What would you do? Pension and lump sum mix.

t0rt0ise

I'm due a small pension in October when I'm 60 and have to decide what mix to take of pension and lump sum.

Here are the options..

A. £3,840 a year pension
B. £3,309 a year pension plus £9,926 lump sum
C. £2,832 a year pension plus £18,869 lump sum.

I can't decide whether I'll live long enough to make option A pay. What a gamble.

So what would you do?

kidmugsy

Is the pension index-linked? Does it carry a widow's pension?

What would you do with the lump sum if you took it?

Update: what's your tax position?

greenglide

Wait until 65?

atush

Do you have other cash savings? Do you need the income? Is 60 the scheme age w/o reduction? Do you have other pensions?

In general, unless you have a very good reason, it is best to take the highest pension.

t0rt0ise

Pension is increased in line with price inflation so the booklet says.
I don't have a partner to widow's pension not applicable.
I'm working full time elsewhere, on a 20 grand salary so will pay 20% tax on it.
I can't see the point in waiting until 65.

I wouldn't do anything risky with the lump sum, would probably put it in an ISA with a long term to get the best rate. I don't need to spend it at least until I retire properly at age 66.

t0rt0ise

Thanks for the help.

I have about 50 grand other savings in ISAs. 60 is the age without reductions for deferred members which I am. I'll have a pittance of an NHS pension, even smaller than that one, and the state pension at age 66 is all.

bigadaj

Assuming in good health, witha low attitude to risk and no debt then normally best to take maximum pension with no lump sum.

As for the pittance of a pension, then an index limked pension of the value you're looking at would need a pension pot of aRound £100k. The average pot used to buy an annuity is around £30k for comparative purposes so it's actually worth a lot.

xylophone

If you don't need /have a use for the lump sum, wouldn't you be better off taking the maximum ( index linked) pension?

As you are still working and have earned income, you could regard the pension income as replacing the same amount of your salary, and pay that amount of salary into your pension thus increasing your retirement provision?

http://www.hmrc.gov.uk/incometax/relief-pension.htm

http://www.nhsbsa.nhs.uk/1289.aspx

state pension at age 66 is all.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181237/single-tier-pension-fact-sheet.pdf

http://www.thisismoney.co.uk/money/pensions/article-2630415/Individual-statements-new-state-pensions-expected-summer.html

t0rt0ise

I hadn't considered putting more into the NHS pension. When you look at the figures it barely seems worth it. I'll look again.

I've got the full NI contribution for the state pension but don't understand what the reduction will be for being contracted out.

atush

You don't have to put it in the NHS pension, you could put it into a DC pension instead.

But it would be worth looking at what added years in the NHS pension would cost.

As you have other capital, I would suggest the higher pension and save the income.

kidmugsy

t0rt0ise wrote: »

Pension is increased in line with price inflation

That makes the pension much more valuable: index-linking until you peg out is very attractive, whether or not we get high inflation again, because it brings you max peace of mind - payment is guaranteed, and so is purchasing power.

t0rt0ise wrote: »

I don't have a partner so widow's pension not applicable.

That makes it less valuable.

t0rt0ise wrote: »

I'm working full time elsewhere, on a 20 grand salary so will pay 20% tax on it. I can't see the point in waiting until 65.

If they were to increase the annual amount for each year you waited, it might be a good idea because you'd not only get more per year but you'd pay less income tax (perhaps none) on it once your earnings have finished. If there were no increase then it would be wisest to take it at 60. You'd need to ask.

t0rt0ise wrote: »

I wouldn't do anything risky with the lump sum, would probably put it in an ISA with a long term to get the best rate.

Then taking the lump sum may not be wise because you'll probably get only 1.5-2% p.a. for the next six years instead of a bigger index-linked pension at 5.35% p.a. on the lump sum forgone. The attraction of a lump sum is if you have a clear purpose for it - to pay off a mortgage, to fly to Australia to see family, to replace an old car… whatever.