Best option

Alvyn

My husband is due to take early retirement, aged 58, from a private company on a final salary scheme.
We owe about £25000 on our mortgage that is tracking at 0.5% above the base rate, so are paying 1% interest. No other debts.
He has 4 options.
1. £23000 per annum
2. £27000 until state retirement age then £19000 per annum
3. Lump sum £97000 and £14000 per annum
4. Lump sum £97000 then £18000 until state retirement then £12000 per annum

I think he should take option 2 but he thinks take a lump sum option 4 whilst he can get hold of it in case something happens to the pension pot. He also thinks it is best to take the lump sum for me in case he dies as I would only get half of his pension.
I have got my own small pension that I can get in 6 years and I am currently working.
So basically if the company or pension fund collapses does he lose his pension?
What option is best??

mania112

When you say early retirement - is he finishing work?

If he is continuing to work, he should wait.

There is a protection scheme in place to ensure he won't lose his pension if the company go belly up - the cover is for up to 90% of his guaranteed pension, so not too much to worry about there.

The main question is - How much regular income do you need? Do you intend to go travelling or buy a new car?

You need to know what you need and what you want.

If you decide you can afford to live on £14k per year, why not take the nice lump sum and pay off the mortgage and buy the car?

Option 2 isn't ideal in my opinion because the fall in pension at retirement is bigger than the state pension (it won't be made back up to £27k)

zagfles

Lump sums on DB scheme always seem to be a rip-off - a lump sum of £97k or £9k extra a year! I'd like to know where you can get a 9.2% index linked annuity!

zagfles

mania112 wrote: »

When you say early retirement - is he finishing work?

If he is continuing to work, he should wait.

There is a protection scheme in place to ensure he won't lose his pension if the company go belly up - the cover is for up to 90% of his guaranteed pension, so not too much to worry about there.

The main question is - How much regular income do you need? Do you intend to go travelling or buy a new car?

You need to know what you need and what you want.

If you decide you can afford to live on £14k per year, why not take the nice lump sum and pay off the mortgage and buy the car?

Option 2 isn't ideal in my opinion because the fall in pension at retirement is bigger than the state pension (it won't be made back up to £27k)

But between them they could easily get well over £8k in state pension.

robatwork

What's his health like?

Option 1 sounds great if he is in good shape...

kidmugsy

When does the mortgage end?

How much index-linking does your husband's pension get? RPI? CPI? CPI up to a cap of 5%p.a.? ………...

Does he have a reason to fear the scheme going bust?

How's his health?

Yours?

How long-lived is his family? Yours?

What is his State Pension Age? How big will his State Retirement Pension be?

Subject to your answers: Comparing (1) and (3): giving up £9k p.a. (taxed) buys him only £97k p.a. (untaxed). That wouldn't attract me: I'd bin (3) and therefore (4) too. If you need a new car you could do it with a loan that would be far cheaper than giving up the annual pension.


Why do you fancy (2): is it that you'll find it easier to pay off the mortgage with that higher pension?

I chose maximum lump sum myself because I expected to have a much shorter life than my wife. I also was concerned with the state of one of my final salary schemes. But I got a much better commutation rate than is on offer to your husband i.e. more tax-free lump sum per £1k p.a. forgone.

If you find yourself comfortably off with option (2), say, you could always direct more money into pension contributions for yourself. It may be that you could benefit from the new deal to buy extra years of state pension that was mentioned - though with remarkably little detail - by the Chancellor the other day.

zagfles

See:

https://www.moneyadviceservice.org.uk/en/articles/should-you-take-a-pension-tax-free-cash-lump-sum

http://www.thisismoney.co.uk/money/pensions/article-2319419/Why-lump-sums-dont-add-final-salary-pensions.html

Alvyn

mania112 wrote: »

When you say early retirement - is he finishing work?

If he is continuing to work, he should wait.

There is a protection scheme in place to ensure he won't lose his pension if the company go belly up - the cover is for up to 90% of his guaranteed pension, so not too much to worry about there.

The main question is - How much regular income do you need? Do you intend to go travelling or buy a new car?

You need to know what you need and what you want.

If you decide you can afford to live on £14k per year, why not take the nice lump sum and pay off the mortgage and buy the car?

Option 2 isn't ideal in my opinion because the fall in pension at retirement is bigger than the state pension (it won't be made back up to £27k)

Yes he is finishing work. It is a manual job and he is worn out!
I don't think we can live on £14 k a year but I am still working and need to carry on for 6 years until I get my pension.
I am reassured that his pension is protected to 90%.

Linton

Looking at the choice between £23K/year or £14K/year + £97K.....

I assume the pension is index linked...

One way of comparing the two options is to see what income you could get from £97K. In this case were you to buy an inflation linked annuity it would provide a guaranteed income of very roughly £3K/year. Or you could invest the £97K and draw off a non guaranteed increasing income of perhaps £4500.

Another way is to note that if you were to save the excess £9K/year (call it £7K after tax) you would have reached £97K in about 14 years - ie when your husband is 72, perhaps 13 years before expected age at death.

Either way, in pure financial terms taking the lump sum looks like a very poor deal. But there may be some overriding reason why you need more cash sooner and believe that £14K/year is more than adequate for your needs through your old age.

I think you need to do some more detailed calculations to work out your needs both before and after your husband dies. One question - if you take the £97K will you receive 50% of £23K or 50% of £14K should your husband die?

Alvyn

robatwork wrote: »

What's his health like?

Option 1 sounds great if he is in good shape...

I sent him to the GPs a couple of weeks ago for a health check so hopefully he's OK for a few years

It's index linked to the RPI.

I think we need to speak to a financial advisor as I'm getting a bit confused.
I think if we took the lump sum we would worry about spending it in case we needed it in an emergency!

Alvyn

I have worked out how much, after tax, he will have received in pension.
This does not take into account any interest on the lump sum.
Option 4 is the most money out until about age 72. From then on option 2 is the most out until he's in his early 80s when option 1 then becomes the best option.
As long as it's protected I'm thinking option 2 still.