Taking a reduced lump sum, so more monthly pension

GibbsRule_No3

Is there an easy way of working out how much of a reduced lump sum I need to ask for to get so much pension per year? EG I am offered a £30,000 tax free lump sum and a pension of £4550. What tax free lump sum should I put down if I want £6500 pension per year. I am useless at maths. Also as I will continue to work how much am I allowed to put into a stake holder works pension to avert paying as much tax on the £6500 which I don't really need while working. I am already receiving another pension, and paying tax on that so I know I would pay tax on the £6500.

jem16

GibbsRule_No3 wrote: »

Is there an easy way of working out how much of a reduced lump sum I need to ask for to get so much pension per year? EG I am offered a £30,000 tax free lump sum and a pension of £4550. What tax free lump sum should I put down if I want £6500 pension per year.

Is this a Defined Benefit pension you are referring to? If so is it possible to take a reduced lump sum? With some schemes there is an automatic lump sum which you have no choice but to take. Some schemes offer inverse commutation which does allow you to commute the lump sum to pension but without knowing the rate no-one can tell you the answer but the scheme itself.

If it's a Defined Contribution scheme and you are taking an annuity it will depend on the rate.

Also as I will continue to work how much am I allowed to put into a stake holder works pension to avert paying as much tax on the £6500 which I don't really need while working. I am already receiving another pension, and paying tax on that so I know I would pay tax on the £6500.

Do you have to take the pension now if you don't need it?

How much you can pay in depends on your income from work as tax relief is limited to 100% of your earnings. It also depends on whether you're a higher rate taxpayer or not. What is your earned income and what is your total income?

GibbsRule_No3

Thanks for getting back. It is a final salary scheme and the quote I have, tells me I can have a pension of over £7000 a year or the lump sum they have quoted with the reduced amount per year but gives the option to take less lump sum and higher pension. I am already 61 years old but the State Pension does not kick in until I am 65 and 9 months so I cannot afford to retire yet. If I don't start taking the pension now I will probably never make up the money I could be receiving before I do retire and likely length of life after retirement kicks in. So I might as well start taking it. Knowing I already pay £100 tax from the Civil Service pension I am already taking I just needed to know how much I should take as a lump sum from this pension. I think paying in to the company Stake Holder pension, now I can just take it all out in 4 years, is the best option with the low interest rates on any other savings.

jem16

GibbsRule_No3 wrote: »

Thanks for getting back. It is a final salary scheme and the quote I have, tells me I can have a pension of over £7000 a year or the lump sum they have quoted with the reduced amount per year but gives the option to take less lump sum and higher pension.

Ok on the figures you have quoted, you are giving up £2450 of pension to get £30k lump sum so it's approximately a commutation rate of 12:1. Is this a Public Sector scheme?

If you want £6500 then you're giving up £500 of pension so should receive a lump sum of around £6000.

I am already 61 years old but the State Pension does not kick in until I am 65 and 9 months so I cannot afford to retire yet. If I don't start taking the pension now I will probably never make up the money I could be receiving before I do retire and likely length of life after retirement kicks in. So I might as well start taking it.

Have you reached the Normal Retirement Date for the scheme? If so do you get any extra for not taking it? If the answer to that is no then take it.

If you haven't reached normal retirement age, then you're going to be losing around 5% for each year you take it early.

Knowing I already pay £100 tax from the Civil Service pension I am already taking I just needed to know how much I should take as a lump sum from this pension. I think paying in to the company Stake Holder pension, now I can just take it all out in 4 years, is the best option with the low interest rates on any other savings.

Are you a higher rate taxpayer if you combine the income from work plus the two pensions?

If you are it could be worth it but if you're not you are simply deferring the tax till later apart from the little extra you will get from the tax-free lump sum.