Retiring-Advice on Pension v Lump Sum please

Lightnbitter

Have been mulling over what's best, would appreciate others views.

Aged 64 in April..retiring this March after nearly 48 years..whoo-hoo !

Wife aged 60 in August, no income other than small Building Society savings/ISA's/Premium Bonds and a few shares dividends.

My savings also consist of cash/S&S Isa's/shares & joint Investment Bond...I estimate JOINT savings would total approx £100k if realised.

We are both in reasonable health.Mortgage and Loan free...I reckon our current annual expenditure to be approx £17-£18k.and would obviously like to maintain a roughly similar standard of living, but I dont know exactly what retirement will cost.

My Pension options are 1..Annual pension £19,784 (increased CPI) with £59,354 tax free lump sum.....or Annual pension £16,381 (increased with CPI) with £109,210 tax free lump sum. Pension includes a 50% spouses pension on my death.

I am being paid one years salary for leaving early, so I also have the option to defer payment of whichever I choose until my 65th birthday.

We are both risk averse, have no great desire to constantly delve into the investment field (other than cash isa type products).

Would be very interested in all the MSE experts views on my pension options.

jem16

Lightnbitter wrote: »

My Pension options are 1..Annual pension £19,784 (increased CPI) with £59,354 tax free lump sum.....or Annual pension £16,381 (increased with CPI) with £109,210 tax free lump sum. Pension includes a 50% spouses pension on my death.

So approximate commutation rate of 15:1. It's not great but not as bad as some.

Does the spouse pension get worked out on the £19,784 or the £16,381 pension options?

Personally I would say go with the increased pension but it's up to you if you need to spend the cash. It would need to make around 6.66% if you were to invest it to make up the shortfall in income.

quotememiserable

This is a no-brainer for me. You have savings already, you don't like the investment market and you're risk averse. If you take the cash what would you do with it? Add this to the fact that the pension is very good value compared to the cash and provides certainty. It's only costing you £50k to get £3400 of index linked transfereable pension, which would cost you more like £150k on the open market. Max out the pension.

Lightnbitter

Thankyou guys for those quick responses so far.

Hi Jem16....... spouses pension would be based on whichever option I chose to put into payment.

Linton

If you took the extra lump sum of approx £50K you would lose a inflation-linked pension of £3403/year. If you chose to spend the £50K on an equivalent pension to the one you are giving up you would get around £1500/year. Tax would reduce the difference somewhat, but it would still be significant.

So the extra pension is more valuable than the lump sum all other things being equal. However other things may not be equal. For some people there could be debts to pay off, or the need for major expenditure, perhaps on their house. If one had a good reason to believe that one's life expectancy would be significantly less than average the lump sum could be more valuable. It would depend on your circumstances and whether the usefulness of a lump sum now would be significantly more important than the extra money for the rest or your and your wife's life.

Lightnbitter

Hi Linton...thanks for your opinion....I'm touching a big wooden table as I'm typing this ...but at the moment I'll take "average" for life expectancy thankyou....No, we have no large sums to pay out that couldnt be covered by our savings.

kidmugsy

There's a very efficient way to buy extra pension for your wife, namely for her to defer her state pension. Every year she defers brings her eventually 10.4% extra pension when she starts it. Compare that with the index-linked annuities in today's financial pages - it's a super bargain. So I suggest you weigh up the advantages of spending some of your savings or lump sum on compensating for the loss of income caused by deferring that pension for a while.

You might even like to consider deferring your own for a while.

http://www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/@over50/documents/digitalasset/dg_200597.pdf

I may say that I used to be a bit unsure of this scheme because I worried that politicians would eventually steal the extra pension from people. However I'm now more relaxed since the government's proposed new state pension scheme will continue the pension deferral offer (though at only half the rate of reward - no wonder, because the present rate is awfully generous).

atush

quotememiserable wrote: »

This is a no-brainer for me. You have savings already, you don't like the investment market and you're risk averse. If you take the cash what would you do with it? Add this to the fact that the pension is very good value compared to the cash and provides certainty. It's only costing you £50k to get £3400 of index linked transfereable pension, which would cost you more like £150k on the open market. Max out the pension.

Says it all, you don't need the cash and you won't do anything with it (apart from put it in a savings acct that wont keep up with inflation).

jamesd

The commutation rate isn't great, better to take the higher income given your good health.

You should both consider deferring the state pensions. You can do this once even if you've already started taking them. It's particularly useful for women in good health since it can cop up their income if their spouse dies first, as commonly happens. This trades improved long term income security for some of the savings. You can use some of the higher income to top up the savings if you like.

You should learn about Flexible Drawdown. You can put money into a personal pension pot now and get tax relief. Then with your work pension and state pensions you'll have a guaranteed income of more than £20,000 a year so you can take out all of the pension pot money, 25% tax free, 20% taxed at your normal rate. This is essentially free extra money for you from the tax relief. Once you've used Flexible Drawdown you can no longer make any more pension contributions but can still defer the state pensions.

You can take the state pensions to qualify for Flexible Drawdown then defer after you've qualified if you like.

The urgency comes because the amount you can pay into a personal pension is limited to your taxable pay in the year you do it, capped at £50,000 this year. If you wait until not working you get only £3600.

Say you could pay in £30,000 gross. Net amount paid in would be £24,000. You could take 25% of the £30,000 as a tax free lump sum then over the next few years take the rest at a rate that causes you to stay a basic rate tax payer. End result: £24,000 net in, 0.25 * £30,000 + 0.75 * £30,000 * 0.8 = £7,500 + £18,000 = £25,500. The would be costs of around £300 so the gain would be around £1,200.