Tax free lump sums from two pensions

voddyman

jamesd wrote: »

thanks. What are the numbers if you didn't take the lump sum?

I only have the option in one of my pensions not to take a lump sum, unless i actually tell them I do not want a lump sum and they would therefore have to re quote me for that.
details are as follows
Pension number One :- Option A :- £2288 annual pension plus £6800 lump sum
Option B :- £1768 annual pension plus £11700 lump sum

Pension Number Two :- Option A :- £6721 annual pension and NO lump sum
Option B :- £5000 annual pension and lump sum of £33000


Also from what I can make out in Pension Number One, should I die my wife would get two thirds of the value of the annual pension of whatever option I choose to take.

In pension number two my wife would be entitled to £3800 regardless of what option I choose.

voddyman

kidmugsy wrote: »

Your commutation rate is therefore
(£44500 - £6800)/(£9000 - £6700) = 16.4 For a man of 60 that's so-so. Turn it upside down and it means that you could be doing the equivalent of investing the difference of your two lump sums to get a return of an annuity-like 6.1% p.a., which is pretty good given current circumstances. Tell me: how good is the index-linking of your pensions i.e. the inflation-protection?



Other questions:

(i) Do you have objective reason to expect to be short-lived? (That can be a clincher.)

(ii) Do you have need of a lump sum? (I can see that it's one way to bridge the gap to your State Retirement Pension, but jamesd has suggested another. Just consider how cheap mortgages, for instance, are at the moment.)

(iii) Will reducing your pensions also reduce your widow's pension? (In my case it didn't, which was one reason I was happy to take the bigger lump sum.)

(i) Do you have objective reason to expect to be short-lived? (That can be a clincher.)
No particular reason but the average lifespan for a man in my area is Seventy Eight, therefore giving me approx say twenty years

(ii) Do you have need of a lump sum? (I can see that it's one way to bridge the gap to your State Retirement Pension, but jamesd has suggested another. Just consider how cheap mortgages, for instance, are at the moment.)
We were wanting to get a few improvements done to our house and the lump sums would pay for that as well as topping up our normal monthly outgoings if the pensions do not cover them. We DO NOT have a mortgage or any debt /credit at all.


(iii) Will reducing your pensions also reduce your widow's pension? (In my case it didn't, which was one reason I was happy to take the bigger lump sum.)[/QUOTE]
Pension number One :- Option A :- £2288 annual pension plus £6800 lump sum
Option B :- £1768 annual pension plus £11700 lump sum

Pension Number Two :- Option A :- £6721 annual pension and NO lump sum
Option B :- £5000 annual pension and lump sum of £33000


Also from what I can make out in Pension Number One, should I die my wife would get two thirds of the value of the annual pension of whatever option I choose to take.

In pension number two my wife would be entitled to £3800 regardless of what option I choose.
:beer:

kidmugsy

voddyman wrote: »

(i) Do you have objective reason to expect to be short-lived? (That can be a clincher.)
No particular reason but the average lifespan for a man in my area is Seventy Eight, therefore giving me approx say twenty years

Yeah, but the question isn't the average lifespan, because that allows for all the deaths before 60, it's the life expectancy of a sixty-year-old, which is automatically older. It's also a question of which local habits you share, such as smoking, standing around in the cold, drinking to excess, getting into fights, eating a bad diet of muesli, lentils and so on, or whatever. How's your own health been? Are you eating plenty of fish, milk, butter, eggs, fruit and veg? At what age did your parents, or aunts, die?

voddyman wrote: »

(ii) Do you have need of a lump sum? ...
We were wanting to get a few improvements done to our house and the lump sums would pay for that as well as topping up our normal monthly outgoings if the pensions do not cover them. We DO NOT have a mortgage or any debt /credit at all.

The improvements are a good reason to want a lump sum; so is the desire for a good emergency cash fund (say 3 to 6 months of outgoings). But jamesd's point is that a financially astute way to get the lump sum can be to borrow it and leave the other money effectively invested in your pension.

voddyman wrote: »

(iii) Will reducing your pensions also reduce your widow's pension?
....
Also from what I can make out in Pension Number One, should I die my wife would get two thirds of the value of the annual pension of whatever option I choose to take.

