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Pension lump sum to take or not
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# 1
damon21
Old 02-02-2012, 6:35 PM
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Default Pension lump sum to take or not

Due to retire later in the year on a final salary pension, what are the benifts and againsts on taking a lump sum, getting conflicting advice on what to do.
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# 2
atush
Old 02-02-2012, 7:29 PM
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It will really all doeend ont he level of your pension and your other savings and investments. You'd have to post details of the commutation rate too- they are all different.

Basically you will get more pension (and even more in future years) as the pension is index linked. So, you could be better off taking it all as pension, esp if you have penty of other savings and investments and your house is paid off.

But everyones pension, and situation is different so we can't really give you our opinions with the info provided
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# 3
Linton
Old 02-02-2012, 8:00 PM
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Benefits of taking lump sum
1) Cash in hand if you need it eg for paying expensive debts
2) Lower tax

Disadvantages
1) Lower pension
2) Other people asking the same question on this forum have generally found that their pension lost is more valuable than their lump sum. They would have difficulty getting sufficient return from investing the lump sum to get the same income and inflation matching.

So as atush says it all depends on your circumstances and on the generosity of your scheme.
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# 4
Tony1952
Old 02-02-2012, 9:12 PM
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I am due to receive a final salary pension in March. I worked out that if I didn't take the cash lump sum, it would take 16.59 years to make this sum up by way of the increased pension, which is, of course, taxable.

OK, I have no way of calculating how the annual increases on the increased pension figure, as opposed to the increases on the lower figure, would reduce this 'payback term', but I felt that it would still take ages.

So I have opted for the cash lump sum. I hope this helps.
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# 5
atush
Old 02-02-2012, 9:43 PM
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And it also pehaps mainly falls on your personal health and family health (ie gene pool).

Most people these days last a lot longer than 16.5 years in retirement. So taking a lump sum in that circumstance would make a lot of sense if your health is impared or your famiuly has a history of early mortality. It would not make a lot of sense if you are in excellent health and your parents lived to 85-95.

Again, this is personal circumstance so unless we have some facts on that, we cna't have an opinion.
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# 6
Linton
Old 02-02-2012, 9:58 PM
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Quote:
Originally Posted by Tony1952 View Post
I am due to receive a final salary pension in March. I worked out that if I didn't take the cash lump sum, it would take 16.59 years to make this sum up by way of the increased pension, which is, of course, taxable.

OK, I have no way of calculating how the annual increases on the increased pension figure, as opposed to the increases on the lower figure, would reduce this 'payback term', but I felt that it would still take ages.

So I have opted for the cash lump sum. I hope this helps.
Your decision may well be appropriate for your situation, but I would question its general applicability.

1) The calculated payback time will depend significantly on your assumptions for inflation, which may or may not match reality.

2) 16.59 years is rather less than your life expectancy at 65, assuming you are currently in good health. So, you are more likely than not to exceed this.

3) I suggest it is sensible in retirement planning to assume that you will live to an unusually high age. Running short of money in my 90's isnt something that I find an inviting prospect if it can be avoided by some prudence earlier on.
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# 7
pineapple
Old 02-02-2012, 10:09 PM
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I decided to take my lump sum last year for the following reasons:

Going by the longevity in my family and also the health problems which my parents had and which afflicted them from their 70s I don't expect more than 15 fit(tish) years ahead.

The global financial situation is precarious - who knows what is going to happen. I would rather have my jam today - before it turns into marg.

I paid off the few grand remaining on the mortgage. As it was a low interest rate I might have been better putting the money into a good ISA. But I would have been tempted to fritter it away. Also given the current financial situation, it seemed the more secure option. I did some much needed work on the house and have a bit left over for renewals/repairs/emergencies.

Someone who is as fit as a lop and whose family have consistently lived to a ripe old age might think differently of course!

