Protected (at 50) deferred pension. Lump sum query

moedeeb

I have a protected final salary pension due to come into payment when I reach 50 next April. I worked in the electricity industry for 15 years to 2001 and the redundancy deal included a non reduced pension at 50.

I've asked for a statement and the administrators have given two main options:

1. A 37k lump sum and annual pension of £12500

2. A 73k lump sum and annual pension of £11,000

As its final salary both these are RPI linked and widows benefit is the same for both options. The statement mentions an option to take an even lower lump sum but no numbers are provided on this. It mentions a total fund value of £289,000 but I realise that this number doesn't mean much as I'm not daft enough to transfer out of such a good scheme.

The computation rate looks good but I've hopefully got a fair few years ahead of me. I'm currently in employment well into the 40% tax bracket. Also I have 120k a new money purchase pension that I started following my previous redundancy.

University for children, love of fine dining and watches has led to a few debts so no real savings to speak of!

Any suggestions on which option to opt for and should I explore the lower or no lump sum reference. The fact they haven't mentioned it may mean it is good and they don't want me to know.

Thanks in advance

bigadaj

The commutation rate doesn't look good to me, but I'd certainly see what the no lump sum option is. Your swapping £36k lump sum for 1.5k per year of pension, so you'd only need investment performance of 4.5% to achieve equivalence, though this excludes inflation.

This is definitely achievable with medium risk investments. More pertinently, and slightly worryingly, is that you have no savings and debt, the debt costs may be well above such a rate so paying these down a effectively produce a far higher rate of return from a lump sum. Also in favour of the lump sum is that you seem to be continuing to work at higher rate, meaning any pension income would be taxed at40%. Further, the fact you have no savings means that assuming you're married there's an immediate 24k that you can shelter in isas so the return is tax free. And everything could be sheltered in this manner in three years.

Do you still have a mortgage and if so what is the rate, this could also be a good use for a lump sum.

moedeeb

yes I do have a mortgage but its a good rate 1.5% currently about !00K owed

kidmugsy

On the one hand if you opt for the bigger pension they're offering you an RPI-linked annuity at 4.2% p.a. on the lump sum forgone: that's a wonderful deal for someone who's fifty - my morning paper says that at 70 you'd get only 4% p.a. from an open-market RPI-linked annuity: so perhaps 35 years of income instead of 15. And nowhere else can you get such an RPI-linked return, never mind from such a very low-risk source.

The counterargument is that's it's wise for a spendthrift to opt for a bigger lump sum. Hm! And I must say I wouldn't bet on 4.5% above inflation coming from medium-risk investments during the next 30 years: here's an estimate of approx 3% p.a. real from equities so, after the sharks have had their cut, call it 2% p.a. if you're lucky.

https://infocus.credit-suisse.com/data/_product_documents/_shop/382269/credit_suisse_global_investment_returns_yearbook_2013.pdf

moedeeb

On this basis (if the deal is as good as you say) I'm probably better making enquiries regarding reverse commutation. It does seem odd that they state it is available but give no numbers.

I was maybe a little flippant with the "debt ridden spendthrift" allusion in my first post. My wife works part time and we have got one 19yo at university and another daughter who has just graduated. I'm not the most careful person in the world admittedly and I would love a few treats and maybe a special holiday. I suppose I'm trying to work out if the commutation offer is marginal based on me having to give up 40% tax on this pension. I'm aware that annuity rates on the open market are disappointing but just because the administrator is offering me something better than "pretty ropey" is that a reason to go for the higher pension and lower lump sum?

Thanks to all who have replied:o

kidmugsy

If you really fancy treats could you defer them to age 55? Because you could draw the biggest pension permitted at 50 and bung enough of your earnings into a pension to avoid higher rate tax altogether (subject to the max permitted annual contribution). Then when you are 55 withdraw your tax free lump sum (there's no need to draw income) and have a major whoopee, including paying off the younger girl's student loan if you like. If you have any reason to suppose you'll die young, however, that might be a reason to go for the cash at 50.
Here's another thought: do they offer a deal if you defer drawing until after 50? (I used to belong to a scheme which would pay 6% extra for every year that you deferred after its normal retirement age of 65.) Because if so you could avoid the 40% tax just by not drawing the money and keeping it in, effectively, a tax shelter until you decide to call on it. Come to think of it, this might be a really good idea, since your other pension scheme is extremely unlikely ever to let you buy such a fine deal as the index-linked pension from the final salary scheme. Heavens it might eventually help you to retire early if you want to.