Selling the Golden Goose? (DB scheme pension swap for lump sum)

Albermarle

littleboo said:

I have been thinking about this, I have a DB scheme covering the the majority of m,y working life, deferred, and  more recently, a DC scheme.  For the DB scheme, the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement. A rough check suggests that the difference in pension and lump sump for the standard lump sum and max lump sum is  £3200 pa/£74,000. So is the commutation factor simply 74/3.2=23?

Yes that is correct. 23 means it is about 50:50 whether to take the lump sum or not. It depends to some extent how beneficial the terms of the pension are . For example it is was inflation linked without a cap, the pension is worth more than one with a cap. The latter being much more likely.
It also depends on your personal circumstances. Would the lump sum come in handy and be used for something? Or on the other hand you may have other investments/other pensions/cash savings and the lump sum would just sit in the bank.

the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement
The 'old lags' are like most people, underestimating their life expectancy and overestimating their chances of dying 'early'. You might well live until a ripe old age, in which case you will have been better off not taking the lump sum.
Also it is human nature ( for most ) to grab a lump sum as soon as it is offered, even though it may well be not the right decision.

rickenbacker330

I commuted the max lump sum when I retired at 55 in 2020. It made sense on a few fronts. 

- the commutation factor was good: 48x
- the pension I gave up would have been taxed at 40% if received as income
- I wanted control of the cash so that I could front-load my retirement, having more cash / income during the pre SP years to pay for travel and expensive university years for kids.

Even with today's scary inflation figures things still stack up.

hyperhypo

I recently chose to take half of available pcls as cash to provide a buffer against drawdown on invested assets from another DC pot, which has been in drawdown for over a year. I had created cash in the DC sipp to cover next couple of years at a nominal 2.75% drawdown....but not beyond that period. To avoid need to sell over next 5 years.  In doing this I was foregoing RPI 10% indexation on the annual db. Commutation was X23.

jimi_man

Albermarle said:

littleboo said:

I have been thinking about this, I have a DB scheme covering the the majority of m,y working life, deferred, and  more recently, a DC scheme.  For the DB scheme, the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement. A rough check suggests that the difference in pension and lump sump for the standard lump sum and max lump sum is  £3200 pa/£74,000. So is the commutation factor simply 74/3.2=23?

Yes that is correct. 23 means it is about 50:50 whether to take the lump sum or not. It depends to some extent how beneficial the terms of the pension are . For example it is was inflation linked without a cap, the pension is worth more than one with a cap. The latter being much more likely.
It also depends on your personal circumstances. Would the lump sum come in handy and be used for something? Or on the other hand you may have other investments/other pensions/cash savings and the lump sum would just sit in the bank.

the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement
The 'old lags' are like most people, underestimating their life expectancy and overestimating their chances of dying 'early'. You might well live until a ripe old age, in which case you will have been better off not taking the lump sum.
Also it is human nature ( for most ) to grab a lump sum as soon as it is offered, even though it may well be not the right decision.

One of the major factors in deciding whether the commutation rate is good or not, is the age at which you can take it. At 65 then 23x is reasonably ok (depending on those other factors you said). But at 50 it's nowhere near so good. 

Albermarle

jimi_man said:

Albermarle said:

littleboo said:

I have been thinking about this, I have a DB scheme covering the the majority of m,y working life, deferred, and  more recently, a DC scheme.  For the DB scheme, the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement. A rough check suggests that the difference in pension and lump sump for the standard lump sum and max lump sum is  £3200 pa/£74,000. So is the commutation factor simply 74/3.2=23?

Yes that is correct. 23 means it is about 50:50 whether to take the lump sum or not. It depends to some extent how beneficial the terms of the pension are . For example it is was inflation linked without a cap, the pension is worth more than one with a cap. The latter being much more likely.
It also depends on your personal circumstances. Would the lump sum come in handy and be used for something? Or on the other hand you may have other investments/other pensions/cash savings and the lump sum would just sit in the bank.

the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement
The 'old lags' are like most people, underestimating their life expectancy and overestimating their chances of dying 'early'. You might well live until a ripe old age, in which case you will have been better off not taking the lump sum.
Also it is human nature ( for most ) to grab a lump sum as soon as it is offered, even though it may well be not the right decision.

One of the major factors in deciding whether the commutation rate is good or not, is the age at which you can take it. At 65 then 23x is reasonably ok (depending on those other factors you said). But at 50 it's nowhere near so good. 

