Taking Pension Early

kitty1941

My husband has applied to take his pension early - from his 55th birthday. He has a choice of a annual pension of £6500, or lump sum of £31000 and annual pension of £4800. Unsure which would be the best option.

dunstonh

Unsure which would be the best option.

Depends on the terms of the pension. Also how it fits with personal needs and objectives, health, tax position etc.

There is no one-size-fits-all answer here as it depends on a number of things.

bigadaj

Dunstonh is right but it's useful to put the numbers into a little context. Transferring pension income into the lump sum gives you a commutation rate, ie the effective cost that lump sum is incurring.

In your example the lump sum is £31000 and the reduction in pension is £1700 per year, so the commutation rate is just over 18; the inverse of this is the effective interest rate you'd need to achieve on the lump sum to match that which the pension would give you. That is around 5.5%, which is obviously a lot higher than any bank accounts are paying currently.

The other consideration is the cost of taking the pension early at 55, to achieve this there are normally penalties on the pension income, 5% for each year below the normal scheme age is typical so it's also worth considering whether you can delay taking the pension as it could leave you with More money in the long term.

atush

How much is the pension reduced for taking it at 55? It can be better to wait and take it later if you can.

Is he still working there? Is there a chance for redundancy?

jamesd

The commutation rate is 18.2:1 which isn't too bad. Not taking the lump sum is equivalent to getting 5.48% on the money, presumably inflation linked in a defined benefits pension. That is quite a good deal even though it's taxable and the income isn't. Getting more than 5.48% plus inflation is not that easy with investments, its' above the long term average performance of the UK stock market.

For the reasons above I think it is likely to be best to take the higher income.

If he wants to boost capital he could then save some of the higher income level. He can also make pension contributions into a personal pension and withdraw a 25% tax free lump sum. He should leave the remaining 75% int he pension until it no longer matters that his pension money purchase annual allowance for contributions will be reduced from £40k to £10k. he gets basic rate tax relief even on income that has no income tax, as could you or anyone else.

If he has no earned income he can pay 2880 net, 3600 gross, into a pension. The difference between those two numbers is the tax relief and 25% of the 3600 can be taken out tax free.

We don't really know enough about the overall situation to give replies that are good for the whole situation so an just mention a few pieces relevant to small parts of an overall situation. For example, we don't know enough about why he wants to take the money, how much it is reduced for taking it early and what other resources are available that could be used instead. The last of those is particularly important because it is usually a better idea to borrow money than take a defined benefit pension early.