Lump sum, take it or leave it?

prudryden

I am still missing something here Dun?Ed. Can you go through those figures again just why it is better to take the lump sum - leaving out any need for future large expenses and that the surviving spouse will only get full pension for the first 5 years and then 1/2 after that. I don't doubt what you are saying just that I can't get my head around an annual shortage of £8,000 vs. @£5,000 return on £100,000 and assuming you will spend the £5,000 not compound it.

dunstonh

prudryden wrote:

I am still missing something here Dun?Ed. Can you go through those figures again just why it is better to take the lump sum - leaving out any need for future large expenses and that the surviving spouse will only get full pension for the first 5 years and then 1/2 after that. I don't doubt what you are saying just that I can't get my head around an annual shortage of £8,000 vs. @£5,000 return on £100,000 and assuming you will spend the £5,000 not compound it.

I will do it in stages so you can see.

Taking the £23,000 with no lump sum.

The £8000 extra income is gross. So, you need to deduct 22% off that straight away reducing it to £6240 net of basic rate tax.

It also takes the income over the £20,100 threshold creating a further tax liability because the age allowance will be reduced by £1 for every £2 over. In this case that adds further taxation of £319 (£23,000 minus 20,100 = £2900. £2900/2= £1450. £1450x22% tax = £319).

So, the net income is now £5921 (£8000 minus £1760 minus £319)

Taking the £100k income

If you are ultra ultra cautious you can get a guaranteed net income of 5% at this time for life. So 100k x 5% = £5000. So, the difference in this case is £921 a year.

If you are low risk, you would invest the money and still take around 5% as that is a generally safe figure to take but invest in a lower risk spread of funds. You would aim for an average of 7-8% a year (5% for income and the rest to cover inflation). You wouldnt have a large stockmarket content in there but had you done that before the crash (so to include 2 poor years in there), you would still have achieved 5% income and a growth on the capital. Periodically, you could increase the income to reflect 5% of the increased value. Therefore building in some safety against inflation.

I can give you a real example of someone that did it 5 years 4 months ago on a low spread of £100k who has taken £5000 a year as income (although two years also took a further £2500 each time) and now sits at £117,054 at opening of business this morning. That was on an 80% non stockmarket/20% stockmarket spread with rebalancing.

EdInvestor

It's important to remember that dividend income for a basic rate taxpayer is effectively tax free and further income can be taken annually tax free via the capital gains tax allowance of c.9,000 pounds p.a.

In the case of the OP, you would want to put the 100k lump sum into the tax free ISA wrapper as fast as possible every year,,using both allowances 2x7k a year, with the higher earning investments going in first.

This is because although basic rate taxpayers don't pay tax on their divis due to the tax credit, they do count towards their total income as far as the dreaded age allowance is concerned.So once over 20k the taxman looms if the investment is not in the ISA.

Note that this problem relating to the tax free allowance only applies to people earning a taxable income between 20k and 25k (raised annually).Basic rate taxpayers with taxable income above or below this level are not affected.

It's really sensible to arrange it so your income is split between pension (taxable) including state pension, and ISA (tax free) with 20k as the dividing line.

prudryden

Would it make a difference if you were, lets say, on an average tax deduction level of 35% anyway, because of other income. I understand that you can invest part of the £100,000 in other areas not as guaranteed as the monthly payment from the pension company, but assuming like for like which would maybe include a AA or better corporate bond (e.g. Barclays Bank) maturing not further than 5 years or so. Your only risk here is that interest rates go up and the bond goes down meaning you have to hold until maturity.

margaretclare

bunking_off wrote:

To stick my oar in, would have thought this all comes down to how healthy your family's been. Options are £8k additional 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....

I've met this argument before but I'm not too sure it holds good any more. We've all benefited from better living conditions and better health-care - things that earlier generations didn't have.

In my case, as an example, I could have said the same about my maternal line. Not one of them, as far back as my great-great-grandmother, survived past the mid-60s, and some departed earlier than that. All of them lived terribly hard lives in poverty and incredibly hard physical work, with no health-care and little comfort of any kind, still less any luxury.

I've now made it to 71. My generation had enough to eat thanks to wartime rationing, but we weren't overfed and we were active. I've benefited from all the improvements in housing, health-care, and comfortable living and working conditions. I've never had to do any of the things my female forebears had to do to scratch a living. People are now living longer, and these factors must have some relevance.

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

Yes, agreed, which is why I pointed Victors_Bruvver in this direction.

Margaret

bunking_off

margaretclare wrote:

I've met this argument before but I'm not too sure it holds good any more. We've all benefited from better living conditions and better health-care - things that earlier generations didn't have.

Hope you're right margaretclare!! However, without being pessimistic I'm missing a kidney and have the family disease (diabetic)...not to say that I'm counting on popping my clogs early, more that I'd rather have my mitts on the money so I win either way - die young & my family get an inheritance, carry on & I have the bonus of being alive...

For me, the thing that our experts haven't particularly emphasised is the end game. Barring widows pensions, if you don't take the lump sum when you die your pension goes with it. The figures that Ed_investor/dunstonh have shown still leave £100k+ left to leave as a legacy. To compare like with like you'd probably work on spending the lot...

missy_brambles

I believe that my company are about to offer me £30000 and an early pension at 50. I calculate that I would be able to take £30000 from my pension and that would leave me with £4500 annual pension. I

missy_brambles

sorry about that, got over excited.. I believe that my company are about to offer me £30000 and an early pension at 50. I calculate that I would be able to take £30000 from my pension and that would leave me with £4500 annual pension. I am also in receipt of a widows pension of £6500. I desperately want to pay off my £45,000 mortgage. I have no idea how long I will live. Having lost my husband at 38 yrs of age, I am very wary about expecting to reach retirement. Therefore, I intend to take the lump sum, pay off my mortgage, and get another job to enable me to live in the manner to which I have become accustomed. Does this seem sensible?

EdInvestor

Is the 4,500 pension index linked for inflation? What about the widow's pension?

What happens at state pension age? How much are you going to get from the two pensions (bear in mind you will only need 30 years for the full basic, plus there should be S2P on top.)

Forecast here

If you're on target for adequate state pensions on top of the other two and they are index linked, your plan looks good to me.