Deferred pension cash lump sum choice of 2! Help

RIPPED-OFF_2

Hello All

My deferred company pension will be paid out in a few months when I'm 60 I am in a quandry as to which option I should choose:-

OPTION 1

CLS = £14,473 PLUS PENSION £6618 PER ANNUM

OPTION 2

MAX CLS £32,262 PLUS PENSION £4839 PER ANNUM

I plan to continue working for another 2 years until state retirement or longer if only for my sanity. Have small amount in savings in an ISA £12k. I don't need the pension at present so I can save it.

I gather the cash lump sum is tax free so I am tempted to go for option 2 but don't want to make a hasty decision. I'm currently in a pension scheme pays out at 65.

If only the one option I would not have a problem I have read so much trying to take it all in you guys/gals on here are so helpful & knowledgeable I welcome any comments/suggestions.

Thank you in advance

Linton

Does your pension rise with inflation? If so....

My interpretation is that:

You would be gaining a lump sum of £18000 and losing a pension (after basic rate tax) of about £1400. If you invested the extra lump sum to provide your lost income you would need an annual return of 7.7% + inflation. IMHO there is no way you could realistically expect to achieve it.

On the other hand circumstances could make taking the extra a good option. For example, if it was the only way you could repay an expensive debt, or if you had good reason to believe your life expectancy was substantially less than the average, or if you didnt need the long term income but had a good use for a lump sum.

mgdavid

I'm surprised you have to take a lump sum at all - are you sure there's not an option just to take a larger pension? that's what I'd do. Linton's perfect summary says it all :-)

RIPPED-OFF_2

Thanks for you replies much appreciated. Yes, pension will rise with inflation I agree Linton's summary makes a whole load of sense and now I have seen a percentage I have a far better understanding.

Just to complicate things there is an option for a smaller cash sum with increased pension I just have to enter an amount. I am being drawn to taking a smaller cash lump sum say £10k is there a formula to work out how much pension that would be....maths is not my strong point

Zelazny

That's a commutation factor of 10:1 - that's pretty poor. As such, I'd be inclined to take as little cash as possible, and have as big a pension as possible.

You ask if it's possible to work out the pension you'd get with a smaller lump sum - unfortunately without knowing the make-up of the pension and lump sum we can't be certain, however if the commutation rate is constant (at about 10:1) your benefit options for 0 or £10k cash would be:
£0 Cash lump sum plus £8,065.38 pension
£10k cash lump sum plus £7,065.32 pension

Note - these figures may be wrong, but should give some idea of the benefits.

jamesd

Do find out about the reduced lump sum option. Given the commutation factors here it's likely to be best to take low or no lump sum. In a couple of years you can save a nice lump sum...

Or you could use the ongoing pension income to pay into a defined contribution pension and take a 25% tax free lump sum from that. Or maybe say something about your current work scheme in case that offers a good deal - maybe it's salary sacrifice/smart pension and you're a basic rate tax payer?

RIPPED-OFF_2

Thank you for your replies. I phoned the scheme administrators and the commutation rate is 10:1 so poor like you say. I have decided to take a minimal cash lump sum and opt for a bigger pension makes a great deal of sense now.

I will look into a defined contribution pension and also see what my current Uni pension scheme can offer.

I am very grateful for all your comments/suggestions
:j

jamesd

10:1 is one of the worst commutation rates I've seen. Probably the worst, I don't remember any single digit commutation rates. Taking maximum income looks like a good move.

RichandJ

jamesd wrote: »

10:1 is one of the worst commutation rates I've seen. Probably the worst, I don't remember any single digit commutation rates. Taking maximum income looks like a good move.

I remember quite a few schemes back in the 80s, 90s & even early 2000s having comm factors of 9.0 (male) & 9.8 (female) at age 65. I agree that 10 at 60 is pretty low these days though.

OP, might be worth bothering the admin again just to check there's not a factor review going on at the mo. You never know your luck - the admin bod may not know so ask them to check with the scheme actuary. If there is & increased rates are in place before you take your benefits (or even if you defer for a while, if possible) it may change the logic re taking cash.

RIPPED-OFF_2

Unfortunately, there are no other options available it's an old deferred pension from mid 80's to 1997 through redundancy.

Still think I should take some cash just in case of emergencies, to think I was going to take the full cash lump sum:eek: that would have been a costly mistake.

Just so glad I posted on the forum I value all your replies:)