Attractive commutation rate

[abbeymeadster]

A couple of my final salary/DB pensions offer the option of trading some annual pension for a tax-free lump sum. What commutation factor would you find an attractive proposition?

I'll say no thanks to the one offering 12x. But the other is offering between 20.7 and 22.3x (dependant on age). Attractive or not?

[monabri]

Not 20 nor 23 unless you think you are going to peg it soon and want to bank the money for your nearest & dearest!!

Not even close! If you were to accept the offer and were to receive achink of money, you would have to invest to achieve 5% or better for the remainder of your life, year in ,year out.

personally I think , 20/23.. a cheek!!

[abbeymeadster]

Really? Even though I wouldn't pay any tax on it?

I'd be paying tax if I reject the lump sum and take it as pension payments instead.

[Robbieg]

Depend's a bit on the benefits attaching to the pension you are giving up for the cash if you do commute. ie a pension with a 2/3 spouses and RPI increases is worth a lot more in value terms than a flat pension with a smaller spouses benefits.

One approach to valuing the commutation offer is to see what kind of annuity you can buy with the cash on offer and you can then compare with the pension you are giving up. As you note you will need to factor in the fact that the cash offered is tax free whilst the pension is taxed and decide how important inflation protection (to the extent it is given) and spouses benefits are to you. There are also other factors than just the financial ones that often come into play into these decisions-eg health and your life expectancy , marital status (not all schemes pay the "spouses" pension to a partner) ,what you may want the cash for (repay debt, holiday of a lifetime etc) and what other guaranteed income streams you and any spouse may have.

Also be aware that in view of gilt yield increases trustees and actuaries may shortly reduce commutation rates or at least not increase them further. Changes can happy quite quickly so this maybe something you want to check with your scheme administrators.

Good luck with the decision

[abbeymeadster]

Thanks for the reply.

No spouse but the pension is inflation-protected to an extent - RPI with a maximum of 5%.

I take on board your comment about commutation rates possibly changing and will check before I do anything.