight oddball. Whilst the rate was slightly better (dependant on age but 21:1 for a 51 year old) you were giving up the pension for far longer. 

Indeed.  My wife retired from the Police at 50 a few years ago and it was all I could do to convince her not to take the full lump sum amount with a likewise miserly 21:1 rate. “..but everyone takes it, that’s what it’s for” etc.    I had to explain really carefully what she was giving up and how a near 5% index+ linked return for (hopefully) 30-40 years was much more valuable.   

Now the 48:1 rate quoted by Rickenbacker is a no brainier IMO.

hyperhypo

What would folk do with a PCLS commutation rate of x24 at age 63?

I'm going to take it ..i think..or perhaps half of it.as 50% of the total PCLS will bridge my income gap between start of DB at 63 and SP at 67.

Or leave it alone and drawdown the money to supplement DB from my DC savings?

Having trouble working this one out .....

hugheskevi

It is quite interesting to look at the PPF lump sum commutation factors, both in terms of actual amounts and the difference in valuation between escalating and non-escalating pension, and whether or not survivor pension is payable.