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Commute this pension or not? Part 2

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Duncan Badger

When making the decision you need to know the discount rate the pension administrator used to calculate the lump sum amount. The last one I saw used 1.9% for the first 10 years and 3.2% after that. I think companies are required to provide this information now. So with this information on a person knows as long as their future returns on their invested commuted value exceeds the discount rate the pension plan used they would be further ahead. If the pension plan has built in inflation assumptions that should also be indicated in the pension administrators report to the terminated employee. In the case above it was 2%. So, In my mind as long as the individual expected to make a return on their investments better than the discount rate plus inflation they would be better off.

In your example you cannot change the assumption to add inflation to the pension amount without also increasing the commuted value to also reflect future inflation.

Friday, Jul 21, 2017 at 12:15 am Reply