In pension number two my wife would be entitled to £3800 regardless of what option I choose.
:beer:

That suggests to me that there is a case for taking maximum pension and minimum lump sum from pension one, and taking your desired lump sum from pension two.

UPDATE TO PARA: Fortunately pension one has a lousy commutation rate of 9.4 (so bad that it's worth checking the figures) whereas pension two has the much superior 19.2. So consider Option AB: commute pension two and reverse-commute pension one. That way you'd get:

Pension number One :- Option A :- £2288 annual pension plus £6800 lump sum

Pension Number Two :- Option B :- £5000 annual pension and lump sum of £33000

Total pension £7228 p.a., total lump sum £39800.

If they'd let you reverse-commute pension one at the same rate all the way down to zero lump sum, consider that too.


Further thoughts: (i) don't rush to put money into ISAs. Especially if neither of you is going to be a taxpayer you'll get far better interest outside, e.g. in interest-bearing current accounts. 5% p.a. and 4% p.a. are easily available. (ii) Consider for each of you contributing £2880 p.a. to a personal pension of some sort. HMRC makes it up to £3600, and the new flexibility from April means you can get at the money whenever you want it. That 25% boost to your money is really useful, and you can time the withdrawal of the money to ensure you pay no tax on the way out i.e. roughly speaking, withdraw it in the years before your State Pension begins. If you get your skates on, you could both make contributions before April 5th. If either of you has earnings in this tax year you can potentially contribute more, up to the level of your earnings minus a correction for any other pension contributions you've made this year.

voddyman

kidmugsy wrote: »

Yeah, but the question isn't the average lifespan, because that allows for all the deaths before 60, it's the life expectancy of a sixty-year-old, which is automatically older. It's also a question of which local habits you share, such as smoking, standing around in the cold, drinking to excess, getting into fights, eating a bad diet of muesli, lentils and so on, or whatever. How's your own health been? Are you eating plenty of fish, milk, butter, eggs, fruit and veg? At what age did your parents, or aunts, die?



The improvements are a good reason to want a lump sum; so is the desire for a good emergency cash fund (say 3 to 6 months of outgoings). But jamesd's point is that a financially astute way to get the lump sum can be to borrow it and leave the other money effectively invested in your pension.



That suggests to me that there is a case for taking maximum pension and minimum lump sum from pension one, and taking your desired lump sum from pension two.

Unfortunately pension one has a lousy commutation rate of 9.4 (so bad that it's worth checking the figures) whereas pension two has the much superior 19.2. These figures turn the conclusion round the other way. So consider Option AB: commute pension two and reverse-commute pension one. That way you'd get:

Pension number One :- Option A :- £2288 annual pension plus £6800 lump sum

Pension Number Two :- Option B :- £5000 annual pension and lump sum of £33000

Total pension £7228 p.a., total lump sum £39800.

If they'd let you reverse-commute pension one at the same rate all the way down to zero lump sum, consider that too.


Further thoughts: (i) don't rush to put money into ISAs. Especially if neither of you is going to be a taxpayer you'll get far better interest outside, e.g. in interest-bearing current accounts. 5% p.a. and 4% p.a. are easily available. (ii) Consider for each of you contributing £2880 p.a. to a personal pension of some sort. HMRC makes it up to £3600, and the new flexibility from April means you can get at the money whenever you want it. That 25% boost to your money is really useful, and you can time the withdrawal of the money to ensure you pay no tax on the way out i.e. roughly speaking, withdraw it in the years before your State Pension begins. If you get your skates on, you could both make contributions before April 5th. If either of you has earnings in this tax year you can potentially contribute more, up to the level of your earnings minus a correction for any other pension contributions you've made this year.

Excellent advice kidmugsy and thank you, much appreciated. I shall probably go down your the road of lower lump sum from pension one and the big lump sum from pension two.
You've given me something to think about now.
Thank you :T:beer::)