ill health retirement - lump sum

jem16

elsie777 wrote: »

Sorry I wasn't given 'an extra amount'.

The only illustrations I was given from my company were the option of max lump sum and salary, or just salary. I never considered alternative lump sum amounts as all the advice I received said to take the maximum I could.

Well if you were given a lump sum of £250k for giving up just £7k or pension you have a rate of around 35:1. Absolutely fantastic and I could see why you were told to take the maximum lump sum.

In the case of the OP he/she would be giving up £7k for £84k. Can you see why that might not be such a good deal as the one you got?

elsie777

Of course I can see that 12 is less than 35 or 28 (at the 200k end of the range), but that doesnt mean the OP would automatically be wrong to do it as well.

I was purely pointing out that there are other factors for him/her to consider, and another important one not mentioned when it comes to ill health retirement as opposed to standard retirement is the fact the pension is not normally 100% guaranteed to continue paying until the 'normal' retirement date, because occasionally people's health can significantly improve in that period even if totally unexpected.

For example often people get reviewed every so often, such as after the first 2 years and so on to see if there has been an improvement in their outlook, and IF the person is ever fit to return to full employment, then the pension can be suspended. There may even be a 'wonder drug' that comes out, especially over the long term, that massively improves someone who previously was totally unable to work. Although this is unusual it can happen, and can apply to even individuals who right now are correctly medically assessed as not being considered ever able to return to full employment.

Obviously each individual will be different, but can you see that IF there is a chance that could happen that it might be another good reason to take your maximum lump sum up front to for example pay off some or all of your mortgage, especially as you may not get employment again after being out of work for a long period?

Anyway hopefully the OP has some other things to think about.

fairleads

maisie1 wrote: »

i would be grateful for advice on my situation. i had a stroke in 2010 and returned to work but have since had to retire on ill health grounds and will finish work in may. I am 51 years old.I have a 25 year mortgage and still have 22 years to pay back. the outstanding balance is £139,000 and interest rate on the mortgage is 4.69%.
I have a local government pension and have the option of taking a pension of £21,000 and a lump sum of £32,000 or a pension of £15,200 and a lump sum of £101,500. The lump sum would be tax free. Would it be wise to take the max lump sum to pay off a large proportion of my mortgage or take the max pension.
I am in relatively good health so would expect to live a normal life span. My wife works and earns about £15,000.

Taking the larger lump sum will cost you about £1000 in lost income every year. But you will have the benefit of the extra 69.5K. However, you will need to invest the capital in a manner that gives you growth in income and, hopefully, capital.

jamesd

elsie777 wrote: »

Firstly as your lump sum payment from your pension is tax free, but your pension income is not, many people take the maximum lump sum they can

If it was a personal pension where you control the investments it'll typically be right to take the maximum 25% lump sum allowed. This is because there's no loss of income to get the lump sum, it just moves if from a lump sum inside the pension that produces income to a lump sum outside that also produces income. Outside it can then be moved into a S&S ISA to generate ongoing tax free income.

For a defined benefit (final salary or similar) scheme the commutation rate is critical. 12:1 is one of the worst offered today and it's so bad that paying tax on leaving the money in the pension is almost certain to beat taking a larger lump sum.

Your deal may well have been substantially better than 12:1 and if so it could well have been the best choice to take the lump sum in your case.

elsie777 wrote: »

I certainly did following financial advice

If that was from an IFA then it was almost certainly correct advice for the specific deals being offered to you. Even more so if what caused the retirement reduced your life expectancy, one of the cases where even a poor commutation rate can make sense.

elsie777 wrote: »

Secondly, it's easy to say you should get 6-8% income no problem from a stocks and shares ISA, but you could also lose e.g. 6-8% or more any given year, so I wouldn't rely on that income as all but guaranteed to happen if you need access to it for paying bills like your mortgage etc.

The capital value will vary each year but the income level is fairly stable. Someone setting things up for income drawing should do something like this:

1. Put a year or three of anticipated income into a savings account.
2. Have the investment income go into the savings account.
3. Have a standing order from the savings account to a current account for their regular income.
4. Adjust the income level every few years so that the balance in the savings account is stable and increasing with inflation.

This provides a stable income level and smooths out the variations in times when investment income is paid.

elsie777 wrote: »

Im now wondering whether to pay off all of my repayment mortgage which is a similar amount to yours with a similar interest rate, or perhaps keep paying the mortgage and invest say £140k and hope it makes enough regular income to justify the decision, because I can't afford to tie up that money long term, pay off the mortgage each year with other money, and also live on further money.

