Pension lump sum or not?

Slinky_spring

I am shortly able to retire from the fire service on a full pension at the age of 50. I do know I am very lucky compared to many others.

I am looking for advice about the pros and cons of taking a lump sum commutation or a higher monthly pension for life.

My debts are mortgages on two properties. One is our home, the other is a rental property. We added the deposit for the rental to our home mortgage and the rest is on interest only. We have an endowment that will pay off the original amount of our mortgage ( not the rental deposit)in five years. The total of the two combined is about £50k.

So should I take some or all of the lump sum (max£114k) and pay off some or all of the mortgage or wait for the endowment for that.
Any general or specific advice welcomed.

atush

What rate is/are your mtgs? What is your commutation rate (ie the amount of pension given up per 1K of LS)?

In general, I would say that taking the max from a FS pension is best, unless you have no spouse or dependants and are unlikely to make old bones.

How are/were you planning on paying off the rental mtg? Do you need to? AS the mtg is funded by the rental income and is tax deductable?

Linton

Lump sums with public sector pensions tend to be fairly poor deals. Ask yourself whether you would be able to get the inflation linked net pension you forgo as long term income from the lump sum or whether you need the money to pay off an expensive debt that would otherwise cost you more than the lost pension. A mortgage isnt an expensive debt.

If the answer to both is "NO", then you could go for the lump sum but it should be for some other reason than simple economic benefit. For example the reduced pension is more than enough to provide a comfortable lifestyle so you would like to pend the lump sum on a wild extravagance.

Also, unless you have a special retirement deal taking a defined benefit pension early and 50 is very early, is normally a bad idea financially.

dunstonh

I am looking for advice about the pros and cons of taking a lump sum commutation or a higher monthly pension for life.

largely depends on what you are going to do with the lump sum, your financial situation, health etc.

if you were just going to stick it in the bank for 20 years then it would likely be better off taking the higher income. The younger you are, the more likely the income will break even over the lump sum option. So, at 50, that needs to be considered (whereas at say 65, its more borderline).

Paying off cheap debt that is unlikely to be cost effective use of the lump sum compared to the higher annually increasing income.

Triumph13

If the commutation table I found online is up to date then you'd be looking at a factor of 22.4 at age 50 which doesn't seem too bad actually. £1000 of pension given up would give £22,400 of tax free lump sum. To get the same £1,000 income from investing it you'd need a return of 4.64% above inflation taxed or 3.57% above inflation in an ISA to get the same income plus your preserved capital. That would be towards the agressive end of the spectrum and you'd need risky assets to hope for that kind of return.
Of course you'd be taking on a whole lot of risk, but at those numbers I might be tempted by commutation if I felt I could live happily on the remaining pension if the investments went to pot and if I wanted to maximise the inheritance I was leaving to my kids.

Seabee42

You also have to factor in that the pension will increase and will be liable for PAYE.

What are you actual needs financially do you need to extra income?

Are you in good health?

Theoretically if commutation rates were such that one option was automatically better then the rates should be reviewed!!!!

If you were purchasing an annuity that increased with RPI at 50 I suspect you would be getting a rate a lot worse than 22 to1.

Triumph13

Seabee42 wrote: »

If you were purchasing an annuity that increased with RPI at 50 I suspect you would be getting a rate a lot worse than 22 to1.

Much, much worse, but that's largely because it has to be invested in gilts.

The OP would need to be looking at much riskier asset classes to get an equivalent income.

Wilkins

Slinky_spring wrote: »

I am looking for advice about the pros and cons of taking a lump sum commutation or a higher monthly pension for life.
Any general or specific advice welcomed.

I took the maximum lump sum at a similar commutation rate to yours, BUT I was 55 and an experienced investor with a plan. Given your age, I would concur with the others here and say that you would be best served by taking the maximum pension since you seem to have your capital needs already covered.

hyubh

Linton wrote: »

Lump sums with public sector pensions tend to be fairly poor deals.

By the sounds of it the OP has an old fire scheme pension, in which case the commutation rate is intended to be actuarially neutral from the scheme's point of view rather than the flat 12/1 you get with the TPS, LGPS etc.

atush

But we wont' know until he comes back and answers the questions put to him?