Larger NHS Lump Sum or higher pension?

Kate_Whitaker

My husband is about to take retirement at 55 from the NHS. He can take £60K lump sum and a pension of £21K or a lump sum of £114K and a pension of £17K. We have no mortgage, but a new house that needs doing up. I do not work due to ill health and bring in approx £4K a year. My husband may do the odd day in the future, but would prefer not to. We have savings of about 40K tax free. Any advice out there? His father lived to 89!

McKneff

Hello Kate and welcome.
I retire myself in October and have the same decision to make.

I was always advised to take as big a lump sum as possible. The bigger pension sounds nice but he would have to live a long time to cover the lump sum amount difference. (of course it also depends on what pension he would leave you when he dies). Once you make the decision there is no going back

dunstonh

This is a bit of an FAQ recently so you may want to check back the last 2-3 pages.

In the past there used to be a bit of a rule of thumb that you take the full lump sum. However, its no longer the case. There are too many variables and considerations now to say one option is better than another.

Effectively you have to do an analysis of needs (both now and future) and an analysis of options available to see what fits. Tax will also come into it. Over 65 and earning over £21,900 sees a higher rate of tax charged as the age allowance is reduced by 50p for every £1 over. So, whilst at 55 it isnt an issue, in 10 years time it would result in over £1000 a year extra tax being paid.

Also, with savings of just £40k, you are a bit on the light side for another 30 years or so life.

Many of the options that exist you may not have considered. Things like taking the lump sum but feeding it into a personal pension for you. So, if you intend to do an analysis yourself, make sure you include all the options.

Kate_Whitaker

Hi Annie. Thanks for your quick reply. It makes no difference to the pension I will be left with. I know all financial advisors told us to take the larger sum, but they wanted to invest it for us - if we had done that recently like some of our friends, we would have lost a fortune! It is SO difficult! Do we invest in the house and do it up, or take much longer and try and save out of the higher pension. I hope you have a good retirement in October! Kate

dunstonh

if we had done that recently like some of our friends, we would have lost a fortune!

How come? Investments in the last 3 months have done very well.

Kate_Whitaker

Hi Dunstonh, Very helpful. I should be getting some money from my parents in the future, so that would hopefully top up the pension. So, if we took the larger lump sum, put some of it into the house and the rest to invest hopefully we will have made the right decision. How do you feed it into a personal pension, if you are already getting an nhs one? Thanks about the tax, my husband thought there may be a tax implication. Kate

dunstonh

How do you feed it into a personal pension, if you are already getting an nhs one?

You have an annual allowance of £3600 which you can pay into a pension. Thats each. The problem is likely to be on your side as you are light on income. So, come 65 you will be able to earn £10k a year tax free. If you dont fully utilise that tax free income, its wasted. So having less income on your husbands side and more on yours is more efficient. Plus, on death his pension will drop by half. So, having more in your name will help reduce that drop.

To give you an indication of the advantage of that £3600 allowance, lets totally ignore growth and just look at the original amount invested.

£3600 goes in. You write the cheque for £2880 as you get £720 tax relief. Say at 65, you commence the pension. You get 25% of the fund value back as a tax free lump sum. On £3600 (as i am ignoring growth), that is £900. The rest of the money buys you an income.

Lets say you get the standard good health, non smoker annuity rate at 65 which is 7.3%. That will pay you £197.10 a year.

That £197.10 a year for life has cost you £1980 (3600 - 720 tax relief -900 tax free cash = £1980). In percentage terms to compare to interest rates, you have got 9.95% . Its hard to get a couple of % on savings at the moment so 9.95% is not bad going. Now factor in the growth on the £3600 over the years between now and 65 (or whenever you decide to take benefits).

I do have to point out that i dont know your circumstances so cant say if this is the best or even suitable option for you but it is one of the options that is available.