Best option

kidmugsy

If your husband goes for the £27k p.a. instead of the £14k p.a. he'll be better off by £10,400 p.a. after tax. He'll make up the £97k forgone pretty quickly, especially since his pension is index-linked and the lump sum isn't. After that, he's in profit all the way with the bigger pension.

Anyway, what does he plan to do with the £97k? Does he feel equipped to invest it himself?

As for "every single person we have spoken to is telling my husband to take the lump sum… the other 8 guys in his section who are retiring at the same time are taking the lump sum", just think of all the bloody fools over the years who told you not to waste your money on pensions at all.

There are three arguments for the lump sum: (i) There's something you both really want to spend it on, (ii) There's a real danger of the scheme going bust and leaving him with a replacement pension with poorer index-linking, (iii) He expects to die young, while being indifferent to the smaller widow's pension.

If none of those three apply, I'd go for the £27k p.a. option.

jamesd

Alvyn wrote: »

I don't think we should take the lump sum but every single person we have spoken to is telling my husband to take the lump sum. Also the other 8 guys in his section who are retiring at the same time are taking the lump sum.

There are two main types of lump sum:

1. Personal pensions and work defined contributions pensions, where you can pick the investments. For these, taking the lump sum is best in almost all cases.

2. Defined benefit and other final salary or average salary pensions or similar. For these, taking the lump sum is almost always a very poor deal and it's usually a significant mistake to take it unless there is desperate need for the money or an exceptionally low life expectancy or similar truly unusual situation.

Both you and your husband are in the second type and the lump sum is a bad idea. Someone who doesn't take the lump sum from his pension but instead just saves the extra money can expect to have accumulate the lump sum amount in about ten years, then be in pure profit for the rest of their life.

The no lump sum deal is so much better than the lump sum that it's better to do things like taking out a mortgage to get a lump sum and repay the mortgage from the extra income for a while. To check on that, look at the numbers:

Alvyn wrote: »

1. £23000 per annum
3. Lump sum £97000 and £14000 per annum

£9,000 lower taxable, £7,200 after basic rate tax, to get £97,000 lump sum. Using the MSE mortgage calculator that £7,200, 600 a month, can repay a 25 year mortgage at 5% of £102,000. After that it's pure profit. Because the pension increases with inflation, from year two there's extra income available above the mortgage payment. So mortgage-based lump sum starts out better and gets even more better as time passes.

Alvyn wrote: »

2. £27000 until state retirement age then £19000 per annum
4. Lump sum £97000 then £18000 until state retirement then £12000 per annum

This one is a bit more fiddly to calculate, since it's £9,000 for seven years then £7,000 for life. £7,200 and £5,600 after basic rate tax, £600 and £466.67 a month. You can calculate that with two mortgages, one 25 years at £466.67 a month and the other seven years at the extra £133.33 a month. The 25 year one is £79,700 and the seven year one is £9,400. That's a total of £89,100 lump sum so far. To get to the £97,000 takes using a bit of the inflation increase that the pension delivers, for perhaps the first five years of increases.

Of course, you wouldn't really want to take out the mortgage to get a lump sum unless you have some need for a lump sum.

Many people don't realise just how bad a deal the lump sum is or just don't think about the alternatives if they want a lump sum. So when people come here we get to explain how bad the deal is.

atush

If you need a lump sum, is he allowed to take a much smaller one? If you don't know, ask them.

I'd hate to see you take the 97K if you only needed say 20K.

Wilkins

jamesd wrote: »

2. Defined benefit and other final salary or average salary pensions or similar. For these, taking the lump sum is almost always a very poor deal and it's usually a significant mistake to take it unless there is desperate need for the money or an exceptionally low life expectancy or similar truly unusual situation.

Well, up to a point, since it depends on the commutation ratio. Mine was 22:1 (27:1 after tax ) and I grabbed the cash in order to make (so far) some good investments.


However, in OP's case, with a CR of < 11:1, I agree entirely that maximising the pension itself would be clearly the better option.

jamesd

Yes, there are a few exceptions and a few more cases where it could be a good idea to take a lump sum, but none of those apply here. The best commutation rate I've seen was around 29:1 for the miners' pension as it was being taken into the PPF. That was the actuarially neutral rate for that scheme and that's how the PPF calculated what to offer.

Alvyn

Thanks for all the advice I've received.
We have decided not to take a lump sum.
We were going to take £20k to buy a new car but after re reading all the advice on here I realised that I would never borrow £20k to buy a new car if I had to pay back the loan for the rest of my life, which in effect is what I would be doing!
We now don't have to worry about investing the money and moving it around all the time.
Thanks again everybody who has helped us understand our options.