Bigger pension or bigger lump sum

angelaR_3

I am about to retire on a small NHS pension but am unsure which option to chose.
1. Pension of £8144 and lump sum of £25229
2. Pension of £6587 and lump sum of £43915

I also have another small private pension of either:
1. £766 per year
2. £568 per year plus lump sum of £4440

I will receive the state pension in 4 years and I have a mortgage of £34000. I plan to find another job, as currently neither pension will cover my outgoings.

Any advice greatly received.

Loughton_Monkey

You could work it out yourself, but in the second example, you are getting £198 'extra' by foregoing the £4,440 lump sum. Divide one by the other, and you get 4.46%. That's a 'reasonable' - but far from good - 'annuity rate'. If it is not inflation linked, it is actually pretty bad.

In the first example, if you do a similar calculation, then by taking the lower lump sum, you are effectively getting an 8.33% annuity rate. That's probably double a 'market' rate, and therefore from a purely financial point of view, it is extremely 'expensive' to take the increased lump sum.

As ever, though, with a decision like this, you must overlay what other priorities or needs you have. For example, if someone must have £12,000 to live on and feed themselves for the next year, it is a bit academic if I tell them I can 'invest' their money for a year with 15% guaranteed interest rate!

If you are on a low mortgage rate, then it would not be a good idea to use any of the lump sums (yet anyway) to pay off the mortgage early.

angelaR_3

Thank you so much for your reply Loughton Monkey

I hope it's ok to ask another question. I am assuming from your answer that you feel I should take the smaller lump sum from the NHS pension and the £4440 lump sum from the private pension and not pay off my mortgage.

Have you any suggestions as to where I should invest the lump sum in order to get a decent rate of interest, as my monthly payments are £500. Would it be worth paying off some of the mortgage, which is a tracker by the way?

kidmugsy

If you want to preserve some flexibility, you could always consider changing your mortgage (when the penalty is low enough) to a flexible mortgage or an offset mortgage. These give you the advantage of reducing your monthly mortgage outgoings for the present, while leaving you the option of withdrawing your funds later if you need them.

Loughton_Monkey

angelaR wrote: »

Have you any suggestions as to where I should invest the lump sum in order to get a decent rate of interest, as my monthly payments are £500. Would it be worth paying off some of the mortgage, which is a tracker by the way?

£6,000 a year repayments. But the bulk of that, by now, is capital. What's the interest? If it's less than, say, 3% then your lump sum could go into a cash ISA and earn 3% (minimum) - possibly 3.2%

And watch for any 'penalties' for paying off lump sums into the mortgage.

angelaR_3

The mortgage is actually a further advance so cannot be moved. The interest rate is 2.5%.

Is there not a limit on how much can be paid into a cash ISA? Would I be able to put the full £25229 in?

kidmugsy

Cash ISA: £5100 in this tax year (i.e. by 5/4/11); slightly more next tax year.
Stocks and Share ISAs: same again, but you may not want to take on the risk.

property.advert

If you remove the £500 a month for the mortgage, how do the numbers stack up ?

If you still need the circa £130 a month the extra pension gives you then you cannot pay down the mortgage. If you didn't need that, then I might pay down the mortgage, put the remaining cash in the bank for a rainy day and not have to worry about rising interest rates in the future leaving me able to pick and choose what work to do.

birkee

I looked at it this way!
If I peg out 12 months after retiring, the lump sum is in my estate for my family, not in their pockets.