Full pension or reduced with pension with lumpsum?

CM58

My wife (age 53) is due to take early retirement from her part time job due to ill health and has been offered a full pension of: £4620.37 p.a. or a reduced pension of £3461.11 p.a. and a tax free lump sum of £20895.60.

We aren't sure which option would be the best to go for, can anyone advise?

dunstonh

Usually the lump sum plus reduced income. The lump sum can be used to provide an income but is always available. However, if there is indexation and spouses pension benefits on the pension, it may be best to take the full pension and not the lump sum.

£20895 @ 5% = £1044 pa income. Difference in income between both options is £1159.

DavidLaGuardia

The difference between the two options will also depend on her rate of tax. A simple jusgment call is to divide the lump sum by this difference and you will get the number of years which it would take to get this amount.

If the pension is indexed then the interest on the lump sum should at least make up for the difference, if it is not then the interest is even more to consider.

As a personal thought, I would rather have more mony in the early years of retirment to spend while fit and healthy (though it can also be argued that money could be needed for long term care)

dunstonh

Another consideration is to re-invest the pension lump sum back into a pension (it may only be £3600 a year if no earnings but it can add up over the years). The net equiv rate of return often exceeds 10% p.a. doing it this way.

Stickems

dunstonh wrote:

Usually the lump sum plus reduced income. The lump sum can be used to provide an income but is always available. However, if there is indexation and spouses pension benefits on the pension, it may be best to take the full pension and not the lump sum.

£20895 @ 5% = £1044 pa income. Difference in income between both options is £1159.

For the difference of £115 p.a. she will give £20,895 to the insurance company. That is so stupid.

oceanblue_3

Stickems wrote:

For the difference of £115 p.a. she will give £20,895 to the insurance company. That is so stupid.

Exactly! (I think this is the point that dunstonh was trying to make).

steveksullivan

on a very personal note and i do emphasize that this is MY VERY SUBJECTIVE view only ..........

My Dad worked hard all his life looking forward to his pension at 65. He died when he was 64.

I am in the fortunate situation of having taken a pay off from work last year. aged 48 (49 now).

I have a very small personal pension from which I will DEFINITELY be taking the cash lump sum next year and also a company pension which I can take early (yes, I will !!) at 55 and I'll take the cash lump sum from that as well .

Sorry, very subjective as I say but a relevant way of looking at it for me ......

shown73

As someone just approaching retirement, this discussion is obviously very relevant. I have wrestled with this question for months, and I'm not much nearer an answer. To commute, or not to commute, that really is the question. Of course the answer is subjective, everyone has different priorities. I've been at my present company over 20 years, and virtually everyone who has retired over this time has taken the maximum lump sum. I think that the feeling has been that no matter what becomes of the company, they at least have control of that part of their pension.
And yet; having read a number of articles on the subject, it would seem to be financial disaster. Even investing all of the lump sum, as far as I can make out, would give a much poorer return, given a reasonable life span, than taking it as pension. Pension providers, not surprisingly, seem keen on people taking money out, as this reduces their liability in the long term.
I think that the average person, like me, just doesn't have a clue really, it's a very complex subject. For that reson, any qualified comments and opinions would, I am sure, be very welcome by many readers.

Ian_W

The lump sum is tax free, pension payments are taxed.
Pension payments are [in some cases at least] index linked, the lump sum isn't.

If you don't need the lump sum then taking the full pension is a better deal providing you survive beyond the years your commuted sum is multiplied by. Is there any warranty, no matter how good your health, that you will survive that long - No.

Faced with all those imponderables I reverted to type and decided,
A BIRD IN THE HAND IS WORTH TWO IN THE BUSH!

I wasn't alone, I worked for an outfit with over 8,000 emplyeees and over the 30+yrs I was with them I only knew of one person who didn't commute the maximum.

Don't know if that is a "qualified" opinion or not, I personally don't think there is a *RIGHT* answer anyone else can give you, just what you feel is best for you and your personal circumstances at retirement.

oceanblue_3

shown73 wrote:

....having read a number of articles on the subject, it would seem to be financial disaster. Even investing all of the lump sum, as far as I can make out, would give a much poorer return, given a reasonable life span, than taking it as pension. Pension providers, not surprisingly, seem keen on people taking money out, as this reduces their liability in the long term.
I think that the average person, like me, just doesn't have a clue really, it's a very complex subject. For that reson, any qualified comments and opinions would, I am sure, be very welcome by many readers.

Assuming you are married: if you commute, and then predecease your spouse, will his/her pension be based on the commuted value or on the uncommuted value?

In your particular case, what are the actual values being offered? (How much annual pension will you lose; how much tax-free lump sum will you gain? Is the pension fully index-linked?)

dunstonh

If you don't need the lump sum then taking the full pension is a better deal providing you survive beyond the years your commuted sum is multiplied by. Is there any warranty, no matter how good your health, that you will survive that long - No.

That statement does need just a bit of tweaking but the idea is sound. Its one of these areas where they are multiple answers and a few "depends" thrown into it. ie. is it from occupational scheme or personal pension.

A purchase life annuity will usually provide a better rate than a pension annuity. So, the lump sum should be taken in those cases and a purchase life annuity taken. However, the pension annuity may get improved rates due to the overall size of the fund which could then give it a better rate than a purchase life annuity with the 25% lump.

Also, subject to eligility (which will improve from April), you could take the tax free lump sum and reinvest into pension to get tax relief again. So you may still end up with annuities providing the income. Its just what type of annuity and how you get to that point that would be different.