Taking Pension Early

wp12345

kidmugsy wrote: »

1) 3% p.a. is pretty generous - no wonder you're tempted.
2) Do you get a lump sum too? You might value some cash to help bridge the gap until your State Pension.

Just looked it up, the choice is : at 55 yrs £34k pa no lump sum or £152k lump sum +£23k p.a +RPI each year.

I assume I can opt for a smaller lump sum +bigger annual pension


Arghhhhhh too much choice

kidmugsy

wp12345 wrote: »

the choice is : at 55 yrs £34k pa no lump sum or £152k lump sum +£23k p.a +RPI each year.

So effectively you could invest £152k and get an extra income (RPI-linked!!) of £11k per annum i.e. an annuity-like return of 7.3% gross, index-linked. You'll not get an annuity at anywhere near that rate at age 55. So unless you really needed/wanted the lump sum (or you expected to die young) taking the lump sum is not a good deal.



At £34k p.a. index-linked you're going to be at or close to a higher rate income tax payer after the state retirement pension comes in, aren't you? Lucky old you.

Jack_Griffin

He must be in the police. LOL

jamesd

wp12345, normally the best guidance is not to take a larger lump sum than necessary. Your situation is an interesting one, with arguments going both ways:

1. £118,000 extra lump sum at the cost of £11,000 pa income lost is a truly horrendously bad commutation rate of 10.7 to 1. Or the other way around, the equivalent of a 9.3% annuity rate, increasing with inflation, which is about three times as good as the best open market annuity rates today. Good rates would have you getting 20 times as much lump sum as the foregone income. So you're getting a terribly bad deal on the extra lump sum. This argues very strongly in favour of not taking more lump sum than you have to.

2. Your tax bracket. As kidmugsy has written, you'll probably be paying higher rate tax on some of your income if you don't take a lump sum, once you start getting state pension payment. If you had a decent commutation rate it could be a better deal to take a lump sum and invest the money inside a S&S ISA, then take tax free income from the ISA. That'd keep you below the higher rate tax threshold.

In your case the commutation rate is so horrendously bad that it's almost certainly going to be better to take the extra income and accept paying some higher rate tax. So that's what I suggest you do: don't take the extra lump sum.

Also find out how much extra income you can buy by giving up some of the lower lump sum. Don't be surprised if you find you have to give up £25 of lump sum to get £1 of extra income from this - they don't have to have the same commutation rate in both directions.

wp12345

I don't suppose anyone knows where I could get hold of a good retirement planning spreadsheet that I could us ?

Many thanks

wp12345

Jack_Griffin wrote: »

He must be in the police. LOL

Nope for sure not a plod !