Pension, lump sum or bigger pension

Rack_Failure

Hi
I'm 57, taking VR but not sure what to take with company pension, ie pension or lump sum & reduced pension.

Pension £17,978
Lump sum £87,142 with reduced pension £13,071

What looks like the best deal and how do you calculate it?

Cheers.

McKneff

approx £5k difference per year in the pension stakes.

£87K divided by five gives you the amount of years you would have to live to break even.

Thats only my take on it, and i know nothing much about pensions, just my common sense kicking in.
The experts will be along soon to blow my theory outa the water. lol

ejlmcdonald

Just asked an IFA the same question re myself. Not easy to answer as depends how long you will live but one thing he pointed out is that the extra pension is taxable, I'm guessing given the amount it would be at 20%. So the £5k p.a. becomes £4k and the multiplier goes upto almost 22 times.

McKneff

Think Id just take the lump sum and go on a long luxurios cruise, enjoy what time you have left, I doubt it would be 22 years........

I took mine 18 months ago,, had a lovely holiday, gave the kids some, new car, new bathroom, new kitchen.
Spent the lot and loved every minute of it.

You would still have 13K pension and maybe a little part time job to supplement it, unless yu have a missus
who can work to keep you in the style you have been accustommed to:D:p

jem16

Rack_Failure wrote: »

Hi
I'm 57, taking VR but not sure what to take with company pension, ie pension or lump sum & reduced pension.

Pension £17,978
Lump sum £87,142 with reduced pension £13,071

What looks like the best deal and how do you calculate it?

Cheers.

It's quite a good commutation rate at 1:17.75 so that's not too bad.

It much depends on whether or not you need the income or you have use for the lump sum.

How much state pension will you get? The age related allowance for over 65 is currently £22,900. With the basic state pension you are going to be pretty close to that. If you get more state pension you will find yourself losing some of that extra allowance and will end up paying a marginal tax rate of 31% as opposed to 20%.

DavidHayton

Rack_Failure wrote: »

Hi
I'm 57, taking VR but not sure what to take with company pension, ie pension or lump sum & reduced pension.

Pension £17,978
Lump sum £87,142 with reduced pension £13,071

What looks like the best deal and how do you calculate it?

Cheers.

Some people don't think about this at all: they take the lump sum, spend it on a stonkingly good party and when the head has cleared, live quitetly on the £13k pension until the state pension bumps the total back up to about £18k.

However, others are more cautious. The key question then is, if you take the lump sum - and invest it - can you produce a return better than the pension that has been forfeited? I think that you would struggle, especially if your pension is indexed linked, but you would need to do your own research (for example, http://www.ft.com/personal-finance/annuity-table) or see an IFA.

David

kidmugsy

You might like to ask the Pension Service to give you an estimate of what your State Pension will be when you reach that age. Then if you think you'd be happy with the combination of State Pension and the smaller occupational pension, you could use part of the lump sum to bridge the gap, part for fun, part for investment and part for rainy day money.

Loughton_Monkey

The best way to look at these things are to work out the equivalent 'annuity rate'. This, in your case, is 5.63% - and is represented by the extra pension you get, divided by the lump sum you forego in return.

For a 57 year old male, assuming it is inflation proofed, 5.63% is a 'reasonable' to 'good' figure. But the extra income is taxed. Your lump sum would not be taxed and could be drip-fed into ISA's to avoid tax on interest/investment income.

Some pensions offer fantastic rates in the order of 8.33%.

But in a more marginal case like your own, there is no absolutely correct answer either way. Do what you would prefer to do based upon your own wishes for cash flow. If your objective for the lump sum would be 100% to 'invest' it and draw down income for the rest of your life, then taking the 'full' pension screams out as the better answer. If not, then take the lump sum.

haddock22

of course dont forget if you take the lump sum and then drop dead the next day your partner would get all the money as opposed to a pension that would just stop or be greatly reduced.