Lump sum, take it or leave it?

kenshaz

dunstonh wrote:

With Final salary its actually quite easy from a monetary point of view as you can see exactly what you are giving up in income by taking the lump sum. You are given the income figures with and without lump sum taken.

So, you can look at the difference and then work out if that lower income can be made up by investing the lump sum.

Then you can bring in the opinion areas such as is it better to have the lump sum in your hand or not. Remember that capital expenditure will still be need in retirement. Its not all about income. Boiler replacing, new car, decorating, repairs etc.

The capital requirements that you mention are they the same as EDINVESTOR mentioned in his post.

prudryden

kenshaz wrote:

The capital requirements that you mention are they the same as EDINVESTOR mentioned in his post.

Sorry Ken - What capital requirements did ED mention? I can't find it. Many thanks

kenshaz

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There are a lot of people who have high pension income but are a bit short of capital - especially since kids started to visit the "Bank of Mum and Dad" asking for a deposit on a property. :rolleyes:

Home renovations ( especially if people need any special facilities due to illness/disability) can be another reason for wanting a smallish mortgage after retirement.

An offset might be a good bet in the OP's case, perhaps?

You can see there might be demand in future (especially from people with less valuable properties who would find it hard to trade down) for a kind of "bridging" retirement mortgage product, starting off as an offset, with the option of conversion to equity release later, depending on how things go.

Prudryden it was on another thread .sorry

Victors_Bruvver

EdInvestor wrote:

Nobody can say much to help the OP until he provides more info about what type of pension he has and what deal he's offered on the lump sum, including the figures.

As someone said earlier it should be a no brainer of a decision but just wanted to be sure it was the right one to take. The "offer" Ed is a final salary pension of 23K and no lump sum or a reduced pension of 15K and a 100K lump sum. The latter you could do an awful lot of "damage" with have a great round the world holiday, new car etc., but down to earth as I am only 60 and have, what, at least another 10 to 15 years perhaps even more as seems to be the norm these days so it has probably got to be invested wisely.

EdInvestor

The "offer" Ed is a final salary pension of 23K and no lump sum or a reduced pension of 15K and a 100K lump sum.

I'd say that's a bit of a no brainer in that 23k is in the nasty black hole area between 20 and 25k where you lose the age allowance disproportionately.

You could invest the lump sum and get a return in the 4-5% area for virtually the same net income as you'd get taking the pension.

bunking_off

To stick my ore in, would have thought this all comes down to how healthy your family's been. Options are £8k additional retirement income per year, or invest/slowly draw down on your £100k lump sum.

If my maths are correct, based on 5% investment return and you surviving for 15 years, £100k would give you approx £12-13k extra income with the above strategy. E.g. year 1 with £100k you'd pick up approx £5k in interest, spend £7-8k of the capital; yr 2 as your capital had dropped your interest would only be £4800 so you spend more capital etc until at yr 15 you get next to no interest and are solely spending the last dregs of the capital. Of course, this assumes you want to spend the inheritance but your children wouldn't see any pension you didn't live to pick up, so why not? Plus, this approach has the advantage that if you do pop your clogs early, someone will get an inheritance.

If you don't think you'll last 15 yrs the economics become more compelling, think you'll last longer, less compelling (indeed guess wrong & you'll have to fall back on the £15k alone).

Given my mother's side has a reputation for not lasting beyond their 60s, know which option I'll be taking....

Edinvestor and Dunstonh are far, far more qualified to comment though...

dunstonh

Earnings over 20,100 for a 65 year old start to see a reduction in the age allowance. Think of this as an additional tax. This can be as much as £524.70 a year extra in tax being paid.

Taking the lump sum of 100k and getting 5% net (which is achievable guaranteed at the moment), that increases the income back to the same level but puts £100k into your pocket.

Also on death, whilst the pension would drop 50%, the income from the lump sum wouldnt.

There would be no real drag on the income as the extra £8000 would be taxed at basic rate as well as hitting a chunk of the age allowance. So, with those deductions would take you to around £6000. £100k @ 5% net is £5000 so its only a £1000 a year difference. In simple terms it would take o ver 100 years to lose the £100k.

With a properly invested spread, that 100k should average more than 5% net over the medium term and cover that £1k difference as well.

Cacran

You sound like just the chap I need to ask, Dunstonh. Oh goodness, my OH is confused.I can't help him. He is in a works pension scheme. When he joined the company over 20 years ago, it was to retire at 60. they have moved the goalposts! the pension scheme will be ended at the end of December. Today we got the form where he has to take an option. that has to be in by 20th Dec. He can still retire at 60, apparently but we have to choose what to do.

these are briefly the choices: Move to new 'hybrid' pension accrual basis and agree to deduction from pay of contributions @ 5% qualifying pensionable salary and 4% of excess pensionable salary or: Join new Defined contribution section of the scheme where we have to choose what contributions between 2 and 5% we want deducting from Pensionable Salary or: Opt out of the scheme altogether.

We have no idea what to do. We do not understand it and am very wary of being ripped off. My husband is 53 so has a few years to go. Can you help please????

Cacran

Oh sorry, just read it and missed out that they now want them to retire at 65 with the 60 option.

Gorgeous_George

It all depends on life expectancy.

At 30 I had to choose between £10K lump sum or £100 per month (not index linked). I took the £100 per month as I expected to live for 40 years (26 left!). I'd have needed almost 10% tax free to make up the £100).



GG