Taking a lump sum

jennifernil

Apologies if this has been covered before, I did read anything that sounded relevant but could not see what I was looking for.

My husband will retire at 65 in about 18 months time, having worked for the same company for 32 years. He has a final salary company pension that will give him about 33k, plus a reduced state pension as he has not been contributing long enough. Part of his company pension will be index linked (about 25% I think) . I have no pension as I have not worked. It is quite possible that he will be offered occasional work with the company after he retires, so there may be an opportunity to boost our income, but we do not wish to rely on this happening.

When he retires, our youngest child will still have at least 1 year to go at university and we are supporting her and paying about £350 per month for the mortgage on the flat in which she lives. We have an interest only mortgage on our own property with 70k outstanding at present. This does not need to be repaid until we sell the house, but we are thinking of possibly downsizing in 4 or 5 years from now.

Instead of taking the full amount he can take a lump sum and reduced pension, this will not affect the widow's pension , it would still be 50% of his full pension entitlement. As yet we do not know how much lump sum he would be able to take. Is there a maximum amount he is allowed to take?

We think we would like to take the lump sum and possibly use some of it to pay off part of our own mortgage,some to buy a new car (which we will need) , and the rest to see a bit of the world while we are still fit enough. Does this sound a good plan?

Also what is a reasonable proportion of the pension to be asked to give up in relation to the size of the lump sum? I believe this can vary considerably, and we obviously want to get the best possible deal.

All advice gratefully received!

Jennifer.

wannabestayathomemum

From what you say it sounds like your husband is in a Final Salary type pension. Currently the lump sum is based on his length of service and final salary, to which a formula is then applied. The way in which lump sums are calculated is all set to change when Pensions Simplification comes in April 2006. Schemes will be able to pay 25% of the fund value as a lump sum irrespective of salary or service. If your husband was previously entitled to a lump sum greater than 25% under the old rules then he should be able to retain the right to the higher amount (which may be the case if he has long service). My best advice would be for him to contact his employer's pensions department, he should ask them to estimate the amount of tax free cash he will get, how much this will reduce his pension by and what affect if any the introduction of Pensions Simplification will have on his benefits.

EdInvestor

What is a reasonable proportion of the pension to be asked to give up in relation to the size of the lump sum? I believe this can vary considerably, and we obviously want to get the best possible deal.

I think we need the figure for the 'commutation rate' to take a view on this, but other posters will be much more informed than me.

wannabestayathomemum

Yes, EdInvestor is correct, a commutation rate would be used to calculate how much pension would need to be 'used up' to provide a lump sum. The rate is decided by the scheme actuary, and can vary from scheme to scheme. As a very rough guide, a common rate used is 12:1, which would mean that for every £12 of tax free cash you receive, your pension would be reduced by £1. Again, the department/company dealing with the pension administration should be able to confirm the rate to you.

jennifernil

Thanks for your replies. His Pension Plan rules booklet is pretty useless at giving the type of information you mention. When you say the lump sum could be 25% of the Fund Value, how can we calculate that value? His annual pension statement only gives a projected pension amount assuming he retires at 65 and his salary remained the same.

We have heard that others already retired have been offered a £1 reduction for every £10 taken as a lump sum, so it does not sound like this is a very good deal, assuming he is offered the same. Does the scheme have to make the same offer to every prospective pensioner?

If the offer is 10:1 , would we be better taking the full pension? How can we work out what is the best course of action? We are finding it all very confusing.