Author Topic: Would you cash out your final salary pension?  (Read 3741 times)

Ozlady

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Would you cash out your final salary pension?
« on: December 07, 2016, 05:57:44 PM »
Hi

I am in a bind atm...

DH is 54..we have requested and obtained a UK defined benefit transfer value analysis...

Option of a) 7200 pounds of pension from age 55 onwards OR
              b) 10700 pounds of pension from age 62 onwards OR
               c) Cash out of 200 000 pounds now (tax free ); pension ends.

DH is in good health; the pension amt is neither here nor there as in we do not need it to survive; it will be icing on the cake so to speak. He plans to retire at age 58...this pension would just be our travel money.

He will also have a UK state pension of about 8000 pounds from age 67 onwards...

We have to make up our mind very soon as the offer ends by end of the month and a new cash amount will be generated every 3 months (atm very high due to low UK gilt rates; may drop as rates going up)

I am inclined to take the money and run (i can generate 4% with confidence)..and leave it to the kids..

What would YOU do? why?


Ozlady

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Re: Would you cash out your final salary pension?
« Reply #1 on: December 07, 2016, 06:01:08 PM »
Sorry to add I am in Australia atm and the 4% return is based on paying down my mortgage...

1 british pound = 1.66 Aussie $

Financial.Velociraptor

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Re: Would you cash out your final salary pension?
« Reply #2 on: December 07, 2016, 06:08:58 PM »
My math may be off but this is what I got from MS Excel using =RATE function...

Assuming 50 annual payments of 7200 versus PV of 200k = 2.60% rate of return
Assuming 45 annual payments of 10700 versus PV of 200k = 4.66% rate of return.

So option one to take payments at 55 is clearly worse than taking lump sum and earning 4% annually
Option two is roughly a wash but no payments for several years.

What options do you have to invest the 200k?  If you can get a Single premium annuity that pays 5% or so that's a slam dunk.

bigchrisb

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Re: Would you cash out your final salary pension?
« Reply #3 on: December 07, 2016, 06:12:12 PM »
Is the pension indexed (and if so, to what)?
What is the tax treatment there and in Aus of the pension payment?  If its taxed favorably, what pre-tax return would you need to generate to get the same after tax result?

If its not indexed and taxed as normal income, you need to generate 3.6% to be equivalent.  That should be easy.
If it is indexed (say at 3%), and tax free, then you would need to generate much more to have the same value.  If you were top marginal tax rates (49%) and it was indexed at 3% per year, then you would need something like 10%p.a. returns to match it.

If its not indexed and taxed normally, I'd take the money and run.  If it was indexed and taxed differently I'd be getting more information and doing my maths.

Ozlady

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Re: Would you cash out your final salary pension?
« Reply #4 on: December 07, 2016, 06:22:40 PM »
Thanks Financial: not sure how you got that 45 and 50 figure??


Thanks BigChris: It is indexed at the UK fund's discretion ; last few years indexed at average of 1% ..arghh!

(I will be eaten alive if i bring this pension in to Oz..)

On retirement, i reckon my tax rates will be almost NIL split between DH and I.

BTW, i get 50% of this pension if DH passes away...


With This Herring

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Re: Would you cash out your final salary pension?
« Reply #5 on: December 07, 2016, 07:46:00 PM »
Thanks Financial: not sure how you got that 45 and 50 figure??
*snip*
My math may be off but this is what I got from MS Excel using =RATE function...

Assuming 50 annual payments of 7200 versus PV of 200k = 2.60% rate of return
Assuming 45 annual payments of 10700 versus PV of 200k = 4.66% rate of return.

So option one to take payments at 55 is clearly worse than taking lump sum and earning 4% annually
Option two is roughly a wash but no payments for several years.
DH is 54..we have requested and obtained a UK defined benefit transfer value analysis...

Option of a) 7200 pounds of pension from age 55 onwards OR
              b) 10700 pounds of pension from age 62 onwards OR
               c) Cash out of 200 000 pounds now (tax free ); pension ends.

