Financial Mess - Need to avoid rash Pension decision!

Ribin

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mania112

It's not the worst decision in the world to take your pension early.

It's better than getting into debt if you or your wife can't find work.

And if you do find work you can divert the pension income into an ISA/Bond.

If you can live on the lower income, it's fine. Rather that than being stressed about the whole situation (or forcing yourself back to work before your well enough to do so).

mania112

You'll need to check if your benefits will continue if you start receiving income from the pension.

jackyann

If you look on other parts of the board, you will see how other over 50s manage.
If you take the pension now, you can consider part-time work. Whatever the new treatment is, commonsense tells you that returning to full time work after 10 years of poor health is a huge strain. There are lost of part-time jobs that supplement income and will give you an interest and social connections with less stress than before.
I can't offer financial expertise on the "lump sum", but I suggest that you look at your sums, bearing in mind that your pension is index-linked and savings rates are currently very low.
After this many years of low income, do you have things around the house that need bringing up-to-date? I think that getting good quality, sensible household equipment and a reliable car (for instance) can be a good investment.

Ribin

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Bigmoney2

I think you may be eligable for help with council tax in your current position.

Other things to consider when coming off benefits are the knock on effects, will you lose an entitlement to free prescriptions/dental treatment.

Do you both have the required amount of NI contributions for state pension, are you receiving benefits thet give you credits for this.

With regard to taking the pension, it is not an either or choice between no lump sum or max lump sum, you can commute any amount up to the maximum, so you could for example take £30k lump sum and the rest as pension so you have a 'buffer' for any large unexpected expenses new boiler, washing machine etc ( or a new car, world cruise etc).

In terms of how much pension you need, log what you spend now, this will give a ball park figure, you can also do a high/low forecast e.g. if living expenses go up faster than your pensions.

In terms of employment, how realistic is this, are your skills upto date if you haven't worked for 10 yrs. Can you cope with signing on and applying for jobs and going to interviews, getting rejections etc.

With the info given, I would say living off £14500 is doable but tight, £20k would be comfortable, I live on less, but am only one, not a couple and quite frugal.

[Deleted User]

The average UK male has a life expectancy of 79 with women having a life expectancy of 81, if we assume you will be the average:

If you took your pension at 60 without the lump sum you would have £23,800 PA for 19 years which is £519,200. That's £23,600 per year.

If you took your pension at 60 with the lump sum you would have £108,500 + 19 years of £16,270 which equals £309,130 and in total that comes to £417,630. Averaged over 19 years that is £21,980 per year.

If you took your pension at 57 without the lump sum you would have £20,875 PA for 22 years which is £459,250. Averaged over 22 years that's £20,875 per year.

If you took your pension at 57 with the lump sum you would have £97,220 + 22 years of £14,580 which equals £277,020 and in total that comes to £374,240. Averaged over 22 years that's £17,010 per year.

Do you have any ideas of how much you're spending per year at the moment? That's probably what is most important to consider, although it seems clear that taking your pension now with the lump sum would substantially reduce the total value of your pension, although taking without the lump sum wouldn't be such a huge difference.

Ribin

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[Deleted User]

Ribin wrote: »

Thank you for the analysis. I just wish it was as simple as that but it doesn't take into account the taxation effect both on the regular income and tax free lump sum. My gut feeling is that once you work out our net income from the pension after tax and also the tax free element + interest, the figures could be a lot closer. Problem is I that whilst I have a grasp of the theory I am not clever enough to work it out accurately

As for what we need to live on, not much - would say £1,000 net a month would do it. We just moved and cleared the mortgage and also bought a Passive House, so energy costs are about 80% less than a normal house

There's definitely a point where the most responsible financial decision isn't necessarily the best life decision and from what you've said and from the figures, it is my opinion that you may well be best to take the pension and lump sum now.

If you choose not to take the pension now you're forcing yourself back in to work, potentially into a position where you'll need to take on debt until you can find a job and subjecting yourself to all the stress that comes from being unsure if you're going to be able to eat next month.

As long as your monthly expenditure is less than your pension income then I see no serious problem with taking it now, other than you're sacrificing the better financial prospects you might have but if your goal is just to have a simple retirement and you're not that interested in providing a big inheritance to any family I can't see any reason not to take it now.

Although reading the other posts you do have the option to take a smaller lump sum, you could find a middle ground where you take say £40,000 lump sum and then a higher yearly pension? That way you have the financial security liquidity offers with the room to breathe with the amount you spend per month.

jem16

Ribin wrote: »

Thank you for the analysis. I just wish it was as simple as that but it doesn't take into account the taxation effect both on the regular income and tax free lump sum. My gut feeling is that once you work out our net income from the pension after tax and also the tax free element + interest, the figures could be a lot closer. Problem is I that whilst I have a grasp of the theory I am not clever enough to work it out accurately

Your commutation rate appears to be 11.58% as you are giving up £7330 of pension to have £84,900 extra lump sum. Pretty dire rate really.

If you were to invest the lump sum you would need to achieve 8.64% just to break even in the first year. You're never going to achieve that with savings and would need to take on a fair bit of risk to achieve it with investments.

Ribin

jem16 wrote: »

Your commutation rate appears to be 11.58% as you are giving up £7330 of pension to have £84,900 extra lump sum. Pretty dire rate really.

If you were to invest the lump sum you would need to achieve 8.64% just to break even in the first year. You're never going to achieve that with savings and would need to take on a fair bit of risk to achieve it with investments.

Thanks for the comment. If 11.58% is dire, what is the norm?