Making best use of my tax free lump sum

albaecosse

I am a Civil Servant and have been offered voluntary redundancy which I have accepted so I will end up retiring on 31 March 2013, aged 51. I will be paid my pension from 1 April 2013 which will be around £11,000 per annum and receive my pension lump sum on this date. My pension is the Classic Scheme. My question is should I use some of my tax free lump sum to increase my monthly pension. If I use my lump sum to increase my civil service pension I will receive £4.43 additional pension for every £100 of lump sum I put back into my pension (called inverse commutation).
Thanks in advance for any guidance anyone can offer.

mania112

how much is the lump sum (before any reverse commutation)?

As you're retiring earlier than you would have thought, do you have any debts/liabilities that need to be cleared to help you manage on the £11k?

It's those sorts of questions you need to ask yourself - can you manage on the £11k, if not, why not? what living costs can you reduce with the lump sum and which would be better suited to a higher regular pension.

If you're all-square financially, the reverse commutation doesn't sound like it'll make a huge difference to the pension (giving up £1,000 only increases your pension by £45 a year).

So time for a nice long holiday and a new car?

Linton

albaecosse wrote: »

I am a Civil Servant and have been offered voluntary redundancy which I have accepted so I will end up retiring on 31 March 2013, aged 51. I will be paid my pension from 1 April 2013 which will be around £11,000 per annum and receive my pension lump sum on this date. My pension is the Classic Scheme. My question is should I use some of my tax free lump sum to increase my monthly pension. If I use my lump sum to increase my civil service pension I will receive £4.43 additional pension for every £100 of lump sum I put back into my pension (called inverse commutation).
Thanks in advance for any guidance anyone can offer.

4.43% is pretty good for an inflation linked pension at 51. If you could buy a commercial equivalent annuity at 51, (which you cant) it would perhaps pay half of that.

So its a balance. If you have plenty of other cash and so dont need the lump sum then it could be worthwhile going for the reverse commutation. If you are happy with the standard pension but have need of cash, then you may chose not to. Also, you could use the lump sum to supplement your pension until you reach State Pension Age.

bigfreddiel

mania112 wrote: »

how much is the lump sum (before any reverse commutation)?

As you're retiring earlier than you would have thought, do you have any debts/liabilities that need to be cleared to help you manage on the £11k?

classic scheme lump sum is 3 x pension - i.e. £33k in this case and that would buy £1460 pa salary - about £97/month or £3.50/day after tax.

cheers

fj

Goldenyears

The lump sum should be a little more than 3 x pension if you retire before the scheme age of 60 yrs. How much more for 9 yrs I don't know, but for ~1 year the actuarial reduction of pension is ~6% as we know, however the lump sum is reduced by only 4%.

kidmugsy

Won't the answer depend on whether you're going to get a new job?

atush

i agree, at 51 you should be looking for a new job (even if just part time) and this could help with your decision.

FWIW, I think if you have other savings and investments, given it is a FS inflation linked pension, I'd be giving up at least half the LS to get more pension for the long haul.

albaecosse

Thanks everyone for the advice - I'm lucky no debts and paid of mortgage -also have some savings - should get around £33k lump sum - do not intend to work initially looking at maybe going to college and doing some unpaid charity work

atush

Do 'look' for work enough to get your 6 months jobseekers allowance while you are deciding.

kidmugsy

albaecosse wrote: »

Thanks everyone for the advice - I'm lucky no debts and paid of mortgage -also have some savings - should get around £33k lump sum - do not intend to work initially looking at maybe going to college and doing some unpaid charity work

When I've been in hospital I've been very grateful to the kind souls who push around the trolley of newspapers and snacks.