I think that Financial Velociraptor was assuming a long life for your husband of 105 years.  So, taking the pension at age 50 would mean receiving 55 pension payments, while taking the pension at age 62...which Financial Velociraptor read as 60?...would result in receiving only 45 pension payments.

These payments are annual amounts, correct?  I agree with other posters who say that it looks like it would be better to take the lump sum now, with just this information (and a thorough ignorance on my part of both UK and AUS tax issues!).  105 is a very long life, and anything shorter would decrease those return rates on the annual payments that Financial Velociraptor calculated.  It is an even worse deal if your husband predeceases you.

If you are not familiar with the RATE formula used, you can use this same calculation by opening up a spreadsheet, and typing in a cell:
=RATE(50,7200,-200000,0)
then hitting "enter."
50 = number of years you expect to receive the pension
7200 = annual amount you would receive
200000 = lump sum payout you are not taking now (present value of this annuity)
0 = no money received at end of pension to pass on (future value of this annuity)
You can adjust any of these numbers for various estimated pension payout spans and annual payout amounts.

Ozlady

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Re: Would you cash out your final salary pension?
« Reply #6 on: December 07, 2016, 08:31:36 PM »
Thanks WITH THIS HERRING

I know this Excel Rate Function, but my head is being twisted in trying to interpret the result ...as it implies for a Loan...

Mine is a pension payout; so is a higher percentage better or a lower percentage better? 

With This Herring

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Re: Would you cash out your final salary pension?
« Reply #7 on: December 08, 2016, 03:26:41 PM »
Thanks WITH THIS HERRING

I know this Excel Rate Function, but my head is being twisted in trying to interpret the result ...as it implies for a Loan...

Mine is a pension payout; so is a higher percentage better or a lower percentage better?

It was a new function for me. :)  I had previously only used the IRR (internal rate of return) function, where you select a series of cells that contain changing payments over time.

The function is telling you that, if we look at this pension as an annuity (which is correct because we're drawing down both principal and interest to bring it to zero), the interest rate on the annuity is X%.  For you, the higher the interest rate the better.  In general, the longer you draw that pension, the better (higher) the effective rate you get.  However, even drawing the pension for an estimated very long life, it looks like the rate still isn't that good at all, and you could generally get more earnings in the stock market than you can get from the interest AND principal in that pension.

Also, I've just realized that Financial Velociraptor left out the effects of the delay in receiving payments for the pension starting at age 62.  It is not only a shorter stream of payments, but also starts more years in the future.  Assuming payments beginning in 7-ish years and running to age 105, the effective rate is only 3.31%.  See attached:
Quick workup in Google Sheets, save a copy of your own to play with it.

This seems so heavily slanted toward you taking the 200,000 now.  Is it possible these payments are actually per month or per quarter instead of per year?

dandarc

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Re: Would you cash out your final salary pension?
« Reply #8 on: December 08, 2016, 03:30:44 PM »
Also is the pension inflation-adjusted?  3.3% real is a whole lot different than 3.3% nominal.

With This Herring

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Re: Would you cash out your final salary pension?
« Reply #9 on: December 08, 2016, 04:13:29 PM »
Also is the pension inflation-adjusted?  3.3% real is a whole lot different than 3.3% nominal.
Thanks BigChris: It is indexed at the UK fund's discretion ; last few years indexed at average of 1% ..arghh!

(I will be eaten alive if i bring this pension in to Oz..)

So, a little?  Eeesh...

Ozlady

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Re: Would you cash out your final salary pension?
« Reply #10 on: December 08, 2016, 07:47:37 PM »
Thanks WTH!

Yep, the pension figures are in pounds and are annual figures (i wish it was monthly haha!)


I actually engaged a financial advisor to look at the figures and produce a report (a UK financial requirement if one wants to give up this "gold plated" final salary pension..

His answer is to transfer..but of course he gets a cut (3% of  transfer value Ouch!)
Plus i have to do a QROPS and it all adds up the fees...)

All in all, i will have to incur about 20K (aussie dollars) in fees alone..

Plus 12 K (aussie dollars) in tax ...so upfront i lose total 32K which will be taken out from the final transfer figure..yes! more than 10% go figure!


