Pension or lump sum?

richlatham

I'm 56 and taking redundancy at the end of the year. I can draw my final salary pension, but would like some advice on whether to take an increased lump sum or maximum pension.

The pension is c£15,400pa and I can swap about £600 for a lump sum of c£11,500.

Iwill be getting a lump sum of c£70,000 and I intend to find further employment next year.

Any advice would be appreciated. I have to make a decision fairly quickly!

mania112

If you will continue working, do you not think it best to leave taking your pension until you retire?

bigadaj

The commutation rate is a little under 20 so an effective rate of return of just over 5% on your money! not great but better than you can get from savings. This is fairly neutral so largely down to personal choice. The bigger questions are why are you taking the pension know and what is your likely tax situation.

If your confident in getting more work then can you defer the pension and get a better deal or possibly reduce any penalty you might suffer from taking it now. You'll need to check this with your scheme.

The other point is on tax, if you're earning then the pension will be taxable and will obviously push you into higher rate tax more quickly. There's no reason why you could t set up a new pension to gain tax relief, presumably your lump sum will at least be partly taxable so might be worth contributing for tax relief on this element as well.

richlatham

I'm taking the pension now because I'm being made redundant and can take the pension now without it being reduced. The annual pension is from a final salary scheme. Thanks for the advice.

kidmugsy

richlatham wrote: »

The pension is c£15,400pa and I can swap about £600 for a lump sum of c£11,500.

Either way it's likely that you'll qualify for Flexible Withdrawal when you start your State Retirement Pension. So making more pension contributions after you restart work, to avoid 40% tax, might be even more attractive.

richlatham

Excuse my lack of knowledge, but what is "Flexible Withdrawal"? It sounds interesting...:)

jamesd

Getting the pension unreduced is a great deal. Definitely worth doing.

jamesd

When you have a personal pension, one where you can pick investments, one of the ways of taking an income is through income drawdown. That means leaving the money invested and taking an income if you want to from the investments. You get the usual 25% tax free lump sum.

This comes in two versions. Capped drawdown has something called the GAD limit that restricts how much can be taken out each year, about 6% at 55, rising as you get older.

Flexible drawdown works the same way but there is no cap. Only available if you have at least £20,000 of pension income from work defined benefit pensions like yours or the state pensions, in payment at the time you apply. Once you opt for this you can never make or have made for you any more pension contributions. The money taken out is taxed as normal income in the years in which it's taken out.

So being eligible for flexible drawdown you get the benefits of pension tax relief but the advantage of no cap on how fast you can take the money out.

atush

With 70K LS, and work on the horizon, I would take the Full pension w/o an extra LS of 11K.

Then, once you are working, put the pension income in another pension. When you truely retire, and get your SP this new pension would qualify for Flexible Drawdown which means you'd have no limits to how much you could take each year (although you might want to impost limits on your self so as to save on tax).