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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
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Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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I would like some advice on a pension arrangement from my last

Resolved Question:

I would like some advice on a pension arrangement from my last employer. I either stay in the defined benefit scheme or take a tax-free lump sum now. The defined benefit scales more-or-less with the Geneva cost of living, except for the first 8% of that rise (it has been zero or negative recently).
Submitted: 1 year ago.
Category: Finance
Expert:  Rakhi Vasavada replied 1 year ago.
Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

Before I begin, the biggest point that one should consider is what effect this lump sum payment will make on your pension AND what you will do with the money taken out.

The calculation of the lump sum you can take free of tax from a defined-benefit pension scheme, and the knock-on effect this will have on your pension income, is more complicated than for defined-contribution schemes.

In particular, different schemes set different ‘commutation factors’ which determine how your lump sum will reduce your monthly income in retirement.

=>For example, in a scheme with a commutation factor of 15, if you took a cash lump sum of £15,000, your annual retirement income would fall by £1,000 (£15,000 divided by 15).

=>The lower the commutation factor, the bigger the effect on your retirement income. If you took a lump sum of £15,000 in a scheme with a commutation factor of 10, your annual retirement income would fall by £1,500 (£15,000 divided by 10).

Be aware that the commutation factors used in many defined-benefit schemes offer very poor value for money in terms of how much pension income you must give up in return for your lump sum payment.

Coming to my second point -- it is important to know what you will do with the money taken out.

Is this money helping you to retire any debt ? Is it enabling you to save any major interest payments ? Will you be able to invest this money so that it grows or generates a separate income to supplement your pension. Putting the lump sum in an ISA rather than a standard savings account maximizes the tax-efficiency, because you pay no tax on any gains you make.

So, you must evaluate the above and if YES, then you should take the lump sum payment.

I am sure this would help.

You may please leave a positive rating if this helps or reply back if you need further assistance.

Warm Regards
Customer: replied 1 year ago.

Hi Rakhi,


 


I need to chose between them. The DB would be 1369/month (indexed as described in the original question) and the lump sum now (which is tax free) is 120790CHF (and would be invested).


 


I need to know which is likely to provide better income when I retire in ~24 years.


 


regards,


 


Stephen.


 

Expert:  Rakhi Vasavada replied 1 year ago.
Dear XXXXX,

Hello and welcome again. Thank you for your follow up question.

Again, I would like to harp on the same point, but show you definitive direction this time. As you very rightly say, you will get 120790 CHF, which would be invested. Herein where the trick lies.

As per my assumption, if you invest the money and if you manage 3% per annum, you money would grow to 245,541.20 CHF. Now, given this, we are living in near zero interest rate and given this thing, I would NOT recommend taking a lump sum.

As per my experience goes, when a choice to take lump sum payout is offered, over 70% of people are likely to opt for that. Given that the risk of managing of money is on your shoulders, it will also significantly affect your retirement income.

Looking to the current market scenario and near zero interest rates and markets offering very risky returns on one hand and almost nil on the other, I feel one should give more weight to a greater desire for guaranteed income in the future.

Even if you are presented with a lump sum offer, a monthly annuity payable at your normal retirement age is always an better option.


I am sure this would help.

You may please leave a positive rating if this helps or reply back if you need further assistance.

Warm Regards
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 3904
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years