To Commute or Not to Commute

ffacman

I am a 56 year old married male and about to retire due to ill health (though my tenure on this mortal coil is not at any immediate risk of being concluded). I have received differing advice regarding my pension. I am able to commute my pension with a net loss of c£5K per annum to my pension thereafter. What is the best option for me? To commute, invest the sum and take the lower pension or not commute and take the larger pension.

dunstonh

Under current tax rules, its usually best to take the tax free lump sum.

If its a personal pension, its virtually always best as even if you want the whole lot in an annuity, the tax free lump sum should get a better return in a purchased life annuity rather than a compulsary purchase/pension annuity.

By taking the lump sum, you can invest it tax free (in part or over the years or into more tax efficient methods depending on your circumstances). This allows you to keep the lump sum on death (which would benefit family), reduce your tax liability and also give you options. for example, you could take the tax free lump sum and invest it into a pension in your wife's name. You get tax relief and depending on her pension status, the income in her name could be tax free.

Not saying that is what you should do as it depends on ages, income, amounts etc but its just another reason why taking the tax free lump sum can be beneficial.

EdInvestor

ffacman

Is this a personal or company pension?

The usual advice is take the cash for PPs and don't for company pensions as you lose too much.

Post a few more figs if you can.

Do you have other large chunks of cash and do you own your own home?

ffacman

EdInvestor

My pension is a company pension. Commutation would provide a lump sum of c£50K with a residual pension of c£16K. I own my home (no mortgage) and have some access to further funds of c£50K. Ideally, I would prefer to take the lower pension, invest the lump sum to provide an income and move other funds for further investment to enhance my pension.

dunstonh

If thats what you want then do it. Its what most people do.

EdInvestor

I am able to commute my pension with a net loss of c£5K per annum to my pension thereafter..Commutation would provide a lump sum of c£50K with a residual pension of c£16K.

It's a pity, you do lose a lot. At 56, assuming you live to aged 80, you will lose 120k in pension income to get 50k now.

However if your health is not good, it may be best to have the money upfront now...

dunstonh

It's a pity, you do lose a lot. At 56, assuming you live to aged 80, you will lose 120k in pension income to get 50k now.

£93,600 after basic rate tax deduction. That doesnt include a potential reduction for age allowance either.

The 50k @ 5% a year would produce £60,000 over the 24 year period. So the loss is £33,600.

If invested and averages 7% then its £84,000 making a loss of just under £9k.

Pal

dunstonh wrote:

That doesnt include a potential reduction for age allowance either.

Any early retirement reduction will already be taken into account before the tax free cash and alternative pension amounts were calculated. There won't be any other age based reduction to the figures.

EdInvestor

Then again, if you took the whole pension and added the 5k ( which you clearly don't need at present) to your existing 50k, @ 7% growth, you would make it up to 100k in 5 years and still have the full pension for the rest of your life.

Not an easy decision.

Is the pension index-linked with full dependants bells and whistles? Is the pension fund in good nick, is the company itself strong?

What about state pension eligibility later?