What to do with with £133,000

jojim65 · 23 January 2010 at 9:27PM

I'm a public service worker and shortly to retire aged 49. I will receive a pension of £21,000 per year assuming I also take the maximum commutation of £133,000 tax free.

If I don't commute the my pension will be £28,000.

I would like to use the commutation to provide a monthly income
I'm also interested in being able to draw down on the capital to top up my monthly income to bring me back to my pre retirement monthly income.
I realise as I use my capital then my monthly income will drop and I will need to draw down more but assume I can factor in my life expectancy ish! and in the expectation as I grow very old I will need less cash.

My wife will retire at the same time and will receive slightly less than me. We have no dependants and mortgage of £98,000 with savings of £35,000

Any advice gratefully received.

Thanks

Procrastinator333 · 23 January 2010 at 9:36PM

Are you saying that by sacrificing a one off payment of £133k you get £7k extra a year for life?

I'm guessing the public sector pension is RPI linked?

Take the £28k a year if you can. I would have thought an annuity for that would cost about £300k.

[Deleted User] · 23 January 2010 at 9:39PM

I don't have advise, but I would like to say congratulations! Retiring at 49 with a decent pension!! Enjoy it

jojim65 · 23 January 2010 at 9:45PM

Other way round really, I will receive £28,000 gross of which I can commute up to £133,000 bringing it down to £21,000

I figured £133,000 tax free would be better than the extra £7,000 which would be taxed.

The pension will become index linked when I reach 55 years of age.

Procrastinator333 · 23 January 2010 at 10:33PM

I just had a quick look at the first anuity calculator I could find.

Guessing it is also passed on to the spouse too? At half or 2/3?

I really don't know too much about all this, so take everything I say with a pinch of salt.

Quick look for a best buy table:

http://pensions.money.uk.msn.com/annuities/pension-annuity-best-buy-tables

Joint life, 50% for spouse, 3% escalation (not even as good as RPI) gives £3.3k for a male aged 55 for £100k

I haven't looked too hard, but a £7k index linked income, joint, for £133k at the age of 55, is an absolute mile ahead of anything you could purchase with that same money.

Ian_W · 23 January 2010 at 11:56PM

Either a Pugh, Pugh, Barney McGrew or Old Bill if you can retire at 49 I'd bet!

What procastinator is saying is that given your age and index linking from 55 there is probably nothing that can beat not commuting in strictly financial terms even though the income from your pension will be taxed whereas the lump sum will be tax free (income from it won't be in many circs). There are many other reasons why people want to take a large or max lump sum (move to seaside, take luxury hols, pay off debts or mortgage, indulge expensive hobbies etc,etc) but as you only seem to be considering it solely to provide an income, why not just get the income from your pension?

When you commute your surviving spouse pension isn't reduced and the lump sum could pass to her should you pre-decease her or vice-versa so there is no penalty in that sense.

My wife will retire at the same time and will receive slightly less than me. We have no dependants and mortgage of £98,000 with savings of £35,000

I really think you'd be well advised to discuss your joint circumstances with an IFA as anything on a forum like this can only be generalised and not tailored to your circumstances. An IFA would also need to know a lot more info than the little you've posted above. For eg: do either of you intend to work in some other field, how/when will you pay off the mortgage, attitude to risk, knowledge and awareness of investments and so on.

The first thing you need to know is - is it a good idea to commute and if it is, what strategies to employ for the lump sums to provide what you both want it to.

getmore4less · 24 January 2010 at 12:22AM

Are you getting a lump sum if you take the £28k?

Remember even though the 133k is tax free any income it generates is taxable.

jojim65 · 24 January 2010 at 10:07PM

Yes, I still get a lump sum of about £64,000 if I take my full pension.
Thanks for all your help, it certainly gives food for thought.

I can now see it might be better taking a full pension and as long as I live beyond 72 ish I will be better off.

I will seek advice from an IFA shortly....

one more quick question..........would you pay the mortgage off with some of the commutation or just continue it with the maximum pension?

rictus123 · 24 January 2010 at 10:19PM

Erm well done you, what a fantastic position to be in!!!!

Ian_W · 24 January 2010 at 10:33PM

jojim65 wrote: »

would you pay the mortgage off with some of the commutation or just continue it with the maximum pension?

Again there's not enough info but I'd look at what rate you're paying for the mortgage against what you can get in interest or investment returns. Mortgages tend to be amongst the lowest costing debt so it may be worth keeping if you feel your money can make more than it's costing. From a personal point of view paying off the mortgage and being (almost) debt free is great, also it reduces your outgoings and your need to have as much income as when you were working.

Our only debt is now a car loan at a big fat 0% interest. Seemed rather churlish to refuse such a kind offer when we couldn't improve the deal by paying cash!

marklv · 25 January 2010 at 11:27AM

Procrastinator333 wrote: »

Are you saying that by sacrificing a one off payment of £133k you get £7k extra a year for life?

I'm guessing the public sector pension is RPI linked?

Take the £28k a year if you can. I would have thought an annuity for that would cost about £300k.

At 49 more like £1.5M.

What to do with with £133,000

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