Should You Keep Your Pension or Commute It If You Change Jobs?

Is the potential for a bigger retirement portfolio always a win? Alexandra Macqueen explains why peace of mind can be just as valuable.

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Over the years when you look at the complex math behind do you commute your pension and do you take it in a lump sum and go on to invest it on your own, in the majority of cases I’ve looked at personally, the odds have favoured you were better to leave it where it was.

Not in all of them, but the odds have favoured it. But what’s interesting is people who went against the odds in the last 10 and 20 years have often won because the markets have been so strong, and depending on where and how they invested the money, they’ve ended up doing quite well and been glad they went the route that the odds didn’t favour being the winner.

Do you think that’s true? Is it consistent with some of what you’ve seen?

I think it depends on your definition of winning, right? So the way that you framed it as they ended up with more money. But if you know, Pensionize Your Nest Egg, the opening vignette is of a woman, I can’t remember what we called her. But the idea is that she’s 84 years old, or she’s in her 80s, and she’s just received a scary envelope from her broker that she has to open and make decisions about.

Like, should I invest in this? Should I invest in that? I don’t know. Uh, versus if she kept her money in her DB pension, the money’s just showing up in her bank account month after month. She doesn’t need to worry about it. So if you define winning as I, I got a bigger pile, then, you know, sure, maybe, but if you define winning as I can sleep at night knowing that the money’s there no matter what, then, you know, maybe that’s winning.

The thing that I think is overlooked around the commutation decision is that for somebody who, you can only commute if you’re leaving a job. So I’m leaving my job with my defined benefit pension. If I trust that the money’s going to be there when I retire, that I’m going to have that income stream in retirement, it means that you can invest much more aggressively with the rest of your portfolio, so you can get that diversification.

I think that that’s a benefit from having some DB income that people don’t necessarily appreciate. It’s this all or nothing. I’ll take it all out. I’ll invest it all myself.

You and I are on the exact same page on this, and we always have been. I mean, I read your book all those years ago, and we’ll talk about annuities in a moment. But psychologically, there is so much evidence, both anecdotal from people you and I have dealt with, but also really well-researched data coming out of some US papers, that psychologically people are much happier, and isn’t that a big part of what this is all about in retirement, when they know they have a certain amount of income coming through on a monthly basis?

And then you’re one of the first people to highlight that, and it’s why you and I both are probably bigger believers in annuities than the vast majority of people out there. And I don’t think they’re perfect, and I don’t throw all my money in annuities, nor would I recommend that to too many. But I think they’re a tool that for a lot of people should be looked at.