Final Salary Pension, maximum pension or lump sum

Party_Animal

Sorry, I hijacked someone's thread the other day. I've got a big decision to make very soon. I'm retiring and can take the maximum pension or a reduced pension with a bigger lump sum or anywhere in between. Everyone I know who's retired before me has gone for the maximum lump sum on the basis that they can invest it and only pay tax on the interest, rather than paying extra tax from their pension every month. Plus, they reckoned they would need more money in the early years of retirement. I got the impression that view wasn't shared on here. A little about myself, I don't have any debt and I won't be in the higher tax bracket which ever choice I make. I suppose, at the end of the day, its a gamble. I don't know how many years I've got left. I'm fit and in good health but you never know.
Any views?
Thanks

somethingcorporate

If you don't take it you cannot spend it - my step-mum took her lump sum, in 6 months it was gone and she now has a lower pension for the rest of her life.

Obviously, it is more complex than this but just thought I would throw that as a consideration out there!

Cardew

Is the pension index linked for inflation(like NHS/Civil Service/armed Forces etc?)

Does your spouse get 50% on your death.

mania112

But they were 6 GREAT months, right?!

If you're looking at it from a tax point of view (i think i'm right in saying), Max Tax Free Cash is the best option, because it's.... Tax Free (and income isn't likely to be).

If you have a wife, especially if she is a few years or more younger, the max pension is better, presumably half of which will be paid to her, after your demise.

If you can't afford to live on the lower amount - your hand is already dealt?

Point is there is no right or wrong answer, not one you'll find on this forum anyway.

If you have a few things to pay off and/or want to buy a car/holiday go for the lump sum.

If you will struggle with the bills take the higher pension.

It's not as simple as that, but that's as simple as we can make it without knowing you (or the values you're talking about)

mania112

Most people are of the opinion 'I want to get my money out before I die, otherwise i'll never get a chance to spend it'. Hence many going for the max lump sum option.

I don't fall out with their opinions and if you're even slightly of the same frame of mind, why not take the max lump sum and invest it somewhere 'accessible' if you're not going to spend it immediately.

Sure it's now in your estate if you do that, but you only get one bite at the 'lump sum cherry' so if you're in doubt you should probably take it.

Party_Animal

Thanks for the prompt replies. I am married and my wife is 3 years younger. We are both in the LCC Local Government scheme. She retired last year and is drawing her pension.

xylophone

Do you have a specific use for a large lump sum?
You mentioned that you want to travel while you are young enough to enjoy it.
If your joint pensions after you have taken your lump sum enable you to live comfortably but would rule out "big ticket" holidays, then taking the lump sum might be a good choice for you?

Party_Animal

Xlophone, many thanks. Don't have a specific use for the lump sum. Just liked the idea of the tax free sum. I wanted to split it into a bond that I can't touch and the best paying savings account which I can top up my ISA from and maybe purchase the occasional long haul flight. I have other savings in an ISA too. We do travel a lot and would like to continue to do so while we can. Thanks again

Linton

Party_Animal wrote: »

Sorry, I hijacked someone's thread the other day. I've got a big decision to make very soon. I'm retiring and can take the maximum pension or a reduced pension with a bigger lump sum or anywhere in between. Everyone I know who's retired before me has gone for the maximum lump sum on the basis that they can invest it and only pay tax on the interest, rather than paying extra tax from their pension every month. Plus, they reckoned they would need more money in the early years of retirement. I got the impression that view wasn't shared on here. A little about myself, I don't have any debt and I won't be in the higher tax bracket which ever choice I make. I suppose, at the end of the day, its a gamble. I don't know how many years I've got left. I'm fit and in good health but you never know.
Any views?
Thanks

Two ways to look at it...

1)It really depends on how much lump sum you gain for how much pension you lose. Schemes vary quite a lot. With many it would seen that the lump sum would not go anywhere near providing an equivalent income to the pension that is lost.

2) If you could live happily solely on the pension after taking the lump sum and have a good use for the lump sum such as debts, fast car, donation to kids etc then lump sum is the way to go. If either of these conditions doesnt apply, then go for the pension.

999

It is a big decision. I had to make a similar one about 6 months ago and went for the vast majority to be paid as a pension. I did some calculations based on estimated inflation and interest rates and reckoned that after about 14 years the pension would break even against foregoing the lump sum. Thereafter it would be better with the increased pension.

Of course I may well be wrong with these factors, and how long I have to live, but I did also go to two IFAs who were initially very keen to get their hands on my lump sum but both eventually agreed they could not guarantee to match an inflation linked pension that also provided a widows pension if needed.

Best of luck with your decision and retirement.

kidmugsy

mania112 wrote: »

you only get one bite at the 'lump sum cherry'

Not really: if your pension is big enough you're well placed to borrow a lump sum in future because you'll easily pay it back.