Commutation rate is it good bad or ugly

HillsideRetired

hi all 
one of my smaller DB pensions is coming up for payment at 63 
the options i have been quoted are below 

am i correct in thinking this is commutation at around 15 ? 

i don't have any immediate need for the lump sum as i have other provisions 

just trying to make any sense or logic of taking the tax free element lump sum and putting it an isa against taking the full pension 
any thoughts i would be grateful 

1 A Full Pension of:£7,080.33 per annum

Payable in monthly instalments of £590.03

2 A Tax-Free Lump Sum payment of:£32,902.84

Plus

A Reduced Pension of:£4,935.43 Per annum

Payable in monthly instalments of £411.

Marcon

How does the pension increase once in payment? What's your tax rate now/expected to be in retirement?

MallyGirl

Yes - commutation rate of 15. Not as bad as some of the big national DB pensions (12) but not great. If you don't need the lump sum I'd leave it alone - more guaranteed income as a base for the future along with state pension. Payback period would depend on how the pension grows in retirement- RPI/CPI/other and whether it is capped 

Phossy

If you are a 20% Tax payer then by taking the lump it would be be 19 years to 'break-even' (in todays money) and that would rise to 25 years if you are a 40% tax payer. Take the lump sum if you can use the money better in that time period (be that spending or investing).

Albermarle

The rate of 15 is not great, something in excess of 20 is quite common for non public sector schemes.

However it depends on the terms and conditions of the pension income. If annual increases are  linked to RPI say, then it is more to give up than if there were no annual increases. ( In reality mainly schemes will be somewhere in the middle)
It also depends on your overall tax position and is you have any other guaranteed income or significant DC pensions/investments/savings etc.
For example I did not take the lump sum from my DB scheme, as I had no real need for the money, and apart from the state pension, I had no other guaranteed income. 

HillsideRetired

thanks for all the thoughts , I did think  15 would be kind of average for private sector DB . 

i will be just under 40% when state pension time arrives for me 

this is how the pension increases , all my benefit will be pre 1997

How your pension increases

Assuming you take a lump sum quoted above of £32,902.84 your pension will be increased on 1 September and then

annually on the same date as follows:

Any pre 1997 benefits including Guaranteed Minimum Pension (GMP) will increase at a guaranteed 3%

Bighitter32

15 is not great but there are lower….. As above, marginal personal tax rate, pension annual increase boundaries, personal view on expected life span, IHT position, personal overall debt position, view on ability to ‘beat’ annual pension increases etc….. Run the calcs and make your choice.

Many will advocate for not taking the Lump Sum and retain the benefits of your pension, sound advice, but not always in line with individuals position and circumstances.

Sarahspangles

HillsideRetired said:

hi all 
one of my smaller DB pensions is coming up for payment at 63 
the options i have been quoted are below 

am i correct in thinking this is commutation at around 15 ? 

i don't have any immediate need for the lump sum as i have other provisions 

just trying to make any sense or logic of taking the tax free element lump sum and putting it an isa against taking the full pension 
any thoughts i would be grateful 

1 A Full Pension of:£7,080.33 per annum

Payable in monthly instalments of £590.03

2 A Tax-Free Lump Sum payment of:£32,902.84

Plus

A Reduced Pension of:£4,935.43 Per annum

Payable in monthly instalments of £411.

Don’t forget to consider spouse’s pension if relevant.

NedS

As others have hinted at, it's not just the raw numbers that are important. If I didn't have enough guaranteed fixed income in retirement to cover my essential spending, then there is no way I'd give up that guaranteed income. On the other hand, if I had more than enough guaranteed fixed income, and I needed the flexibility of a lump sum then I could probably afford to take it.

Is that your only DB pension? If you have more than one and you are considering taking a lump sum, see which scheme offers the most favourable terms and consider taking the lump sum from that scheme. One of my DB pensions only has a 2.5% capped CPI increase (whereas my others are uncapped), so if I were to take a lump sum, I'd take it from there to reduce the amount of pension that is vulnerable to large increases in inflation like we have seen recently.