Cash lump sum option

Ronlg0

I’m taking early retirement in December and I’m in a finalsalary pension scheme. I’m considering the options I have of either taking myfull pension of £18k per annum or taking a reduced pension of £12.5k per annumwith a cash lump sum of £80k.



I’m in reasonable state of health and my parents andgrandparents have enjoyed life into their mid-eighties and my dad is stillalive at 95 so my prospects aren’t bad for maximising the pension.



I’ve consulted an IFA as to the better of the 2 options andhe said (naturally) to take the cash and invest it in a tax efficientPrudential PruFund Growth Fund, of which his commission is 3%. As a result I’mnot sure if his advice is totally unbiased or leaning towards what he can makefrom it.



Any view as to which is the better option in this situation,and the best form of fairly cautious investment to improve on the pension Icould get?



Thanks

Archi_Bald

Did your IFA work out the difference in monthly income for you, over the next, say, 10 years? Is taking the risk with an investment, versus your guaranteed (and inflation-linked?) pension worth it?

Nick_C

If you expect to die in the next 15 years, you may want to take the cash.

However, if you expect to die before your partner, they will get a surviving partners pension which will be a percentage of your pension.

Unless you desperately need capital, I would take the maximum possible pension.

If you want to invest £80K, consider doing it yourself by buying shares or tracker funds.

atush

How many other savings and investments do you have? Do you need a Lump sum? What is the commutation rate in % for the LS?

How old are you? How many years early are you getting this pension? how much will it be reduced each year to take it early?

Personally, I would not take FS pension early and if I did, I would not take a LS. This is guaranteed for life, indexed income you are playing with.

So w/o other information from you i'd take no LS, esp with good health and a superb LE.

Vortigern

Ronlg0 - you might get more answers in the Pensions section of the forum. Take a look HERE and perhaps ask the question again on the Pensions board.

It might be useful to say which company's final salary scheme you are in, and whether the annual pension amount is index linked.

jem16

Ronlg0 wrote: »

I’m taking early retirement in December and I’m in a finalsalary pension scheme. I’m considering the options I have of either taking myfull pension of £18k per annum or taking a reduced pension of £12.5k per annumwith a cash lump sum of £80k.

So you are giving up £5.5k of indexed pension income to receive £80k lump sum. That works out at a commutation rate of 15.5:1. This is not quite as dire as public sector commutation rates of 12:1 but not particularly great either.

If you invested the £80k you would need to be looking at a return of 6.45% above inflation as your final salary pension is likely to be index-linked. That would just to break even.

I’ve consulted an IFA as to the better of the 2 options andhe said (naturally) to take the cash and invest it in a tax efficientPrudential PruFund Growth Fund, of which his commission is 3%.

This is an Investment Bond which basically allows you to take 5% as a capital withdrawal each year as "tax-free" income. It's also a With-profits fund. An Investment Bond can be useful for higher rate taxpayers and has a few other uses as a tax wrapper. However charges are usually higher than using an ISA or simple unwrapped investments. Unless you fit into the category of needing the Investment Bond tax wrapper, it's usually considered unnecessary.

As a result I’mnot sure if his advice is totally unbiased or leaning towards what he can makefrom it.Any view as to which is the better option in this situation,and the best form of fairly cautious investment to improve on the pension Icould get

We don't know all of your circumstances which might make the use of the Investment Bond the correct choice. However if it's income you really are after, personally I would be taking the maximum pension.

daniel80

The pension amounts you have mentioned is exactly the option that I had to decide on.[ Gas industry ] I decided to pay off all credit cards, no other debts and take the larger pension. Depts were not massive, did not really take me long to reach that decision and glad that I did.

Hominu

20 years @ 18K = 360K
20 years @ 12.5K = 250K + 80K = 330K. You'd then have make up the rest in investments and interest, ensuring you remember inflation, to break even.

So I'd say that if your expecting to live 10 years to less, then take the lump sum, else take the higher pension (which is likely to be index-linked)