Help!-Lump sum or bigger pension?

perception99

Oh and i am taking the pension right away.

jamesd

20:1 is quite a good commutation rate so you're getting a decent to good lump sum deal. Why do you need the money immediately? Got much in other savings?

Bad ideas include paying off a mortgage - better to take the higher pension and use the extra income to clear the mortgage over time. This is because the mortgage rate is lower than the amount of extra income you get by not taking the money to clear the mortgage.

If you don't need the money immediately and are comfortable with investments you'd normally invest any extra lump sum in a stocks and shares ISA. You can also put £3,600 a year into a personal pension and get tax relief at 20% even if not working and that's a good deal for some people.

If you're going to actually retire the lump sum invested option gives you the ability to take some of it and its income each year to keep your income higher until your state pensions start. That's one of the best reasons there is for taking the maximum lump sum, since it can smooth your income level at above £13,136.

I'll assume that you'd be left with 2/3 of the £13,138 if you took the maximum lump sum. Don't rely on that, get the actual numbers - I'm being pessimistic and I expect the income to be higher.

Say you took the maximum lump sum and dropped your work pension income to £8,757 (2/3 of £13,136). An £80,000 lump sum when invested can reasonably be expected to produce 6% of the lump sum as income, £4,800 a year, allowing for inflation, without on average reducing the lump sum value. You don't need to have the whole lump sum left when the state pensions start so you could increase that by perhaps £500 a year and still leave decent safety margins. That's £8,757 + £4,800 + £500 = £14,057 a year of income instead of £13,136 and a £39,410 lump sum.

There would be a reduced lump sum left, possibly even nothing if you took income at a high rate. But this wouldn't matter because then the state pensions would start so you would have them to top up the £8,757 instead of relying on the lump sum money to do it.

If you aren't comfortable investing you could also see what annuity you could get for a 10 year term by spending the £80,000. There would be no money left at the end but it would pay you more during those 10 years before the state pensions.

I think that the bigger lump sum used to boost income until the state pensions start is likely to be the best option since it keeps your income smoother instead of leaving you relatively poor now and relatively well off when the sate pensions start.

You might not be able to take the full 25% of all of the pot, just ask them what your options are, particularly for maximum lump sum, and what income you'd be left with. Then you can do better calculations.

perception99

Many thanks for this, I find it very helpful.

jamesd

I should add that I was being pretty cautious there. Even with no investment income at all, that £80,000 could pay £8,000 a year for ten years - just 80,000 divided by ten. But that's with nothing left and I'm assuming you want to try to keep most of it. In reality you could get a state pension forecast and start now at the same level you'd get with the state pensions, accepting the reduction in the 80k over time.

dhj

On similar lines to some of the above, I am 56 and taking early retirement and lump sum is about £60k. However, my wife doesn't work so I am concerned about leaving enough money behind should I expire suddenly I had thought of perhaps of adding some of my savings and buying a small two up two down property and renting it out. That way we would have a small income and my wife could always sell the 2nd property should I die. I could also have a larger pension but this would drastically reduce if I die and is not enough to keep my wife going.
Any general ideas about the pros and cons of each approach?

jamesd

If you're getting into buy to let property you should be using a mortgage and getting more than one property. The interest on the mortgage can be deducted from rental income up to the value of the property at the time it became owned by the rental business. That mortgage can be one on your own home, which will be cheaper than a BTL mortgage on one of more of the properties being let.

You might also want to look for properties being sold at a low prices that need refurbishment, where the refurbishment will increase the value of the property by more than the refurbishment cost. Then you have immediate equity and could have the option of using a remortgage to take equity out of the property and buy another one, or just save the money. This increase the return on capital invested, because your deposit is a lower percentage of the value after the work and remortgage.

There's property management hassle to consider but if you're not working otherwise that may be fine.