NorCal

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Re: Would you cash out your final salary pension?
« Reply #11 on: December 08, 2016, 11:42:02 PM »
Assuming the following:

1. The lump sum is equal to the actuarial value of the pension benefit.  This would be true in the US.  I don't know your local laws on the matter
2. You reasonably believe you will live beyond the average lifespan
3. You are not worried about the financial health of the pension.
4. You have significant other savings (I gather this to be true from your post).

Assuming the above is true, you should NOT take the lump sum.  The pension is fairly priced, and a longer life would give you greater benefit.  It would also be protection from longevity risk, which is the hardest risk to control with a traditional portfolio.

Heywood57

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Re: Would you cash out your final salary pension?
« Reply #12 on: December 09, 2016, 12:44:19 AM »
The pension payments stop at your end of life.

200K invested now and inherited by heirs later, could continue to grow/pay out for many generations.

VoteCthulu

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Re: Would you cash out your final salary pension?
« Reply #13 on: December 09, 2016, 01:45:05 PM »
I would take the payout, because I'd rather have the control and flexibility of owning it outright rather than a promise of regular checks.

If I needed the money to live off, though, I would keep the pension to reduce the risk of me doing something stupid with it or losing it from some medical emergency, bankruptcy, scam, etc.

theolympians

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Re: Would you cash out your final salary pension?
« Reply #14 on: December 11, 2016, 11:34:54 AM »
DO NOT TAKE THE PAYOUT.

You are not considering risk. Everyone is healthy now, but who knows in 5 or ten years. The government offers that as it is cheaper for them to kick you to the curb.

The idea to take the cash and run may be alluring, but don't assume (bet your future standard of living) that you can get better returns than a defined benefit. With consistent money coming in, that is a huge worry off your shoulders, now, and when you are 80.

marty998

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Re: Would you cash out your final salary pension?
« Reply #15 on: December 11, 2016, 01:32:32 PM »
DO NOT TAKE THE PAYOUT.

You are not considering risk. Everyone is healthy now, but who knows in 5 or ten years. The government offers that as it is cheaper for them to kick you to the curb.

The idea to take the cash and run may be alluring, but don't assume (bet your future standard of living) that you can get better returns than a defined benefit. With consistent money coming in, that is a huge worry off your shoulders, now, and when you are 80.

But she will take the payout and invest it (or have her kids invest it), probably with more favourable tax treatment here via superannuation.

Remember - this is cream on top. Ozlady isn't relying on this to stay out of poverty.

Ozlady

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Re: Would you cash out your final salary pension?
« Reply #16 on: December 11, 2016, 02:11:53 PM »
Thanks for all your replies:)

It is just driving me nuts!  I am seeing the transfer specialist in exactly 6 hours time..as i have to beat the deadline by 31 Dec and get the forms into the UK asap.


I did a spreadsheet excel and this is my result (all Australian $) of accum. amts

                                   age 60         age70          age80
Lump sum at 4%          365K            540K            800K

Pension of 7k Pounds     100K         375K            862K
(3% CPI  increase pa)

(at 5% CPI increase pa)  105K            433K         1 million


Caveats: this is DH's pension; if he kicks the bucket,i get only 50%..if i kick the buckets, the kids get Nothing!


However i have this romantic vision of being trapped somewhere in the world on my retired travels and the post arrives...with my Pension ..like clockwork (haha!)


Urggggg..........i hate Decision time!!


                           

Ozlady

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Re: Would you cash out your final salary pension?
« Reply #17 on: December 12, 2016, 12:13:31 AM »
Just to say the deed is done!

I have taken the lump sum option...thanks for all your help!

marty998

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Re: Would you cash out your final salary pension?
« Reply #18 on: December 12, 2016, 12:20:26 AM »
"Never get between a Premier an Ozlady and a bucket of money"

VoteCthulu

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Re: Would you cash out your final salary pension?
« Reply #19 on: December 12, 2016, 08:41:46 AM »
Good luck, and don't spend it all in one place!