Help!-Lump sum or bigger pension?

Michael_Ready

Hello,I require a little help.I am retiring soon,on a Royal Mail final-salary pension,at age 60.Ineed to take out a relatively small lump-sum to pay off a small mortgage and outstanding debt.I am left with the dilemma-to withdraw the maximum sum(to invest elsewhere) or to leave monies in fund.Roughly,£60,000 equates to £3,000 p.a. payment.I need to make a decision soon.Any advice?

Redemption

Michael_Ready wrote: »

Hello,I require a little help.I am retiring soon,on a Royal Mail final-salary pension,at age 60.Ineed to take out a relatively small lump-sum to pay off a small mortgage and outstanding debt.I am left with the dilemma-to withdraw the maximum sum(to invest elsewhere) or to leave monies in fund.Roughly,£60,000 equates to £3,000 p.a. payment.I need to make a decision soon.Any advice?

I assume your pension will be index linked? If so taking the bigger pension is the totally safe option.

Remember that it it is hard to do much better than inflation with safe savings after tax. You probably can do a BIT better if you work at it but it is also possible that within a few years we could have a period of High Inflation when "safe" savings will not keep up.

Also, if you have a significant sum in the bank it is always tempting to spend it which of course will reduce future income.

If you want to be totally safe, why not take enough lump sum to buy the maximum holding of Index Linked savings certs (which, come what may will do a LITTLE better than inflation) plus enough for this and next tax years cash ISA (tax free so should do better than inflation).

Of course, if you feel like chancing your luck even a little, putting some or all of the lump sum into the stockmarket via unit trusts COULD do a lot better than inflation - but might do worse!!

It all comes down to how you feel. A compromise would be 1/3 in each.

Hope this helps

EdInvestor

What is your total pension income ( incl state pensions) going to be?

How about other income ( savings interest, dividends, rental income etc) not in ISAs?

MikeJones_2

Hi Michael Ready,

A few things to factor-in as part of your decision making would include tax on your income in retirement, other sources of income, state benefits, your health, your life expectancy, your marital and family status (dependants benefits), your State Pensions entitlement.

If married the spouse's benefit on your death might be important to consider. Do you know, for example, whether exchanging part of your pension will reduce the spouse's pension on your prior death - or if you take the cash is the spouse's pension still based upon your pension before you commuted? Indeed, is this important to you at all?

Whilst not entirely relevant to you:
10 reasons why you may not want to take that cash lump sum from your pension

Whatever you choose to do (lump sum vs pension), I hope you enjoy your retirement!

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Michael_Ready

EdInvestor wrote: »

What is your total pension income ( incl state pensions) going to be?

How about other income ( savings interest, dividends, rental income etc) not in ISAs?

Hi,total pension income £12,000 at age 60,no state pension of course until 65.
Some savings interest,£500 about,no other income(or debt!)
Thanks

bigbloke45

Michael, I took my maximum lump sum when I retired and I bitterly regret it!

Remember that your pension is index linked, so that whatever pension you give up to take the tax free cash is also indexed linked; a pension of £3,000 now would be worth £4,031 after 10 years if inflation was 3%, at 5% it would be worth £4,887.

I suggest that you consider using part of your pension to fund your mortgage and debts, if this doesn't leave you completely skint, because when they are paid off, you will still have your pension income that will have risen by inflation.

If you can, you ought to do some sums to see what the different options create and decide on the arithmetic, not "gut feeling"!.

Finally, your comment that £60,000 lump sum equals about £3,000 a year indexed pension looks a little bit "iffy" to me. Are you saying that your pension scheme calculates that a fully indexed income, linked to the RPI and not the CPI would only cost 5%? i.e. 3000/60000 = 5%? I find this difficult to accept.

I suggest you get some financial advice ASAP.

Good luck and come back to tell us what you decided upon.

Check out entitledto.com for what you can get. Well worth it!

EdInvestor

While index-linked pension income is very valuable, some savings/capital is necessary in retirement for things like home repairs/car replacement/ holidays/ family events etc.Not many people would be happy with no reserve capital at all or only a small emergency fund.Equity release from the home can of course be a backup.

But given that the OP will be topped up with his index linked state pension in 5 years time, and has limited other savings, I'd be inclined to go for a larger lump sum - perhaps a total cash fund of around 50k (incl existing savings) would be about right, with the remainder converted to pension? There appear to be no tax band issues.

Andy_L

bigbloke45 wrote: »

Finally, your comment that £60,000 lump sum equals about £3,000 a year indexed pension looks a little bit "iffy" to me. Are you saying that your pension scheme calculates that a fully indexed income, linked to the RPI and not the CPI would only cost 5%? i.e. 3000/60000 = 5%? I find this difficult to accept.

Most final salary schemes don't base the commutation rate on a "fair" investment value but rather on what the scheme rules say (which may or may not have been a fair rate when they were written).
The OP's being offered £20 lump sum for £1 of pension which is quite good. Public sector schemes (of which the royal mail one is sort of still one) generally only offer £12 lump sum for £1 of pension

Michael_Ready

Andy_L wrote: »

Most final salary schemes don't base the commutation rate on a "fair" investment value but rather on what the scheme rules say (which may or may not have been a fair rate when they were written).
The OP's being offered £20 lump sum for £1 of pension which is quite good. Public sector schemes (of which the royal mail one is sort of still one) generally only offer £12 lump sum for £1 of pension

Hi, I'm afraid you're right,the difference between taking £60,000 lump and none at all equates to £3,200 P.A.

MrMicawber_2

Hi - The rule of thumb is don't take a lump sum on a final salary pension. You said above you had £500 interest from savings. If this is interest per annum it suggests savings in the region of £9,000 - £11,000. A tidy rainy day fund.

deebster

For my sins I've worked in final salary schemes admin for 15 years.

Most people take the cash, but if you ask an Actuary (chief number-crunchers who set these commutation factors) they will tell you it usually costs the scheme more if you don't take any. And whatever costs the scheme more in turn usually means more for you.

Think of it from the pension scheme's point of view - every 3 years they have to value the assets and liabilities and the pension they are paying you is most definitely a liability. So the majority of schemes offer the maximum cash that regulations allow on the basis that you will take it and thereby reduce the scheme's liability.

As you know, you are able to take any amount of cash up to the maximum 60K they have quoted you, so this might be worth considering if you need a few grand now. From the figures you have quoted it seems you get £18.75 cash for each £1.00 of pension you give up. That's not that bad to be honest.

Bear in mind also that you may be asked to sign a disclaimer saying you will not 'recycle' this tax-free cash (incidentally, now known as a Pension Commencement Lump Sum), which basically means re-investing it in a tax-efficient manner (ISA etc). I have been made to get these signed for the last year or so. I don't see anyone actually physically checking to see if it is happening, but just like anything else a little south of the law, don't get caught.