Final salary pension and taking a lump sum

accobra

I have just taken ill health early retirement at 53 years old. I have a finly salary pension. My condition is not life threatening, so hope fully I have a good few years ahead of me yet!
Ihave the option of taking a full pension of £10,890 or a lump sum of £53,940 and a reduced pension of £8,091.
The commutation rate is £19.2667 cash for every £1 per annum scheme pension given up.
I am unlikely to work again and my husband has a couple of small pensions but is not due to retire for another 10 years.
Should I take the lump sum or part of the lump sum and invest in an Isa? Or keep the full pension?
We have paid off most of our mortgage, so don't need the money for this purpose.
Thanks

CLAPTON

is the pension indexed linked to inflation

accobra

Increases are made in April each year up to a maximum of 2.5%

Linton

The commutation rate looks better than most we see here. So my view would be the the case for taking the pension or the cash isnt that strong either way.

The possibility of greater ill health than average, if not now but perhaps in the future, also complicates matters.

What do you want to do with the money? If all you were going to do was to put it in a cash ISA and take the income you would be better off with the pension. If however you were going to pay off high interest debts or even a mortgage (perhaps waiting til interest rates rise) you may be better off taking the cash.

kidmugsy

That's a decent commutation rate. The inflation-linking on the pension is not particularly good. If future high inflation is a worry to you, you could take the lump sum, and then you and your husband could each buy £15k in index-linked savings certificates from ns&i. That might help you sleep soundly. (They have a 5 year maximum life but you can withdraw money on good terms after just one year.)

Then you could one or both put £5340 into a Coventry BS 5 year 5%p.a. Cash ISA: that would be a way to get an interest rate that will seem pretty good if inflation doesn't take off.

That leaves at least £13260. Perhaps you'll want to keep some as a rainy day fund, with a good combination of convenience, instant access, and interest rate. If you'd like a bit more index-linking you could always do it with one of you holding some more index-linked savings certificates In Trust for the other. Or you could go for one or two S&S ISAs and within them buy ... well, how about ETFs in Physical Gold? You also have my full permission to pay for a nice holiday.

In a way, it comes down to the question: what are you trying to protect yourself from?

If this sort of pattern of saving, investing (and spending) doesn't appeal, you could always just take the maximum pension. But the chance to get a good lump of capital, tax-free, is not likely to recur. Who knows how valuable it might prove to be in future?

Bigmoney2

How much do you need to live on?
I would base the decision on what your outgoings are, do you have any savings?
If no savings then some lump sum is probably a good idea, incase you need money for say a new car, new boiler etc.
However too much in savings (lump sum) could make you inelligible for means tested benefits, either now or in the future.
How secure is your husands job, if he gets made redundant during the next 10 yrs he could find getting another job difficult so you could be left with just your income until he can draw his pensions.

kidmugsy

Here's a way to look at it. If an aunt died and left you £53940, would you use it to buy a taxable pension that paid £2799 per annum, increasing by at most 2.5% per annum? Would you?

Linton

Why not? If I had no dependents and if that was what would guarantee me enough to live on for the rest of my life - quite possibly. If it was part of a portfolio of income streams and I wanted something safe to balance out more volatile investments, again it may make sense.

It doesnt look a bad deal compared with other annuities.

kidmugsy

Linton wrote: »

Why not? If I had no dependents and if that was what would guarantee me enough to live on for the rest of my life - quite possibly. If it was part of a portfolio of income streams and I wanted something safe to balance out more volatile investments, again it may make sense.

It doesnt look a bad deal compared with other annuities.

Fair enough. So the question is whether accobra feels the same way. She presumably would find it impossible to match the annuity terms at age 53, unless she got impaired health terms: but why am I presuming? Could it be worth her while to get a quotation?

kidmugsy

Linton wrote: »

Why not? If I had no dependents and if that was what would guarantee me enough to live on for the rest of my life -.....

I've been reflecting on this. I would not myself be confident that "that was what would guarantee me enough to live on" because the inflation-linking is so limited. It's not that I especially fear a Weimar type of hyperinflation, more a 1970s Heath-Wilson inflation. That would be quite enough to ruin many people on a fixed annuity or a 2.5%-linked pension. So I would be sorely tempted to take the lump sum and bung almost all of it into ns&i nflation-linked savings certificates, as I mentioned above. Of course, your fears may be different.