take lump sum or highr pension

Heedtheadvice

Having read through (partially) this great site and some of the advice given i am impressed but cannot find the answer to my dilemma, so have registered and posted!

I have found at least one reference to taking a lump sum from a final salary pension scheme - in general keep with pension if inflation linked as it is more valuable; but that depends upon individual circumstances! So perhaps someone would give a little thought to this?

I aim to maximise income but my spouse will effectively only have state pension in 5 years time (£100 per week approx) so need to make provisions should I die. Also would like to be able to pass on as much as possible consistent with income. Hoping to achieve £20+K per annum and £15K+ for survivor. I expect [ :-) ] to survive to maybe 80 but spouse expects less owing to more severe health issues. I will get state pension in 3 years time also £100 per week or so.

Currently have as income/expect:
8K from final salary pensions (taken at 60) with half for survivor. index linked as current income. [remainder from ISA S&Shares income 5K] This does not meet our hopes so have been dipping into savings say £3K a year but not really meeting my hopes. (retired early owing to chronic ill health that will not affect life expectancy)

Expect to be able to take another final salary income of £10K this year (early as it's not due till 65) also index linked. Has options: Can reduce to £7K p.a. with £25K lump sum. I see the options as complex as can also wait another year or two, amend lump sum (downwards) and take an option to get higher income to equate to the pension's income + state pension for the next 3 years and then a reduced pension thus equalising income before and after state pension age. Do not expect to be significantly affected by recent pension changes but who knows about the future?

Bearing in mind spouses poor provision this causes me concern -roughly half mine should i die first plus state pension, potentially say [ if i take all final salary pensions now] £9K this year and then up to £13K in five years time. I wish to therefore optimise current situation but reduce the risk of spouses situation and I am finding all the options bewildering.

Any thoughts would be appreciated as well as any 'equations' i could use to calculate the various options. I realize that if i did nothing my tax bill would be higher than is optimum so could transfer the potential lump sum to spouse.

Have i provided enough info here - or is it just too much to ask and should i seek professional help!

somethingcorporate

Just looking at the simple trade off between annual pension and lump sum on your second FS scheme your breakeven point is roughly:

£25k / £3k pa difference (£10k-£7k) = just over 8 years.

Given you expect to live much longer than this I would suggest this is a poor return for giving up £3k pa index linked pension.

I will leave it to one of the experts to figure out the rest!

marathonic

Look at it another way:

Ideally, you should be taking a maximum of 4% per annum from your total retirement pot to ensure that it lasts until the end of your days.

Therefore, to take £3k per year, you'd really want to have a pot size of £75k. As you're only giving up £25k for the same benefit, it's a no-brainer.

Andy_L

You're giving up £3k of pension income for a £25k lump sum. Going in the other direction, that £25k lump sum, on the open market & makeing some asumptions about the indexation rate, would get you £1-1.5k of pension income. As somethingcorportae said its a poor deal

Heedtheadvice

Thanks for those early responses....but....

oops my mistake. Reviewed my options and it is a reduction of £3270 for £50K lump sum. Memory obviously fails me!

So on STC's calc that is more like 15 years straight time . That seems a lot better. However based upon M's post could still be considered poor? Is that correct?

Where does the 4% figure come from, M? As a first thought I had that sort of figure as income after tax for a long term equity income investment with also the prospect of growth if not just capital maintenance; Does that 4% you quote factor in tax loss at the basic rate for the pension I will give up -, tax which I would no doubt have to pay if I did not take the lump sum, or indeed on the majority of the rest of this particular pension income as the others FS pensions virtually take up the personal allowance.

Additionally, reading further on my options, if I did take a lump sum, the spouses pension would be unaffected and Mrs Heedtheadvice would likely have the benefits of the lump sum too. That would indicate that potentially the benefit might be greater, would it not?

Heedtheadvice

Thank too Andy. further evidence of viability or lack of it!
Please note my update, above. I will assume pro rata that would be 2-3K for £50K. Not as bad a deal. Can I assume that the open market option is a 'no risk' return? On the other hand an equity income investment I had thought about is a riskier option, but perhaps less of a risk for Mrs H?

atush

I agree, I would not take the LS but get higher annual pension.

