Should I take a pension early?

mgdavid

if you don't need the lump sum don't take it; the higher pension - especially if index-linked as most are- will be much appreciated later on, believe me!

jamesd

The lump sum depends on the specifics of the pension. In some cases it'll be best to take it all - personal pensions - in others to take none - some final salary schemes. Others it may be best to take some but not all. Best to ask again when it's a bit close to making the decisions for each pension and say how much lump sum you get for a particular reduction in ongoing income. Deals like 12:1 (twelve times the reduction income) are almost always once where it's best to take no lump sum, while deals at 20:1 or higher can make it a good idea to take the maximum.

Loughton_Monkey

For a typical "money purchase" pension pot, the issue of when to take them and whether to take the lump sum is largely personal choice or 'need'.

Vesting a pension is basically doing two things: Firstly, you are converting a potentially volatile equity investment into a "safe" saving vehicle in which the proceeds of bond yields (that lie behind the annuity) are paid to you, with a bit of your capital back. Secondly, you are getting "insurance" for longevity. If you live a very long time, you still get paid. This is balanced by the reverse situation in which dying 'young' means the pension dies with you [unless you have paid for spouse pension or guarantee].

There can be small advantages (tax relief) on taking the 25% lump sum, but if you put that into a savings plan and draw down the interest, plus a bit of the capital, every month to live on, then you might just as well have thrown it into a higher annuity.

jamesd

No real need to buy an annuity here - most of the income comes from final salary work pensions and later the state pensions. But the value of any defined contribution pensions might be too low to make drawdown worthwhile (under £10,000 say).

bobthedambuilder

Just backing away a bit from the financial analysis of your situation, have you considered when the money would be of more benefit to you? Now, you're hopefully healthy and would enjoy a bit extra (you've said so yourself in your OP). When you're 75, will you need/want as much? It's a personal lifestyle decision for you. If it were me, I'd be leaning towards the money now.

philbert

Thanks to all for your contributions. Perhaps it’s time I gave a few more details if you can bear it.

Much the biggest pension is in the Local Government scheme, due at 60, index-linked (CPI now, seemingly no upper limit), conversion rate for pension to lump 1:14.29 (there is another option to give me a larger lump at 1:12 which I’m ignoring). At the moment I’m drawn to maximising the pension and not taking a lump at all.

The next one, also due at 60, also final salary, similarly index-linked, conversion rate 1:18.7. I’m thinking of maximising the lump.

The next one, again final salary, conversion rate 1:17, not due till 65. With this one the inflation-proofing is more complicated and seems important in deciding both when to take it and whether to take a lump. 60% of it gets increased annually by a minimum of 3% up to RPI with a maximum of 5%, 13% by RPI up to 5% and the final 27% by RPI up to 2.5% (!). The minimum 3% and the RPI rather than CPI aspects suggest to me that it could give me particularly good annual increases if inflation is reasonably low (though it would seem I’d lose out if it was high because of the maxima) so I’m drawn to a) taking it early (at 60) and b) maximising the pension.

The last one is very small, due at 65, conversion rate 1:14.6, no annual increases. As there is no index-linking, I’m thinking of a) taking it now & b) maximising the lump.

I’d love to know what people think of my plan.

bobthedambuilder

^^ Sorry, count me out of further comment. That lot might as well be written in chinese as far as I can understand it.:eek:

philbert

Sorry Bob. This is the world of pensions I think. Most of us struggle. As you can imagine, I've spend a good deal of time sweating over an Excel spreadsheet to get this far. Thanks for your earlier post. I tend to agree that the money is more use to me now than when I'm past it but I want my choices to be financially sound.

SeniorSam

This is an excellent and informative post and something I have been looking into myself recently. I do not know enough about pensions, particularly the way to consider commuting a 'Pot', whatever sort it may be.

I am a little surprised that there has been no mention of 'short term annuity', which I have been looking at recently, as it may be a 'stop gap' to consider for some, although I don't know if it would be appropriate for the OP. Any thoughts on that ?

What has made me curious is that last April, I obtained an illustration for an after TFC sum of £198,00 which would produce a short term annuity with 5 year guarantee and a 50% spouse pension, escalating by 3% pa. That figure was £9,732.12. A few days ago, I looked at the pot, which has increased by £20k since then and would now give a sum of £204,640 to buy the short term annuity , but the figure has dropped to £9,484.24 p.a.

Obviously going down as I am getting older - no joke! I am now 71 years of age and although my SIPP fund is growing well (only one fund dropped by £430), do I hang on and hope for continued growth, or will it simply balance out in another 4 years time when I'm 75.

Drawdown was the right way to go ONCE, but will it still work well? Any crystal balls out there.

Sam

Sorry, in hindsight I should have put this in another thread. Apologies to all
Sam

mgdavid

philbert wrote: »

Thanks to all for your contributions. Perhaps it’s time I gave a few more details if you can bear it.

Much the biggest pension is in the Local Government scheme, due at 60, index-linked (CPI now, seemingly no upper limit), conversion rate for pension to lump 1:14.29 (there is another option to give me a larger lump at 1:12 which I’m ignoring). At the moment I’m drawn to maximising the pension and not taking a lump at all.

The next one, also due at 60, also final salary, similarly index-linked, conversion rate 1:18.7. I’m thinking of maximising the lump.

The next one, again final salary, conversion rate 1:17, not due till 65. With this one the inflation-proofing is more complicated and seems important in deciding both when to take it and whether to take a lump. 60% of it gets increased annually by a minimum of 3% up to RPI with a maximum of 5%, 13% by RPI up to 5% and the final 27% by RPI up to 2.5% (!). The minimum 3% and the RPI rather than CPI aspects suggest to me that it could give me particularly good annual increases if inflation is reasonably low (though it would seem I’d lose out if it was high because of the maxima) so I’m drawn to a) taking it early (at 60) and b) maximising the pension.

The last one is very small, due at 65, conversion rate 1:14.6, no annual increases. As there is no index-linking, I’m thinking of a) taking it now & b) maximising the lump.

I’d love to know what people think of my plan.

all sounds extremely sensible; and how fortunate to have several index-linked final salary pensions - you will be better off than many contemporaries, so keep safe and enjoy :-)