Lump sum versus increased pension

Andrew12_2

I am about to retire aged 52. I have been offered a choice, Gross pension of approx £22,850 or a lump sum of £50,000 reducing my gross pension to about £20,500. I don't need the lump sum to pay off any mortgage. Would I still be better taking it and investing it or should I take the bigger annual pension.

meg72

I would take the lump sum everytime,never know how long before pop clogs,and that is a fantastic pension.

xylophone

Often discussed.
See https://forums.moneysavingexpert.com/discussion/3771733
http://candidmoney.com/questions/question430.aspx for starters.

Linton

My quick assessment of the situation is...

You are gaining £50K, I assume tax free, and losing £2300/yr. I assume you pay standard rate tax so £2300/year=£1800 approx net. I also assume your pension is index linked with no cap. And another assumption - your health is good and therefore can expect to live another 30-40 years.

If you invest £50K in say dividend paying shares you can get perhaps 5%-6%, but if you were to take 3.5-4%, tax free if you are a standard rate tax payer, and re-invest the remainder perhaps you may keep in line with inflation. On the other hand if you were to buy a guaranteed RPI linked annuity with the £50k then you would only get about £1100 /year.

So from a purely financial point of view, on crude assumptions, it looks pretty marginal. You could of course do much better, or much worse depending on the market and how you invested the money.

If it was me and I had to have the income to meet my required standard of living then I would take the pension. If I was happy to live on the lower pension if necessary but of course would like more then I would take the cash.

But that's me, your attitudes may well be different.

The cash you are getting for the pension reduction looks rather more generous than some examples that have appeared on this forum.

Andrew12_2

Linton wrote: »

My quick assessment of the situation is...

You are gaining £50K, I assume tax free, and losing £2300/yr. I assume you pay standard rate tax so £2300/year=£1800 approx net. I also assume your pension is index linked with no cap. And another assumption - your health is good and therefore can expect to live another 30-40 years.

If you invest £50K in say dividend paying shares you can get perhaps 5%-6%, but if you were to take 3.5-4%, tax free if you are a standard rate tax payer, and re-invest the remainder perhaps you may keep in line with inflation. On the other hand if you were to buy a guaranteed RPI linked annuity with the £50k then you would only get about £1100 /year.

So from a purely financial point of view, on crude assumptions, it looks pretty marginal. You could of course do much better, or much worse depending on the market and how you invested the money.

If it was me and I had to have the income to meet my required standard of living then I would take the pension. If I was happy to live on the lower pension if necessary but of course would like more then I would take the cash.

But that's me, your attitudes may well be different.

The cash you are getting for the pension reduction looks rather more generous than some examples that have appeared on this forum.

Thanks,
my gut feeling is to take the lump sum. If I left it in a 5yr FRB even at todays crappy rates I could still get 3.5% after tax. That would be just about equal to the £1800 reduction in my pension and if I left the interest in it would outstrip it after year 2. My pension isnt indexed linked until 55 so I see this as a way of protecting it. Plus I still have all that capital for a rainy day(or holiday) Am I making sense or talking rubbish?

jamesd

You're making some sense but you're taking the inflation and life expectancy increase risk. That's part of why deals like this are usually a bad deal long term.

If you take the lump sum you need to get a return of 4.6% plus inflation to break even long term. That's not too tough with investments but it's pretty much impossible with savings accounts.

Using savings accounts is just a way to fritter the money away over time due to inflation. If you're going to do that, take the higher pension. It'll leave you better off.

Your offer is one of the better ones out there. It could be made to work very well, if you were to use investments.

If you're unfamiliar with investments you might consider this sort of thing (using too few investments to keep things simple):

1. Invesco Perpetual Monthly Income Plus in a S&S ISA so the income is tax free. Pays 7% yield/interest. Stick £26,000 in this and comparable income funds and the tax free income will match the after tax income from the pension income you're giving up to get the lump sum. Have this paid into an instant access savings account - it pays monthly but not necessarily evenly.

2. Put £3,600 into the instant access savings account, two years of net income. Set up a standing order from this to pay you the £150 a month income that you'd get from the pension. Now this savings account acts to smooth the income out and provide a nice buffer so you don't have to worry much about income variations short term but can adjust every few years.

3. Put the remaining £20,400 into a range of other investments like Invesco Perpetual Income, Jupiter Merlin Growth Portfolio and a range of others for capital growth. The job of this part is to grow long term enough to keep you ahead of inflation so you can move money to pots 1 and 2 periodically to keep your ongoing income rising with inflation.

I've mentioned some funds but those are just examples. There are many similar ones, and much more choice particularly for pot 3. These are just something to help you get started.

getmore4less

£50k for £2300 net £1800

to compare against pension you need to use 100% drawdown

So if you asume the return will just keep pace with inflation(pension indexing).

£50000/£1800 is 27.8 years, 1% taked ot over 32years, 2% over 40years.

What other assets do you have and how tight is living of the reduced pension.

if you plan to work then you could build up savings quickly if you can live of the pension.


The cash would allow you to do some things over the next few years thet may not be possible with pension income alone.

With the cash, if you don't spend it you have something to leave, also should circumstances change and life expectancy drops you can spend it earlier.

Bigmoney2

Also the 50k is the max you can take tax free, you can take any amount up to this, so could consider for example taking 15k and pension trade off will not be as great. It depends if you already have savings to cover any emergencies/large purchases.