Yes you are right of course.
Mine was 22 at age 62.5.
I did not take it as I did not need the cash, and my DB was not that large in comparison to DC pots, savings etc. so seemed the best idea to hang on to the max guaranteed income. 

CheekyMikey

Albermarle said:

littleboo said:

I have been thinking about this, I have a DB scheme covering the the majority of m,y working life, deferred, and  more recently, a DC scheme.  For the DB scheme, the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement. A rough check suggests that the difference in pension and lump sump for the standard lump sum and max lump sum is  £3200 pa/£74,000. So is the commutation factor simply 74/3.2=23?

Yes that is correct. 23 means it is about 50:50 whether to take the lump sum or not. It depends to some extent how beneficial the terms of the pension are . For example it is was inflation linked without a cap, the pension is worth more than one with a cap. The latter being much more likely.
It also depends on your personal circumstances. Would the lump sum come in handy and be used for something? Or on the other hand you may have other investments/other pensions/cash savings and the lump sum would just sit in the bank.

the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement
The 'old lags' are like most people, underestimating their life expectancy and overestimating their chances of dying 'early'. You might well live until a ripe old age, in which case you will have been better off not taking the lump sum.
Also it is human nature ( for most ) to grab a lump sum as soon as it is offered, even though it may well be not the right decision.

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

QrizB

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

It's unlikely, though. For a 23x commutation factor, your investment would have to be uncommonly wise and return 4.35% above inflation for 24 years.

Somebody

QrizB said:

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

It's unlikely, though. For a 23x commutation factor, your investment would have to be uncommonly wise and return 4.35% above inflation for 24 years.

Wow. Some clever people in here. How do you work this out?

Malthusian

QrizB said:

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

It's unlikely, though. For a 23x commutation factor, your investment would have to be uncommonly wise and return 4.35% above inflation for 24 years.

Are we ignoring the inconvenient fact of death?

After 24 years of 2.18% growth above inflation - half your figure - a lump sum of £100,000 would have grown to £164,031 in today's money. If you took the pension of £4,348pa you would have received a total of £104,348 in income, again in today's money.

If you drew £4,348 per year (increasing with inflation) from the lump sum you would have received the same income and would still have £33,249 of your lump sum left, rather than nothing.

You do not need 4.35% above inflation growth to match a 4.35%-inflation linked income that expires on death. Not when you can deplete the capital, where anything less than 100% depletion means the lump sum wins.

jimi_man

Albermarle said:

jimi_man said:

Albermarle said:

littleboo said:

I have been thinking about this, I have a DB scheme covering the the majority of m,y working life, deferred, and  more recently, a DC scheme.  For the DB scheme, the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement. A rough check suggests that the difference in pension and lump sump for the standard lump sum and max lump sum is  £3200 pa/£74,000. So is the commutation factor simply 74/3.2=23?

Yes that is correct. 23 means it is about 50:50 whether to take the lump sum or not. It depends to some extent how beneficial the terms of the pension are . For example it is was inflation linked without a cap, the pension is worth more than one with a cap. The latter being much more likely.
It also depends on your personal circumstances. Would the lump sum come in handy and be used for something? Or on the other hand you may have other investments/other pensions/cash savings and the lump sum would just sit in the bank.

the wisdom from the "old lags" seems to be to take the max lump sum, the logic being that you want to get the most out of the scheme and you might die early in retirement
The 'old lags' are like most people, underestimating their life expectancy and overestimating their chances of dying 'early'. You might well live until a ripe old age, in which case you will have been better off not taking the lump sum.
Also it is human nature ( for most ) to grab a lump sum as soon as it is offered, even though it may well be not the right decision.

One of the major factors in deciding whether the commutation rate is good or not, is the age at which you can take it. At 65 then 23x is reasonably ok (depending on those other factors you said). But at 50 it's nowhere near so good. 

Yes you are right of course.
Mine was 22 at age 62.5.
I did not take it as I did not need the cash, and my DB was not that large in comparison to DC pots, savings etc. so seemed the best idea to hang on to the max guaranteed income. 

Mine was 21.6 - but at age 51. So pretty poor really and consequently I didn't take it. The comments I got from colleagues about being 'insane', 'stupid', etc etc. Very few people didn't take it (police) though I think that there may be a little more now with very low interest rates but high inflation (uncapped index linking).