Thoughts on the best pension option

SandieB_2

Hi everyone, can I run this by you and see what you think.
I'm retiring at the end of July and have just received the paperwork to submit to receive my work pension and I need to decide what option to take regarding pension amount and lump sum.

I have the basic state pension, and my instinct is to take the biggest pension option from the work scheme with no lump sum to ensure that I have a decent annual income. However I was just looking at some info about tax. I will be over the tax free threshold by about £6000 pa, so will have to pay basic rate on that. Would it better to take one of the lesser pension options with a tax free lump sum so that I pay less tax annually? I assume that I would have to pay tax on any interest generated, but presume it wouldn't be as much as the income tax on my pension.

the lump sums in question are either 27k or 51k

I hope that makes sense. I know there are a lot of knowledgeable people on here and would like some input.

thanks in advance
Sandie

Linton

What are the two pension offers?

SandieB_2

with no lump sum 10652
or 9082 and 7696 respectively.

thanks

Linton

You are giving up £1570/year for £27K - a commutation rate of 17. With £27K you could buy roughly £810/year inflation indexed or get say £1100/year from investments. So even assuming the extra pension is taxed at 20% and the money from the £27K is tax free it doesnt look that great a deal all things being equal. Note that you couldnt get 4% interest at the moment and it wouldnt be inflation linked. So to come close to matching the pension you would need to invest in shares/funds.

The higher lump sum offer is at the same commutation rate.

Are all other things equal? Do you need a lump sum now more than extra income in the future? Do you have any debts that need paying?

Linton

On second thoughts you could take the £27K and use it to delay taking your state pension for 3-4 years. When do you reach state pension age? Before or after April 2016?

Delaying taking the state pension provides a return of over 10% now and 5.8% after April 2016. Though of course you would still be paying extra tax once you do take your SP. In fact at 5.8% it works out much the same as keeping the pension. However were you to reach SPA prior to April 2016 taking the lump sum to defer the SP looks worthwhile.

SandieB_2

Thanks very much Linton. I appreciate your input, I'm not very good at this sort of thing.
I was state pension age last year, and deferred it for a year. I've used the current pension rate for working this out, but I realise I will have slightly more than that if I take the deferred amount as a weekly amount rather than a lump sum. I just wanted to see what the options might mean.

I'm not desperate for a lump sum...I have some savings (not very much and am decorating and stuff with some of it), and am hoping to move next year which will release a decent amount from my property. I would mostly like to maximise monthly income, so that I don't have to scrimp on the day to day stuff. But have something behind me in case of emergencies, or just for plain old fun! I'm on my own with no one to fall back on so this has to last me if you see what I mean )

Linton

I assumed your pension was defined benefit (final salary), probably public sector, providing an inflation linked pension. If that's not the case and your pension is Defined Contribution and you are taking a fixed rate annuity which is possible given the figures then things are different - pls confirm.

Linton

Taking the SP deferment as a lump sum is poor value - much better to get the extra pension. All assuming your health is reasonable.,

SandieB_2

Linton wrote: »

I assumed your pension was defined benefit (final salary), probably public sector, providing an inflation linked pension. If that's not the case and your pension is Defined Contribution and you are taking a fixed rate annuity which is possible given the figures then things are different - pls confirm.

That's right it is a final salary scheme.

SandieB_2

Linton wrote: »

Taking the SP deferment as a lump sum is poor value - much better to get the extra pension. All assuming your health is reasonable.,

Thanks again, that's what I was going to do.

kidmugsy

In your shoes I'd consider taking the bigger lump sum, "spending" a chunk of it on buying extra state pension by continued deferral, and using the other bit as an emergency cash reserve, and for jollification.

It might be worth having a go at the sums to see if you can end up with an unshrunk income plus a bit of extra capital. Remember to allow for the tax-free lump sum being tax-free.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdfhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf