Small Lump Sum or Big Lump Sum?

mixer2011

A friend of mine is early retiring from the Civil Service, and he has a choice.

Choice1: Take a lump sum of £45,000 and a pension of £19,000 pa OR
Choice2: Take a lump sum of £95,000 and a pension of £14,000 pa.

He is 53 and has an outstanding mortgage of £70,000 (with tons of equity). The mortgage he is on is on a variable rate (2% above base rate) and there are 17 years outsstanding.

Based upon these facts, does anyone have a simple answer? Thank you.

CLAPTON

the figures don't seem quite right to me but assuming they are then

50,000 of capital provides 5k per annum...presumably indexed linked for life
that's equivalent to 10% per annum indexed linked... there is no where else you can obtain anything near that

breakeven if he takes the lump sum is 10 years... not very long

many people however, like the idea of being mortgage free

does he have any debts?

will be work after retiring from the CS

kindofagilr

I know nothing of figures etc I just wanted to give you my personal thoughts.

Although the £95k lump sum is tempting, £5000 a year drop in pension is quite a lot, especially as he is only 53 and can't claim his State Pension for another 12 years.

It does all depend on what he can afford to live on.

If he lives to say 83 then if he took the lump sum of £95k he would have sacrificed £150k in pension over the years (30 x £5000) which is quite a lot of money.

Andy_L

Unless theres something unusualy going on he should get £12 of lump sum for each £1 of pension given up, so for £5k of pension he should get an extra £60k lump sum (ie £105k lump)
Either way at age 53 thats an abysmal exchange rate: even at the age of 65 a RPI pension of £1 costs about £20 to buy, so it costs even more at 53.

Edit, I'm with Clapton, in option 1 the lump sum should be 3x the annual pension. The pension may include an annual compensation payment for going early which stops when he reaches retirement age

Thrugelmir

The pension will also will be index linked. So the lost income into the future could be considerable.

Taking the higher pension could easily push him into the higher rate tax band if he seeks other employment as well.

Alternatively clearing the mortgage will save money.

Without knowing all the financial circumstances its not possible to be more specific.

dunstonh

Based upon these facts, does anyone have a simple answer? Thank you.

Before pension simplification (April 06) it used to be a case of take the lump sum and reduced income. Indeed, most schemes had that as default. However, since then, its not as clear cut and taking the maximum income can often be the best option.

However, its more a case of personal circumstances and tax position nowadays. If your income is going to exceed £22,900 from age 65 (in todays terms) then taking an increased lump sum can be better as you wont lose your age allowance. However you have to weigh that up with you taking the pension very early and having a longer period before age allowance applies to you as well a a longer period overall of payment.

This is a case where a cost/benefit analysis needs to be done taking account tax now and in the future and your expected spending patterns.

zygurat789

Assuming no other income.
A guaranteed job with an RPI (not wages) linked income of £19,000pa with a mortgage of £25,000 or:-
A guaranteed job with an RPI (not wages) linked income of £14,000pa with
£25,000 in the bank and no mortgage

Magical_Ana

Interesting comments I am age 55 and am taking ill health retirement from a LGPS with similar dilema and figures. I am inclined to take the higher pension which for me is £19,000 and £37000 lump sum. However I am worried about the effect of taking on any part time work in future due to tax situation. But to take higher lump sum without good interest rates seems bad decision as I dont want to tie up my income as hoping to move and buy again in next year. So need income for a mortgage. Any advice would be much appreciated.

dunstonh

Remember that from age 65, the effect of having your age allowance removed is nearly £1000 a year in extra tax (or will be possibly more by the time you get there).

So you may be better off from 55-64 but from 65 you could be worse off. This is why you need to do a cost benefit analysis. Do the short term gains get cancelled out by the long term taxation hit from 65? (remember that taking 19k now and add on the basic state pension of £5k, possibly more and add in interest and other income and you wipe out the age allowance).

I'm not favouring one or the other here as we dont know the facts to make such opinions. However, you need to consider not just now but later as well. Also, consider future car replacement, boiler replacement, house refurbs etc. Dont leave yourself short.

You could also check if the pension scheme allows an in-between option and not just maximum tax free lump sum or nothing.