25% lump sum or not

Uplander1111

Hello

I have searched to see any similar threads, cannot find so would appreciate any thoughts anyone has.

I am being made reduntant age 59 in May (stat redundancy pay) but can draw a final salary pension of £12000 at the end of June. Alternatively I could take a pension of £8500 with a cash lump sum of £56500.

We have no debts at all but would need the £12000 to live on plus my wife's modest earnings.

The pension would be linked to CPI whereas to get £3500 out of £56500 would need a return of 6%. On the other hand, if anything happened to me (I have a few health issues but nothing lefe-threatening) my wife would have the cash. Whichever option I took, my wife's pension would not be affected either way were I to peg out.

Please do not berate me for being in a reasonably fortunate position (as somebody did once before) - I am not bemoaning my position, just confused.

Thanks in advance.

hugheskevi

Alternatively I could take a pension of £8500 with a cash lump sum of £56500.

A commutation rate of 16.1.

Not the worst, not the best.

I am being made reduntant age 59 in May (stat redundancy pay) but can draw a final salary pension of £12000 at the end of June.

Presumably that pension isn't enhanced due to redundancy, as you say you are getting statutory redundancy?

Is the normal pension age of the pension 60 (ie, there won't be any actuarial reduction for early payment in June)?

Alternatively I could take a pension of £8500 with a cash lump sum of £56500.

£56,500 would buy you about £1,400 of comparable annuity. Even taking into account that the £56,500 is tax free, it would only buy about £1,750 of income adjusting for tax at 20%. (although those amounts are based on RPI indexation rather than CPI, so will be a bit on the low side).

We have no debts at all but would need the £12000 to live on plus my wife's modest earnings.

That sounds like you need income more than capital.

The pension would be linked to CPI whereas to get £3500 out of £56500 would need a return of 6%.

That isn't allowing for any indexation of withdrawals or useage of capital.

On the other hand, if anything happened to me (I have a few health issues but nothing lefe-threatening)

Depending on the severity of the health issues, you may wish to investigate if enhanced annuity rates are available to you, for use with either the lump sum via a Purchased Life annuity or (unlikely) the whole pension pot using a transfer value.

Personally I'd be going for the £12,000 option based on what you have said - especially as £8,500 won't be using all of your personal allowance. But do consider your retirement as a whole, eg, you will get State Pension later, which might mean that you could prefer the capital now so that you can use that during the period 60-SPA so that you smooth your income over retirement - in doing that, also take into account your wife's income both now and into retirement.

Jack_Griffin

Will not 1/2 that pension be paid to your wife if you pre decease her?

Uplander1111

Thanks for the posts hugheskevi and Jack Griffin.

A few claarifications:
> The pension is not enhanced because of redundancy
> This scheme has been closed for some months
> It provided for retirement at 60 so no reduction for that fact
> Health issues are not severe but I would be surprised if I outlasted my wife!

If I took the cash it wouldn't be to purchase an annuity - I was thinking of investing the cash through an IFA. They suggest a return of 5% is possible but I know little about these things.

My wife's pension should I predecease is 50% of the higher amount i.e. £6k p.a. regardless of which option I take.

Hopefully this clarifies things and if there are any further thoughts well many thanks.

hugheskevi

That all is as expected then.

My main thought is that you seem to basically be thinking about turning income into capital, and using that capital to generate an income. That gives flexibility which is of value, but on the figures given I'd be keeping the income intact, especially if you have some other savings.

A 5% return is consistent with investments with lower risk, but would still entail some risk. It probably wouldn't allow much if any scope for withdrawals to increase in line with inflation, although that depends on the level of risk you are willing to bear with the investments and the capital would still be intact.

You also probably don't need to take the maximum lump sum - you could consider only commuting enough to leave you with income at or a bit above the personal allowance level (£9,440 p/a). That might be a useful compromise, ensuring you make full use of the personal allowance whilst also giving some capital both for flexibility and to smooth income before State Pension comes into payment.

xylophone

You might consider taking enough lump sum to open S&S ISAs for you and your wife - this offers the possibility of tax free income/capital gains?

Or, if you took the whole lump sum, doing the above then drawing down capital to cover any income shortfall until state pension kicks in?

jackyann

I was in a similar position. I took the view that I was unlikely to be able to invest anywhere reasonably safe that gave me a good enough return.
I did however, have some savings and it is unclear whether you do or not.
I would consider whether you need to buy something to help your lives for the next few years: eg: ensuring you have a reliable car, doing any work to your home, and have a sum put by for emergencies.
Beyond that, I would take the pension.

Uplander1111

I am really appreciative of these thoughts. We have been saving for several years knowing that the writing was on the wall. As such we have £50k on ISAs and we are by nature, risk averse. All-in-all, the income seems the sensible option.

Once again MSE brings some clarity to our thinking.

Thanks all.

jamesd

Yes, income looks best. The IFA is right but you don't need the risk, so why take it?

I'm assuming that you're in reasonably normal good health, with no reason to believe that you'll die younger than usual, which means about half of 65 year olds living beyond 88.

Uplander1111

Thanks jamesd - I am pleased we have considered the options only to come back to where we started!

atush

Yes, my concern was along with jackyann that you might not have had access to capital.

Given you have 50K in capital outside your pension I would be inclined to go with the full income, and if taking any LS at all I would take only a small amt to leave you with 10K in pension.

How soon before your wife retires, and what sort of pension does she have? With 12K in income for you plus 2x the new flat rate pension (perhaps reduced in your case with a FS pension) I can see you should be reasonably comfortable.