Last edited by pineapple; 02-02-2012 at 10:17 PM.
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# 8
atush
Old 02-02-2012, 10:17 PM
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You are quite right. No pockets in a shroud, but not a good life to be living on state pension only when you have out lived your cash.
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# 9
xylophone
Old 02-02-2012, 10:26 PM
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Quote:
Originally Posted by atush View Post
You are quite right. No pockets in a shroud, but not a good life to be living on state pension only when you have out lived your cash.
Unlikely that someone on a DB pension (plus state pension) would wholly outlive their resources, even if lump sum taken?
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# 10
pineapple
Old 02-02-2012, 10:29 PM
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Quote:
Originally Posted by atush View Post
You are quite right. No pockets in a shroud, but not a good life to be living on state pension only when you have out lived your cash.
Agreed. Fortunately I also have superannuation. So enough income even to save a bit. Can't imagine how people manage on the state pension alone.
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# 11
jamesd
Old 02-02-2012, 11:17 PM
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These decisions depend on:

1. the amount of ongoing pension income you give up to get the lump sum. The lump sum varies between 12 times the ongoing pension loss (almost always a bad deal) and 20 or more times (can be a good deal).
2. your health and whether you expect to live to a normal age. That's around 23 more years for half of 65 year old men, a few more for women, assuming normal health.
3. whether you have some more profitable use for the money. Paying off a mortgage is popular but makes you worse off financially.

Since we don't know any of those three things it's impossible to give you any guidance that allows much for your own situation, leaving the general guidance: it's usually something that will leave people in normal health worse off long term but can be good if you want to use it when you're more fit in the early years or if you're a skilled investor who will invest it to make more money.

Last edited by jamesd; 03-02-2012 at 9:21 AM.
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# 12
dunstonh
Old 02-02-2012, 11:32 PM
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Quote:
getting conflicting advice on what to do.
That is because it is not clear cut any more. Rules changed in 2006. So, some people may still be thinking of pre 2006 rules. Whilst others may be thinking post 2006. Post 2006 made it less likely to have maximum tax free cash being the best option when you only look at the terms. However, when you start to factor in spouse benefits, dependants, capital availability, taxation, health or even "a bird in the hand" you soon realise that it is more of a personal decision.

If anyone has told you that one option is bad and the other is good without knowing your circumstances, then chances are they dont know what they are talking about. So, eliminate them from your research.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.

Last edited by dunstonh; 03-02-2012 at 9:48 AM.
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# 13
zygurat789
Old 03-02-2012, 9:38 AM
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It's like insurance, life insurance sells well but only a few actually need it.
You're buying peace of mind, a secure, increasing income in old age or loadsamoney now.
You pays your money and takes your choice.
The only thing that is constant is change.
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# 14
maggieann155
Old 03-02-2012, 10:25 AM
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my husband will be taking early retirement (at 60) in march and his maximum lump sum with final salary pension reduced. the commutation rate, at 17.04, seemed average (12:1 being bad, and 22:1 good)

this is because we want to spend more in our early years of retirement but with sp and fs pensions each, we will still be ok in later life.

we are even more grateful for this lump sum now as i have just been diagnosed with malignant melanoma so my future is somewhat uncertain at the moment. you never know whats round the corner as they say.

it is a balancing act between purely financial and personal circumstances i think.
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# 15
Stolt
Old 03-02-2012, 11:29 AM
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My wife and I have been kicking this dilemma about for 9 months “lump sum” or “larger pension” and weighed up all our options, spoke to banks, IFA’s, read this that and the other and in honesty we kept coming back to the same old conclusion, how long do we live?
here was our situation at teh end of 2011
Mortgage already paid off some 12 years ago
Both still working and relatively fit, thankfully
I’m 61 and she 62
We have over 100000 savings
The posts above cover most other reasons etc.
Both eligible for State Pension (wife already receiving me at 65)

Last weekend we grasped the nettle and signed the papers opting for lump sum.
Break down as follows
Lump sum 115K
Reduced pension about 18K p/a
I die wife receives almost 14K p/a
Do you know why we took this path,
if I die first my wife of 40 years should be OK financially as well as an insurance pay out of about 50k if either of us go before 70.
We don’t care how daft this seems to some but it’s what we decided and more importantly we are comfortable with the decision.
Good luck to the OP because it’s not easy trying to muddle through it.
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# 16
mania112
Old 03-02-2012, 11:55 AM
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I think it's actually quite simple.

If we remove the 's and %'s we can summarise quite easily:

Like most things in life, the longer you wait, the more you'll get - clearly taking a lump out of your pension will ultimately leave you worse off.

So, do you need/want a lump sum of money now?

If you can happily live without the lump sum - go for the long term gain.

If you need the money to pay something off before you retire or you want to splash out on a new car / holiday (perfectly acceptable to splurge at this point in your life) - go for the lump sum

Last edited by mania112; 03-02-2012 at 11:58 AM.
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