LUMP SUM CONVERSION TO PENSION

[vaulter]

I think you can do it but what's the rate?

[RobertT]

By your question, I'm assuming you're in either Section A or B?
If that's the case, then yes you can convert some or all of your lump sum into extra pension.

A ratio of 1:12 is often used to work these things out, but to be honest I'm not sure. So if that's the case, you'll give up £12,000 in tax free cash for an £1,000 extra pension per year.

See this for more info and download the file at the bottom of the page, or contact the pension people in Chesterfield.
http://royalmailpensionplan.co.uk/73/yo ... retirement" onclick="window.open(this.href);return false;

[baldrick]

I think you can do it but what's the rate?

Yes you can. The amount of lump sum to be converted to provide £1 of pension is £23.70.

You can also convert pension to lump sum. The amount of lump sum provided for each £1 of pension commuted is £17.75.

[Brainache]

Shouldn`t the ratio be the same for each ? because otherwise :
£23700 lump sum converts to £1000 pension, but , £1000 pension converts to £17750 lumpsum.
I thought (guessed) that the ratio was 1:20, as in calculating the value of your "pension pot".

[baldrick]

The figures I gave above are correct. I was sent them by the RM Pensions Service Centre.
You are right that there is a difference in changing lump sum to pension, and vice versa.
I would guess this is because if you take a bigger lump sum, you are obviously taking a smaller pension which might cost the pension fund less in the long run.
If you take the bigger pension it will probably be increased every year, even if that increase is now less with CPI rather than RPI being used.
So if you live longer it will cost the pension fund more.

Most of the people I know who have taken the RM pension have opted for a larger lump sum, with smaller pension.
I would opt for the larger pension with reduced lump sum, because I intend to live long enough to get my money's worth! Of course I might get run over by a bus and lose out, but I it wouldn't bother me then!
Also if you take a larger lump sum you would have to invest it somewhere, and you will find it difficult to get a return of over 3.5%.
But taking the larger pension equates to a return of 4.4% on the lump sum you have surrendered, though you wouldn't then have access to the surrendered lump sum money.
And as I said the pension should increase while the real value of the lump sum would decrease in time with inflation.

[vaulter]

A 23.7 to 1 conversion doesn't seem too great a deal to me.
It requires a not to die by age of 83.7 years to break even. While hoping to surpass this mark, I note that the office of national statistics suggest a current 60 year old will live to around 81.6 years of age. Maybe I need to adopt a regime of yoghurt and yoga?

I would also be giving up a lump sum that was tax free and as there are fixed rate ISA savers around currently giving 4.4% tax free, the lump sum could be a better bet.

I was offered a 26 to 1 conversion 3 years ago on lump sum when enquiring about taking pension early at 50, obviously the lump sum was on an actuarily - (probably spelt wrong) reduced basis, giving a break even age of 76.

Obviously something to think about, as also rates are likely to change over the next 7 years.

[baldrick]

As I understand it, the ISA savings accounts only give the headline (bonus included) rate for the first 12 months, then fall to around 1-1.5%. Of course they are tax exempt though.

But you can only invest a maximum amount each tax year in ISAs - can't remember exactly but I think it's a total of £10,720 for current tax year, and that would be into 2 ISAs, one a cash ISA and one a stocks and shares ISA.

A better rate is with the NS&I Index linked savings certificate which is giving an RPI + 0.5% rate for 5 years, which is also tax exempt. You can invest up to £15,000 in it.

btw I made a mistake about the return for converting lump sum into pension. My maths isn't great. I did the sums on a calculator and it is 4.22%, not 4.4%.