pension choice

Gemius

When choosing how you want your firms pension paid is it better to take the lump sum or the maximum pension?

My wife is coming up to sixty and has an offer of a pension of £2769 per annum, or a lump sum of £13,216 and a pension of £1982 per annum. The pension is index linked.

My gut feeling is that she should take the maximum pension as we have savings but will be short on income when I retire in four years time.

Can someone put the argument for and against please.

jamesd

How long do you both expect her to live? The benefit of the lump sum depends on the life expectancy. The benefit of the index linking also depends on the life expectancy. If she's expected to die within 16 years the lump sum looks like a good option.

Other than that, there is the question of what happens to her income if she doesn't benefit from your pension after you die. There's a substantial chance that it's better for her to get the highest index linked pension possible to reduce the drop in her income after your own death. This depends on what your own pension says about income for her after you die, so you should check this.

Another consideration is tax and independent tax allowances for each of you that can reduce the effect of tax on your combined income. Eliminating tax on say 5000 more of your combined income can be helpful. It may pay for you to take a lump sum from your pension to contribute to a pension for her to reduce tax liability for the pair of you, up to the point where her pension would be taxed at the same rate as yours. Or increased contributions to her pension while you are working, this one or another, might be of benefit.

You mention savings and expecting to be short on income. Is there any prospect of you having to rely on benefits? That could eliminate or reduce the benefit of the pension because of means testing. Or taking the lump sum could cause ineligibility.

Do you see any real possibility of having to sell your home because of too low income to continue living where you are? If so, it may be worth doing this sooner rather than later. Potentially, any funds from this could be used to increase pension income, possibly getting you to a situation where you have a cheaper place to maintain and pension income that's more comfortable than the one you're expecting now.

Unless she's known to be likely to die soon becaue of a health problem the tax and after your death reasons seem to me to favor the higher pension. However, I am not as familiar with this area as I could be and you should wait for comments from others who are more familiar with the subject.

EdInvestor

What other taxpoable ( pension) income will she have?If she has already used up her personal and age allowance she may be better to take the TFC and put it in her investment and cash ISAs, where the income will be tax free.It would all be sheltered within two years @7k p.a.

Gemius

Thanks to both of you. We've decided to go for the highest pension. mainly due to the fact that it will be an amount that can't be taken away in the event of me going first.