Second, wont your spouse get the new larger 140/wk state pension?

If you have extra income (later I know you are short now), can you think about putting some in a pension for your spouse? even if not working you can have contribs of 2880 PA that are grossed up to 3600.

Have you spoken to a doctor about your LE?

I don't what your condition is, but pretty much all of the Chronic ones I can think of (that would make a person 100% unfit to work any job so they HAD to retire early as in your case) would mean some sort (even if small) of reduction of LE.

Heedtheadvice

larger state pension for spouse? I think that the case is not, Atush but I would have to double check that. I feel a pensions agency query coming on...

pension for spouse? I believe that the extra that might produce in say 10 years time, given that i might be able to contribute the full 2.88K in three years time would only give a pot of £25K (7*3600) and an annuity of a thousand a year a year (perhaps a bit more owing to spouse LE) and that would take another 25 years to get it paid back! Are those reasonable assumptions? If so I would not be very impressed as she would be over 90!

LE are not Doctors figures but our own realistic ideas based on family history and our own health. My chronic condition is rare and leaves me with pain and associated nerve issues but is unlikely to affect longevity. It was personal choice to retire early for quality of life reasons I was not considered unfit. Sorry if I gave a different impression but chronic in that it will be long term. Choice was also to be able to spend time with spouse rather than retire later with possibly a shorter period together. Very romantic eh? :-)

kidmugsy

It's a long shot but enquire whether either FS scheme allows "allocation" whereby you give up some pension so that your widow gets a bigger pension than she otherwise would after your death.

Heedtheadvice

Will do Kidmugsy.

Spouse pension quick check is for £107 p.w. Official statement requested.

kidmugsy

Heedtheadvice wrote: »

I aim to maximise income but my spouse will effectively only have state pension in 5 years time (£100 per week approx) so need to make provisions should I die. ...Hoping to achieve £20+K per annum and £15K+ for survivor. I expect [ :-) ] to survive to maybe 80 but spouse expects less owing to more severe health issues.

Here's what I understand: tell me if I'm wrong.

Current income: you £8k
Later this year: you £18k
3 years time: you £23k
5 years time: you £23k, wife £5.4 k

On your death (in more than 5 years time): widow £14.4k
OR
On her death (in more than 3 years time): you £23k.

Now then, your current £8k is inadequate and you boost it by drawing on your savings. Later this year the gap will be nearly closed: you'll have £18k versus the desired £20k. Either of two manoeuvres might help here. You could use some of your savings to buy your wife some pension which would (I assume) be tax-free. In both this tax year and next (starting April 6th) you contribute £2880 (net). Either (i) make the contribution to an Immediately Vesting Personal Pension - this returns £900 (always tax-free) as Pension Commencement Lump Sum, and an annual pension paid in advance, or (ii) accumulate the two contributions and then after you've taken the lump sum you should have £5400 available to buy an annuity that would be on improved terms because of your wife's ill health. Again you would take it on the most favourable basis for your situation namely single life, no guarantee, paid in advance. (Warning: this is a small "pot" for an annuity and your choice of provider might be a bit limited.)

Repeat the procedure as often as your income and savings permit. The help this idea offers is modest but at least it exploits your wife's tax-free status and, in case (ii), her health status. If your savings are already all tax-sheltered, or in your wife's name, then the scheme might not be worth it.

Another notion is to protect your wife's position in the event of your death by your taking out life insurance. A five year term policy might be pretty cheap, and would see her through to the start of her State Pension. You could also, presumably, take a longer policy for a smaller sum. Maybe you can even buy a policy which pays out only if you die before your wife during the 5 or more years: that might be cheaper yet.

You could also try to cut your outgoings for the next three years: how about 0% credit cards - could a sequence of those push some of your expenditure back for 3 years? Then again, could you borrow cheaply to bridge the gap? How about mortgage borrowing? Would you qualify for a fixed rate five year mortgage at a low loan-to-value ratio? They're cheap at the moment, and you can do an accelerated repayment of the successor loan when the 5 years are up and so is your income. That would probably fit well with the idea of buying life insurance.