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DB Pension larger lump sum or larger pension

edited 30 November -1 at 1:00AM in Auto-enrolment
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escubadosescubados Forumite
10 posts
edited 30 November -1 at 1:00AM in Auto-enrolment
I have just received my pension statement, I will be taking early retirement at 60 at the end of the year.
I have been offered a full pension of £17,300 pa,
or a reduced pension of £14,800 pa with an additional tax free lump sum of £45,600.
the pension is index linked to cpi but capped at 2.5%. taking into account additional tax to be paid on pension, it will take 23 years before taking the higher pension pays off.
Also my wife would benefit from the whole should I die if I take the additional lump sum, whereas her spouses pension will be unaffected by either choice.
I have considerable savings so don't need the money but feel if invested it would be a better hedge against inflation rises going above 2.5% in the future.
I would welcome any views on this

Replies

  • jem16jem16 Forumite
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    escubados wrote: »
    I have just received my pension statement, I will be taking early retirement at 60 at the end of the year.

    This will have been better on the main pensions board as this board is about auto-enrolment which is not what your post is about.
    I have been offered a full pension of £17,300 pa,
    or a reduced pension of £14,800 pa with an additional tax free lump sum of £45,600.

    So you're giving up £2500 of pension to get £45,600 lump sum? That is a commutation rate of about 18.25:1 which is reasonable.
    Also my wife would benefit from the whole should I die if I take the additional lump sum, whereas her spouses pension will be unaffected by either choice.

    That's good.
    I have considerable savings so don't need the money but feel if invested it would be a better hedge against inflation rises going above 2.5% in the future.
    I would welcome any views on this

    You're going to need to make about 5.5% above inflation to keep ahead. Saving it won't work so will you be happy to invest?
  • Thanks for the reply I will repost on the pensions board, I am not quite clear on the 5% above inflation as my pension incraeses will be capped at 2.5%, which is part of my worry.
  • jem16jem16 Forumite
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    escubados wrote: »
    Thanks for the reply I will repost on the pensions board, I am not quite clear on the 5% above inflation as my pension incraeses will be capped at 2.5%, which is part of my worry.

    Your pension will go up by CPI up to a maximum of 2.5%.

    So your investment will have to go up 5.5% to keep even with what you give up plus CPI to a maximum of 2.5%.
  • I realise this percentage would be needed to give the same income, but this doesn't take account of the cash, which it would take 23 years to deplete assuming zero growth and zero inflation.
    Given average life expectancy of 85 years this is pretty much the time frame.
    I would intend to invest the whole amount in funds etc eventually in an ISA wrapper as time permits, I would see this as a safeguard for my wife should anything befall me, but also if needed I could assign to income rather than growth funds.
    If the growth were not capped at 2.5% I would have no hesitation in taking the larger pension, but feel it may be more prudent to take the lower one, just in a bit of a dilemma about it.
    Thanks again for your reply.
  • jem16jem16 Forumite
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    escubados wrote: »
    I realise this percentage would be needed to give the same income, but this doesn't take account of the cash, which it would take 23 years to deplete assuming zero growth and zero inflation.

    If you had £45,600 it is going to take 18.25 years to deplete if you withdraw £2500 each year.

    However inflation is unlikely to always be 0% for those 18.25 years so in reality that 18.25 years will be much less.

    Where do you get 23 years from?
  • The lump sum is tax free the extra 2,500 pension will be taxed at 20% so I worked this out at approximately 23 years.
    I worked out the pension income figure for max 2.5% inflation compounded over 23 years it was just over 80,000 from pension, while if I invested with only a 2.5% return over 23 years compounded it was very slightly more within 1,000, I can currently achieve this even with a cash savings account. the only issue would be lower or negative returns which in the current climate appear possible. but in this event CPI will likely remain low.
    I will speak to a financial adviser before I make a final decision.
    If the markets were not in such turmoil it would be a very much easier decision to make.
    Thanks again. much appreciated
  • xylophonexylophone Forumite
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    In the circumstances described where inflation linking on the pension is limited to 2.5% and where the commutation rate is reasonable, I think I would incline to taking the PCLS - it would be possible to fill a couple of S&S ISAs over the next couple of tax years for the OP and his spouse which would give additional tax free income if required - it should be possible to achieve a return in excess of inflation.

    The ISA allowance would also be transferable to the widow/er on death of the spouse.

    http://www.mandg.co.uk/investor/news/intelligence/isa-inheritance-changes/
  • Thanks Xylophone,
    I have still to make my decision, It is a pretty close thing either way.
    I have reasonable investments at the moment and will have to find a home for my normal retirement sum plus some redundancy anyway, so will be filling a couple of ISAs for a few years as it is. So it really is all down to life expectancy, and ensuring my O.H is provided for!
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