Final salary pension decision

mookev

I am about to receive a final salary pension from a previous employer. I have a choice of £12000 CPI linked income and a lump sum of £36000 or a £10000 CPI linked income and a lump sum of £66000. I intend to keep in full time work for a short period but may look to go part time shortly to enhance my free time. I have been advised by a financial advisor it is better to take the 2nd option and invest the lump sum if an investment bond and take 5% income per year but my caution says take the larger income.. Which do you think is the better option.

bryanb

How long do you intend to live?

mookev

Until I die!

xylophone

Do you have a specific plan /need for the larger lump sum (gift to child as house deposit, extension to home, trip round the world etc)?

If not, it comes down to life expectancy and a view on inflation - if you think you have a reasonable chance of still being in the land of the living for the next say 20 years or more, it makes sense to take smaller lump sum and larger pension?

You then have a choice of how to use the smaller lump sum - using your isa allowance each year will keep any income tax free.

When will you draw your state pension?

Do you have a pension in your current employment?

Totton

Part of your calculation should also be how annual increases will affect the pension, initially the gap is 2k between the higher and lower lump sums, but how big will that gap be in 20 years time?

I'd take the larger lump sum but I don't expect to live too long, take a look at your life expectancy, family trends etc and get some rough figures for both options.

darkvader

The difference between the two options is taking £30k in hand now or waiting 15 years for Option 1 to break even with Option 2. And yes after 15 years Option 1 is paying you £2k extra annually.

You can take the £30k and invest it well to, based on investment choices, make a decent profit in 15 years time so its down to you really. Personally, I'd take the extra £30k and go for Option 2 because of 2 things
1. I prefer having control of my money and managing my investment and 15 years is a long time to double/triple that £30k rather than being drip fed £2k a year
2. No matter how fit I am today no one can guarantee I will be alive 15 years down the road or for that matter what the word 'cash' will mean in 2028

All the best
DV

opinions4u

Totton wrote: »

Part of your calculation should also be how annual increases will affect the pension, initially the gap is 2k between the higher and lower lump sums, but how big will that gap be in 20 years time?

If they are both index linked, the gap will be exactly the same as it is now in terms of spending power.

benalder284

Life expectancy?

Inflation expectations over the next 5, 10, 15, 20, 25 or more years?

Possible investment returns and attitude to risk?

Need for immediate lump sum?

Other sources of retirement income?

Probably no single right or wrong answer - everyone's circumstances and views on the above will be different, but these and some of the other questions posed by other posters might be relevant

Totton

opinions4u wrote: »

If they are both index linked, the gap will be exactly the same as it is now in terms of spending power.

I understand what you are saying but disagree. The actual cash amount difference will increase whilst the spending power assumption requires that everything increases in price equally, that does't tend to happen. No matter, I'd still take the lump sum myself as you never know what is around the corner.

atush

Here's the difference between Venus and Mars.

Take the 12K pension and smaller lump sum. Men like to get their hands on the dosh, assuming they won't live 15 years ;-)

I know what is around the corner, increased LE.

kidmugsy

Taking the smaller lump sum and bigger pension is equivalent to investing £30k into an index-linked annuity paying 6.7% p.a. initially. That's far better value than any commercial annuity. So if you reckon you have a decent life expectancy and you have no urgent need for the lump sum, take the bigger pension. If you later need a bit more lump sum, borrow it. Interest rates are low and you'll have an extra £2k p.a. index-linked with which to pay off the loan.