Occupational Pension Dilemma?

vigman

Second attempt...the tables scrambled on posting


Hi

I'm soon taking Tier 1 Ill Health retirement in my 59th year. The figures I seem to be quoted are a choice of 67K lump sum and 10K per annum or 20K lump sum and 14K per annum. At first I thought that the latter was the obvious choice but doing the sums I found that it won't be until I'm 69 that I start to 'lose out' by taking 4k less pa (however I will get state pension at 65):

AGE Lump Sum @ 58 £67,000.00 OR Lump Sum £20,000


58 £10,000.00 £14,000.00
59 £10,000.00 £14,000.00
60 £10,000.00 £14,000.00
61 £10,000.00 £14,000.00
62 £10,000.00 £14,000.00
63 £10,000.00 £14,000.00
64 £10,000.00 £14,000.00
65 £10,000.00 £14,000.00
66 £10,000.00 £14,000.00
67 £10,000.00 £14,000.00
68 £10,000.00 £14,000.00
69 £10,000.00 £14,000.00

Both totals = c £188,000.00 by age 69

Which option would astute MSE folk take? Obviously the 67K could be fed to interest earning accounts (I'd have to release c 10K pa from this). I am on standard Tax allowance

My head is spinning, so any advice appreciated, please?

Vigman

jem16

At a commutation rate of 11.75% which is dire, I would go with the higher pension and lower lump sum. Your £67k lump sum is never going to make up for the loss of income. If you had plans to spend it fair enough.

How would you plan to realise £10kpa from £67k?

I would also assume that the pension is index linked and you don't seem to have accounted for this in your calculations.

bigfreddiel

jem16 wrote: »

How would you plan to realise £10kpa from £67k?

The above makes no sense!

"....choice of 67K lump sum and 10K per annum or 20K lump sum and 14K per annum..."

Why would you want to know how £67k would make £10k pa?

What you really want to know is how to make £4k pa from £47k.

And the answer is you would need 8,5% tax free interest and from some posts most people think this is an achievable rate with a bit of risk

fj

vigman

Apologies for lack of clarity:

.....don't shoot me, please, but this is a Local Govt Final Salary pension scheme, so no annuities etc, just a choice of a higher lump sum and lower pa pension or vice versa. Annual pension linked to pay rise, so frozen in my case for the last 5 years and probably never more than 1% increase..



I can choose a 67K lump sum and then get paid 10K per annum, or choose a 20K lump sum and get paid 14K per annum.

Does this make any more sense??

TIA

Vigman

jem16

bigfreddiel wrote: »

The above makes no sense!

"....choice of 67K lump sum and 10K per annum or 20K lump sum and 14K per annum..."

Why would you want to know how £67k would make £10k pa?

In answer to this statement from the OP.

vigman wrote: »

[Obviously the 67K could be fed to interest earning accounts (I'd have to release c 10K pa from this). I am on standard Tax allowance

bigfreddiel wrote: »

What you really want to know is how to make £4k pa from £47k.

No I didn't.

And the answer is you would need 8,5% tax free interest and from some posts most people think this is an achievable rate with a bit of risk

Do tell us how.

jem16

vigman wrote: »

Apologies for lack of clarity:

.....don't shoot me, please, but this is a Local Govt Final Salary pension scheme, so no annuities etc, just a choice of a higher lump sum and lower pa pension or vice versa. Annual pension linked to pay rise, so frozen in my case for the last 5 years and probably never more than 1% increase..

LGPS increase for this year will be 5.2% (CPI last September).

Are you suggesting your increase is different to what is normally done?

http://www.lgps.org.uk/lge/core/page.do?pageId=101544

I can choose a 67K lump sum and then get paid 10K per annum, or choose a 20K lump sum and get paid 14K per annum.

Does this make any more sense??

TIA

Vigman

It was clear the first time.

Question to you?

Do you need the higher income?

vigman

I seem to be getting some other folks quotes attributed to my original posting.

What I meant to say was that if I took the 67K lump sum and annual pension of 10K, I would invest the 67K but allow for RELEASING 10K of this saving each year for spending to make my annual income 20K.

Therefore of the 67K I could put say 17K in a 6 year high interest account, 10K in a 5 year account, 10K in a 4 year account, 10k in a 3 year account, 10K in a 2 year acc and 10K in my current account for the first year's spending.

Vigman

vigman

Thanks Jem

I need the highest income.

In your first reply, you asked "How would you plan to realise £10kpa from £67k?" In my last posting I explained that I would spread the 67K lump sum in various accounts and then cash 10K of them annually and combine this with my annual pension of 10K.

Thanks for the interest info. I was told by work (and not the LGPS) that any rise would be the same as our current pay structure in a university so will check this out.