You don't need to tie up the money long term. Inside a stocks and shares ISA you can sell the investments at any time and expect to have the money in your own bank account within a couple of weeks. Same for unit trusts outside an ISA.

One easy decision is probably to sign up for the 8% regular saver account from First Direct. That's taxable but still beats the mortgage interest rate and is completely safe.

For investments within an ISA you might investigate these to start if you're unfamiliar with investing:

1. Invesco Perpetual Monthly Income Plus
2. Newton Higher Income
3. Invesco Perpetual High Income

The first should get first priority for an ISA because it pays out as interest which is tax free inside an ISA. The other two pay out as dividend-like payments and don't benefit as much.

elsie777 wrote: »

Currently im erring towards paying off the mortgage, and wiping out the big monthly repayment totally, because at least that's guaranteed to happen and I know I can live fine then with the pension income. I'll also use left over lump sum money to place in stocks and shares ISA(s). However if anyone thinks this plan is crazy I'm all ears if they say what they'd do instead with mortgage money and why

I'd do what I suggested above because it's likely to leave you better off. But people have different risk tolerances and for yours it might be better to pay off the mortgage or some of the mortgage, even though it's expected to make you poorer.

Having a few years of the anticipated income in a savings account as a buffer greatly reduces the uncertainties and leaves you sure that you'll have the money you expect on a month by month or year by year basis. If you were to say put three years of planned income into the savings account it's unlikely that you'd have a sustained income drop sufficient to run out of money in the savings account before the mortgage was paid off. The more years in the account and the shorter the mortgage term, the greater the level of certainty that it'll be sure to happen. Something like one year of income for every five years of mortgage should be very sure (an income drop of 20 % is unlikely and even more unlikely to be sustained) while one year for every ten years should really be sufficient to have high confidence.

elsie777

Yes my deal was 100% better taking the maximum lump sum, that's why I did it, and yes my advice was from an FA. I was purely letting the OP know that lots of people do take the full lump sum, particularly as it's tax free, but he obviously needs to decide if his circumstances mean it's better not to.

As for the income from a stocks and shares ISA, I stand by what I said. You could definitely also lose 6-8% plus on any given year, so I personally wouldn't rely on making 6-8% each year IF I needed that return to pay bills each year. It simply might not happen. I would agree it's pretty stable longer term but short term who knows. Looking at the past 5 years performance of any fund will often show at least one year with a negative return. Again this is just something for the OP to consider rather than assume he's getting the return guaranteed.

In response to your comment 'you don't need to tie up the money long term. Inside a stocks and shares ISA you can sell the investments at any time and expect to have the money in your own bank account within a couple of weeks.' I wasn't talking about ISA's specifically, because I was talking about investing £140k and you can't invest that much in an ISA, you can't even invest 10% of 140k in one tax year.

If we do talk about stocks and shares ISAs, I'm already max'd out on mine, and I think most people know they can instantly access their money. However if you need a decent return from that investment then you need to be prepared to tie up (not touch) the money in the medium to long term because as mentioned above you may lose money short term. Therefore if you think it's likely you'll need to access the cash short term then you need to also be prepared for the fact you might have to take a loss.

I was actually referring to something like an investment bond when I wrote my comments re tying up the 140k cash, and there are often penalties for coming out of those early e.g the first 6 years.

Basically I dont want to put the 140k anywhere that means I might lose cash if I need to access it in the next few years, because I'm expecting to need all of it for a lifestyle change at some point in that time frame, but I dont know when that will be at the moment.

The 8% regular savings account with First Direct would be an interesting option, so thanks for the suggestion BUT my understanding is the maximum you can put in it is £3600 each year which doesnt dent £140k. However I'll look into it if that's wrong.

Finally I dont really understand how paying off my mortgage makes me poorer than I am right now. If you mean investing the £140k would be expected to be better financially then yes I can see how you'd expect to make more from e.g. a bond, but as we've discussed it's not a guaranteed return, and you should be at least prepared to have to keep the cash invested beyond the short term to account for the dips that can happen. I personally can't put myself in a position where I may have to avoid touching that investment if things aren't going well with it, because I have many other considerations, including the fact I would also need to keep paying my mortgage repayments.

bryanb

maisie1 wrote: »

I am in relatively good health so would expect to live a normal life span.

Just out of interest, how do you square the above with having to retire on ill health grounds?