Take lump sum on smallish DB pension?
Discussion
I've got an small and old DB pension that kicks in next year. I don't need to take a lump sum, but is it worth doing for tax reasons, given that the state pension will use up about 95% of the nil rate income tax band, and I'll have other income potentially taking me into higher rate...
Annual pension is ~£6K, Lump sum is ~£12K.
Annual Pension drops by 12.5% if I take a the lump sum.
Annual pension is ~£6K, Lump sum is ~£12K.
Annual Pension drops by 12.5% if I take a the lump sum.
That’s a commutation factor of 16 to 1 - I.e. you are (kind of) getting 16 years of pension payments as a one off payment.
However, it’s tax-free so, if it would otherwise be taxed at 40%, that’s more like 26.67 years of net payments up front. (The actual calculation would need to take into account annual increases and interest/discounting.)
Only you can decide if that’s a good deal based on what you might use the money for, your view of your life expectancy, what your other sources of income/savings are, and so on. But you could put it in an ISA and draw down 3%-4% a year sustainably. That would give you similar net income and money left over at the end of the day.
However, it’s tax-free so, if it would otherwise be taxed at 40%, that’s more like 26.67 years of net payments up front. (The actual calculation would need to take into account annual increases and interest/discounting.)
Only you can decide if that’s a good deal based on what you might use the money for, your view of your life expectancy, what your other sources of income/savings are, and so on. But you could put it in an ISA and draw down 3%-4% a year sustainably. That would give you similar net income and money left over at the end of the day.
depends how that DB pension amount factors in to other sources for retirement income, whether you've maxed out ISA's etc, or indeed whether any other pensions are maxed out.
Combined with how/what you'd be happy to invest those funds - and when you might want access to them.
If it were me; i'd max out a flexible isa and be investing in my own choices of stocks for totally tax free gains, once the isa limit is hit next stop would be to see whether i can add anything to another pension/sipp - to do exactly the same.
Combined with how/what you'd be happy to invest those funds - and when you might want access to them.
If it were me; i'd max out a flexible isa and be investing in my own choices of stocks for totally tax free gains, once the isa limit is hit next stop would be to see whether i can add anything to another pension/sipp - to do exactly the same.
Thanks again.
I've just had the figures for my second DB scheme - which are rather different. The first has a commutation factor of 15.9, the second is a better 19.5
More surprisingly, the max lumps sums are very different. The first lump sum is equivalent to just two years of pension, the second is five years!
Presumably it's in the fund's interest for me to take a lump sum - is it ever possible to negotiate a higher commutation?
I've just had the figures for my second DB scheme - which are rather different. The first has a commutation factor of 15.9, the second is a better 19.5
More surprisingly, the max lumps sums are very different. The first lump sum is equivalent to just two years of pension, the second is five years!
Presumably it's in the fund's interest for me to take a lump sum - is it ever possible to negotiate a higher commutation?
silentbrown said:
Thanks again.
I've just had the figures for my second DB scheme - which are rather different. The first has a commutation factor of 15.9, the second is a better 19.5
More surprisingly, the max lumps sums are very different. The first lump sum is equivalent to just two years of pension, the second is five years!
Presumably it's in the fund's interest for me to take a lump sum - is it ever possible to negotiate a higher commutation?
Most DB schemes will let you commute pension to get the maximum lump sum. Broadly, take the annual pension and multiply by 5. (The actual calculation is a bit more complicated than that as it depends on the commutation factor offered, but multiply by 5 is accurate for a commutation factor of 20.)I've just had the figures for my second DB scheme - which are rather different. The first has a commutation factor of 15.9, the second is a better 19.5
More surprisingly, the max lumps sums are very different. The first lump sum is equivalent to just two years of pension, the second is five years!
Presumably it's in the fund's interest for me to take a lump sum - is it ever possible to negotiate a higher commutation?
So I would guess that the first pension scheme is quoting a typical level of lump sum (possibly based on some old “IR12” formula before the tax rules changed in 2005). Back then, schemes would typically provide n/60ths pension and allow a lump sum by commutation of 3n/80ths. (n is the number of years of pensionable service.)
(3/80)x60 = 2.25, and you would sometimes see it expressed as a lump sum of 2.25 the pension.
It’s usually in the scheme’s interest that you take the biggest lump sum possible so I would expect the trustees to say yes to a request to take a higher lump sum. Not always true, though - e.g. there could be something in the Trust Deed & Rules of the pension scheme which doesn’t allow a higher lump sum.
Zigster said:
....
(3/80)x60 = 2.25, and you would sometimes see it expressed as a lump sum of 2.25 the pension.
It’s usually in the scheme’s interest that you take the biggest lump sum possible so I would expect the trustees to say yes to a request to take a higher lump sum. Not always true, though - e.g. there could be something in the Trust Deed & Rules of the pension scheme which doesn’t allow a higher lump sum.
Thanks. will investigate. In this case the lump sum is exactly 2.00 x annual pension.(3/80)x60 = 2.25, and you would sometimes see it expressed as a lump sum of 2.25 the pension.
It’s usually in the scheme’s interest that you take the biggest lump sum possible so I would expect the trustees to say yes to a request to take a higher lump sum. Not always true, though - e.g. there could be something in the Trust Deed & Rules of the pension scheme which doesn’t allow a higher lump sum.
Given the relatively poor commutation factor on that one it may not be worth pushing...
Gassing Station | Finance | Top of Page | What's New | My Stuff