Vigman

jem16

vigman wrote: »

Therefore of the 67K I could put say 17K in a 6 year high interest account, 10K in a 5 year account, 10K in a 4 year account, 10k in a 3 year account, 10K in a 2 year acc and 10K in my current account for the first year's spending.

Vigman

Savings accounts will never make up for the loss of £4kpa (more if it's index-linked as normal). You would have to have an account that will pay 10.625% gross just to break even with what you are giving up.

vigman

Many thanks, Jem, excellent, clear reply!

Vigman

jamesd

Since you've a target income of £20k I'll assume that you have a state pension forecast saying that your state pensions will be paying you at least £10k per year so that you can maintain £20k income with a £10k work pension plus £10k state pensions.

Looking at the numbers it appears that if you take the higher lump sum you will be worse off at these ages by these amounts:

70: £ 9k
75: £42k
80: £85k
85: £137k

If you take the smaller lump sum, to maintain £20k income you would need to borrow money starting at age 61, increasing to peak borrowing of £12k at age 64. From age 66 onwards you'd be in credit and ever-increasing surplus.

If no credit is available you could eliminate all but £100 of the borrowing by spending at £18,400 instead of £20,000.

After clearing the borrowing at age 66 your income would be £28k with the smaller lump sum or £23k with the bigger one, a difference that increases each year.

What this means to me is that if you have £12k of savings or £12k of borrowing facilities or can take a smaller income or any mixture you are likely to be substantially better off with the smaller lump sum unless you've reason to expect to die shortly after you reach state retirement age.

In calculating this I've assumed work and state pension increases of 3% a year and 2% as income from capital or cost of borrowing.

pension income		14000		
	pension inflation increase		3		
	spending		20000		
	capital		20000		
	capital interest rate		2		
	state pensions		10000		
					
age	capital	pension	capital  state 	final capital
               income     income pensions
58	20000	14000	400	0	14400
59	14400	14420	288	0	9108
60	9108	14853	182	0	4143
61	4143	15298	83	0	-476
62	-476	15757	-10	0	-4729
63	-4729	16230	-95	0	-8593
64	-8593	16717	-172	0	-12048
65	-12048	17218	-241	10000	-5071
66	-5071	17735	-101	10300	2862
67	2862	18267	57	10609	11795
68	11795	18815	236	10927	21773
69	21773	19379	435	11255	32843
70	32843	19961	657	11593	45053
71	45053	20559	901	11941	58454
72	58454	21176	1169	12299	73098
73	73098	21812	1462	12668	89040
74	89040	22466	1781	13048	106334
75	106334	23140	2127	13439	125040
76	125040	23834	2501	13842	145217
77	145217	24549	2904	14258	166928
78	166928	25286	3339	14685	190237
79	190237	26044	3805	15126	215212
80	215212	26825	4304	15580	241922
81	241922	27630	4838	16047	270437
82	270437	28459	5409	16528	300834
83	300834	29313	6017	17024	333188
84	333188	30192	6664	17535	367579
85	367579	31098	7352	18061	404089
86	404089	32031	8082	18603	442805
87	442805	32992	8856	19161	483814
88	483814	33982	9676	19736	527208

pension income		10000		
	capital		67000		
					
					
age	capital	pension	capital  state 	final capital
               income     income pensions
58	67000	10000	1340	0	58340
59	58340	10300	1167	0	49807
60	49807	10609	996	0	41412
61	41412	10927	828	0	33167
62	33167	11255	663	0	25086
63	25086	11593	502	0	17180
64	17180	11941	344	0	9464
65	9464	12299	189	10000	11952
66	11952	12668	239	10300	15159
67	15159	13048	303	10609	19119
68	19119	13439	382	10927	23868
69	23868	13842	477	11255	29443
70	29443	14258	589	11593	35882
71	35882	14685	718	11941	43225
72	43225	15126	865	12299	51515
73	51515	15580	1030	12668	60792
74	60792	16047	1216	13048	71103
75	71103	16528	1422	13439	82493
76	82493	17024	1650	13842	95009
77	95009	17535	1900	14258	108702
78	108702	18061	2174	14685	123622
79	123622	18603	2472	15126	139824
80	139824	19161	2796	15580	157361
81	157361	19736	3147	16047	176291
82	176291	20328	3526	16528	196673
83	196673	20938	3933	17024	218569
84	218569	21566	4371	17535	242041
85	242041	22213	4841	18061	267156
86	267156	22879	5343	18603	293981
87	293981	23566	5880	19161	322588
88	322588	24273	6452	19736	353048

Inflation-linked increases to the pension income are a critical factor to consider.