teacher's pension lump sum

Daina_2

Hi have to make a decision very soon as retiring at end of term. I can take an annual pension of approx. £20000 and lump sum of approx £62000 or commute some of my pension and take an annual pension of approx £16000 and a lump sum of approx £111000. I have seen a financial advisor endorsed by my union and he recommended me to take the higher lump sum and to use some of it to invest in a Wesleyan Investment Bond. He says because the lump sum is tax free that it is a more attractive option and that it is best to have money to spend when you are younger, but obviously if tied up could not spend it any way. I agreed with him at first as I am single and cannot bequeath my pension to my children but now not so sure. Would be grateful for advice.

CLAPTON

from what you say you can lose 4,000 per annum of indexed linked pension and gain 47,000 in cash

to 'earn' the same 4000 from 47,000 you would need to get a return of 8.5% indexed linked to inflation (i.e. 4,000/47,000 ).... an impossible task
on the other hand you have the extra cash to spend... do you need it... do you have any debts.. do you have any expensive plans?

I have no specific knowledge of wesleyan bonds but I generally consider these products as being either risky or give poor returns and make quite high charges

jem16

Daina wrote: »

I have seen a financial advisor endorsed by my union and he recommended me to take the higher lump sum and to use some of it to invest in a Wesleyan Investment Bond.

Who did you see - a tied financial adviser from Wesleyan perhaps?

Investment Bonds can be useful but usually only in specific cases, none of which seem to fit you. This particular Investment Bond (if it's correct) seems to only utilise 3 funds which is very poor.

http://www.wesleyan.co.uk/CONTENT/professions/teachers/investments/capital_investment_bond.aspx

How much were you suggested to invest in it? Were you advised to use an ISA first?

If you want proper advice you should see an Independent Financial Adviser. However as Clapton has already pointed out the commutation rate of 12:1 is very poor and would be impossible to achieve the same results through investing.

edsks

we are in a similar situation to you. We have thought long and hard about the maximum pension/minimum lump sum or maximum lump sum/minimum pension decision we need to make and our thinking is as follows;
· The commutation rate of 1:12 is not generous, thus suggesting the maximum pension is the better option
· We are both in very good health and so there is no reason why we should not live for another 30 years or so – the longer we live the maximum pension appears to become the better option
· We have no debts and so do not need any additional lump sum to pay off any mortgage, credit cards etc. On the one hand this suggests the maximum pension is the better option, but on the other hand we would have all the lump sum to invest for income
· Taking the maximum pension is, we feel, for peace of mind and maximum security, the safer decision since we feel that, no matter what happens to the economy and our savings, we will be able to live off our pension – which is guaranteed and index linked, no matter what. This is probably, for us, the most powerful factor.
· Taking the maximum pension (and subsequent state pension) will not put us in any higher income tax bracket
· We appreciate that if we take the maximum pension then we may well pay more tax (particularly if our savings return is tax-free).
· We are unaware of any “benefits” that we might have been entitled to if we took the minimum pension. In other words which ever option we take we understand that we would not be entitled to lower council tax, etc.
· The economic climate is still not yet stable enough to guarantee net returns on the lump sum which would completely compensate for the 1:12 commutation rate
· Taking the maximum lump sum gives us more flexibility but we feel that if we needed any “flexibility” in our spending plans then we already have sufficient other savings to satisfy this.
· If in the future we transfer an amount of our savings into an annuity then the annuity will not give us the kind of return that keeping our “savings” in this index-linked pension will give us.
· We realise that any “additional” lump sum through commutation will not be taxed on receipt.
So, taking all these factors into account we feel that the maximum pension/minimum lump sum is our preferred option. This is just our thinking - obviously you need to consdider your own specific context and situation. Good luck!!!

andyt8

I'am in a similar position but in further/higher education.

"commutation rate of 1:12 is not generous" for conversions to lump sum but mine is the other way around with a commutation rate of 1:20. That makes it quite expensive to buy extra pension but you get a better deal when converting to lump sum. I am suprised there is such a difference between teacher and further ed pensions.

I am just going to see what index linked annuity I could buy at a later date if I took max lump sum.

getmore4less

Don't forget the pension is taxed it will be possible to generate income from savings that is taxed less, allthough it would take a while to ISA it all, so the rate of return before indexing can be lower than the x/y number.

The age related personal allowance kicks, so along with state pension this needs to be considered this can reduce the rate of return required later.

If going for a full drawdown(no one to leave it to) the rate of return required is lower still.

Do a retired SOA and see what you can live on if the reduced pension cover this with a bit to spare that basics are covered even if the investments fail.
An index linked pension that allready provides surplus can create savings for the big spends, how many more cars will you need?

Also consider what you might want to do, travel is easier and cheaper when younger so blowing a few £10k's in the first few years of retiement might be preverable to excess pension income that won't cover the travel insurance.

The other thing about taking the pension is that this is hte easy no brainer option, do you want to manage £100k+ investments for the next few years if you do (spare time) then this may be an option converting to an anuity later or just spending it quicker.

andyt8

Good point getmoreforless. All the extra income is taxed as your allowance (even when increased to 10K) will be gone by then. Thanks for pointing that one out.