Pension tax free lump sum

bord

Any advice would be useful. I've just been made redundant from LA post and as I'm 59 my pension is being paid. Not a large one only £ 8500.00. I've received a letter from them saying I can opt for a larger tax free lump sum. For every £1.00 of pension I give up, I can receive and extra £12.00 lump sum. I can give up £1975.48 and receive a lump sum of £43360,97. My pension would reduce to £6504.00 per year.

I'm not sure what to do. I do aim to look for another job and work until I'm 65. Like I have said any advice would help me decide what to do.

ermine

basically what you need to ask yourself is can you realise a zero-risk return of 1/12 = 8.3% on the lump sum. That's very inlikely, unless you're Warren Buffet.You can usually change up to 25% of your pension into a lump sum. Tax sometimes makes taking the lump sum advantageous, as does using it to pay off a mortgage or expensive loans.

In general unless there are particular reasons the answer is no, don't convert. Unless you have other income, you won't be paying income tax on your pension soon. The tax threshold is £8105 next year and you don't pay NI on a pension, and the tax threshold should go up to 10,000 by 2015.

jamesd

With that 12:1 commutation rate taking a higher lump sum is likely to be a bad deal. You don't just need 8.3% you need 8.3% plus inflation risk-free to match the extra income you're giving up. that's too high a target so the higher lump sum isn't a good option in general.

So better the higher income and looking for another job. If you don't need the extra income when you're in another job you can pay it into a personal pension to get tax relief on it and take a lump sum and income from that later.

atush

I agree, you are better off with the higher pension.

And paying the amt into a personal pension if you are eventually working and earning enough that you don't need it.

Because you were made redundant, are they paying you a redundancy payment? Or did they raise your years accrued in the scheme? They need to/should offer you more than just your current entitlement i think.

ffacoffipawb

bord wrote: »

Any advice would be useful. I've just been made redundant from LA post and as I'm 59 my pension is being paid. Not a large one only £ 8500.00. I've received a letter from them saying I can opt for a larger tax free lump sum. For every £1.00 of pension I give up, I can receive and extra £12.00 lump sum. I can give up £1975.48 and receive a lump sum of £43360,97. My pension would reduce to £6504.00 per year.

I'm not sure what to do. I do aim to look for another job and work until I'm 65. Like I have said any advice would help me decide what to do.

Looks like an extra £22 (not £12) lump sum for every £1 of pension which, allowing for tax, looks pretty reasonable to me.

43360.97 / 1975.48 = 21.95

Unless than lump sum includes a lower lump sum that you would receive anyway?

mgdavid

generally always a bad idea to take lump sum instead of higher pension, but we need more details:
do you have a mortgage still owing?
do you have accumulated debts ?
what are your chances of finding another job?
what are ALL the options being offered to you? - it sounds like they are offering a lump sum + pension or a *larger* lump sum and smaller pension, can you take it ALL as pension i.e. no lump sum?
do you know your rights in terms of LA pension options or are you just accepting those options they are offering you? (don't assume they are working in your best interest!)
you may be best to take professional advice?

bord

Hi
Thanks for advice. I received £29,000 redundancy plus £20,000 lump sum from pension ( all tax free). I don't own my own home and have a bank loan on which I owe £9,000 ( thinking of paying this off ). Luckily I have been offered a couple of jobs but a lot less that I was previously on,

gadgetmind

bord wrote: »

as I'm 59 my pension is being paid. Not a large one only £ 8500.00.

Err, that's a rather large pension which would require a pot of well over £200k to have accumulated if you were paying for it yourself. This is 4x what most people in the private sector manage to accumulate by state pension age.

Neverland

bord wrote: »

Hi
Thanks for advice. I received £29,000 redundancy plus £20,000 lump sum from pension ( all tax free). I don't own my own home and have a bank loan on which I owe £9,000 ( thinking of paying this off ). Luckily I have been offered a couple of jobs but a lot less that I was previously on,

Well you'll have too much to qualify for any benefits then it seems

Reality is its not too likely you will find well paid employment again

You need to look at the benefit implications of what you are doing before rushing to pay off loans etc.

Probably best to go the benefits board rather than here for some advice on that - I'm too young to know for certain, but I think something called the Pension Tax Credit might help you

Neverland

gadgetmind wrote: »

Err, that's a rather large pension which would require a pot of well over £200k to have accumulated if you were paying for it yourself. This is 4x what most people in the private sector manage to accumulate by state pension age.

Its not really a lot, its only £160 a week with index linking

Hardly princely even with a state pension on top once you get to 65...

gadgetmind

Neverland wrote: »

Hardly princely even with a state pension on top once you get to 65...

Many people in the private sector would be jolly glad of a pension as large as that, particularly at age 59.