Pension Lump sum v income

jagnew1234

I am 61 and due to retire shortly and have been given the opportunity to increase my lump some by reducing my monthly pension.
£40k plus £15k a month OR £75k and £12k a month.
Any thoughts ?
Jim

Stargazer57

As written your lump sum is rising by 35K and your pension falling by 3K a month (or 36K a year). I suspect you mean that your pension is falling by 3K a year, giving you about 12 pounds lump sum for each pound of pension.
Unless you are in very poor health, or in desperate need of a lump sum, this is a very poor commutation rate. If you use an annuity calculator to see what it would cost to buy the pension given up, the answer will be something like double the lump sum you are getting.

brewerdave

I took early retirement relatively recently - gave up ~ £6.5k pa for a lump sum of £130k+ so as said by Stargazer57 your offer doesn't seem a very good one.

robbieroy

It might be worthwhile considering in some detail and at some length what your income and expenditure needs are. Focus on what you weekly, monthly and annual expenses are and this will help inform you of the retirement income you need and therefore how much monthly income you require. Your course of action really depends on your personal circumstances and what your retirement income and needs are and how best to invest any lump sum. If you wish further advice then it might be best to discuss your particular situation with an IFA.
RR

dunstonh

Whilst taking those figures in isolation would suggest taking the income, its not possible to say what is actually the best without knowing your financial position (including tax both now and future) and your personal situation and current and future requirements.

A quick and dirty example of where it could be worth taking the lump sum rather than the income is if you take £15k and have £7k of state pension income at 65, then that takes your income to £22,000. If you have savings, investments or other income then you could well go through £22,900 and that will see the removal of some (or all depending on amount) of your age allowance. If its fully removed then that is nearly £1000 a year extra tax (on top of basic rate). So, reducing the income down to avoid going through that £22,900. If you need the income then the extra capital could be used in tax efficient investments to provide that. Its a calculation to see if its worth basically (as sometimes going through £22,900 is still the better option).

Stargazer57

On the age allowance trap, the worst case is that all the income that would be used to provide the lump sum lies in the affected band and would be liable for tax at 30%, rather than the normal 20%. I'd agree this would make the lump sum a "less bad" option but I can't see, save in the case of very poor life expectancy or desperate need for a lump sum, how even at 30% tax a 12:1 commutation rate could be worth taking.
It is however a favourite trick of IFAs to point to minor tax disadvantages and to use them to sell some alternative investment when, on fundamentals, the original option, in this case the full pension, is the most attractive.

dunstonh

It is however a favourite trick of IFAs to point to minor tax disadvantages and to use them to sell some alternative investment when, on fundamentals, the original option, in this case the full pension, is the most attractive.

Even if you reduced the income down to just under the age allowance, then use the lump sum to put into a pension in the wife's name who may be a non tax payer. Therefore avoiding 30% tax on income as well as getting tax relief on the contriubtion for the wife and improving death benefits.

As I clearly stated = "Its a calculation to see if its worth [it] basically (as sometimes going through £22,900 is still the better option). "

jagnew1234

Sorry, I did of course mean pension per year not per month. I wish

Loughton_Monkey

Yet again we see the 'standard' rate of 12:1 which must be 'hard coded' into many final salary schemes. It was probably fixed at a time when the 8.33% annuity rate was about 'par for the course' at retirement age.

These days, 8.33% annuity rate is brilliant (with the consequential dire commutation rate - the other side of the coin). So the 'technical' answer should be to take the maximum pension (minimum lump sum). Normally, for most pensions, the 'technical' answer is always to take the maximum tax free lump sum.

In both cases, though, the 'technical' answer should always be overlaid with a more detailed analysis to see if another answer can beat it. Certainly, the tax position should be critically examined, as must the 'need' (or otherwise) of the lump sum at that time. More specifically, are you in a position (if you take the lump sum) are you confident of 'maximising' the utility of it? [e.g. for those who take a lump sum because it is the 'right' thing to do, and then bung it in a bank at 0.5% interest and forget about it might have been better advised to take an increased pension.

Also, any major health/longevity issues might suggest taking the lump sum. I'm not talking about 'snagging' ilnesses, but any hard facts that almost certainly dictate you will have a shorter lifespan. If you know nothing of any consequence, then it's best to assume you will live as long as anyone else.