pension scheme AND a lump sum confusion.

colinpost

My university pension scheme (final salary) is a £n AND a lump sum.
So, if I take 25% of the lump sum, would the remainder of that lump sum payout pension p.a. , in addition to the final salary pension…?


Or, as I suspect, would the 25% lump sum lower final salary pension?

Linton

The lump sum would lower your pension. Often we see that the lump sum is worth significantly less than the cost of providing the missing income.

Ps your wording confused me - I assume you are asking whether you should take the extra lump sum.

PPS reading again I am completely confused as to what you mean. Normally the lump sum is the equivalent of the 25%.

mania112

I would disagree.

Usually there are 2 options.

1) £x per annum

or

2) £n per annum AND a lump sum.

Looks like you're talking about option 2 - the £n is already the lower amount including a lump sum.

colinpost

mania112 wrote: »

I would disagree.

Usually there are 2 options.

1) £x per annum

or

2) £n per annum AND a lump sum.

Looks like you're talking about option 2 - the £n is already the lower amount including a lump sum.

That is correct and is how our pension statement is worded

mania112

So £n is what you will get and you will also receive a lump sum.

It might not be 25%, Final Salary schemes tend to use a 'commutation' factor (give up £1 pension for £13 lump sum, for example) or 3x the pension.

Bennifred

I think how it works (in it's simplest form) is that

1)you can take up to 25% of your pension pot as a tax-free lump sum and the rest as a taxable monthly income.

OR

2)You could take a smaller lump sum and have a higher monthly income.

OR

3)You can take NO lump sum and have the highest possible monthly income.

You should remember that the lump sum is tax-free and the remaining monthly income is taxable. Also - is your spouse entitled to anything from your pension when you die?

Linton

Bennifred wrote: »

I think how it works (in it's simplest form) is that

1)you can take up to 25% of your pension pot as a tax-free lump sum and the rest as a taxable monthly income.

OR

2)You could take a smaller lump sum and have a higher monthly income.

OR

3)You can take NO lump sum and have the highest possible monthly income.

You should remember that the lump sum is tax-free and the remaining monthly income is taxable. Also - is your spouse entitled to anything from your pension when you die?

No - the maximum 25% applies to defined contribution schemes only. The values for DB/final salary schemes are as specified by the scheme rules. DB schemes dont have a pension pot.

So your choice may be between one or more possible lump sum values and the corresponding annual pension, as defined by the scheme rules. Generally speaking the lump sums tend not to be generous considering the pension you give up.

PS The amount of benefit to your wife after your death will be defined by the scheme rules.

xylophone

No - the maximum 25% applies to defined contribution schemes only.

Not necessarily so - relative has DB/FS pension - he could take anything up to a maximum of 25% as a lump sum and the rest as monthly pension - his commutation factor was 20.

atush

You should remember that the lump sum is tax-free and the remaining monthly income is taxable. Also - is your spouse entitled to anything from your pension when you die?

While the lump sum of 25% or less is tax free, it is often best not to take it from a DB epnsion if you are not desperate for the LS. AS it is better to take the larger pension indexed for life. And some DB pensions base the Spousal pension on the lower rate if you take the LS.

So, if you find you may need a LS, and would prefer a higher increasing income for life, do think about saving ito S&S isas outside your pension.

hyubh

colinpost wrote: »

Or, as I suspect, would the 25% lump sum lower final salary pension?

I think you (and some of the previous answers) are a bit confused. Under the rules of the particular scheme you are a member of, standard pension benefits take the form of a pension + a lump sum. It is however possible to either (a) reduce the pension to increase the lump sum (up to a statutory maximum) or (b) reduce the lump sum to increase the pension. The former is called 'commutation' and the latter 'reverse commutation', and in both cases, the same 'actuarially neutral' factor will be used. This means, on a general balance of probabilities, it will cost the pension fund the same whether you choose to take the standard package, boost your pension, or boost your lump sum. See here:

http://www.uss.co.uk/Factsheet%20List/FS%20Tax%20free%20options%20at%20retirement%20v8%200.pdf