DB best deal

PT18

Old DB pension 65 in July approx 12.5 k pension + 30 k tfls or 9.5 k pension + 70 k tfls won't need lump sums to live on. Which should I take?

mgdavid

that depends on something nobody knows - when will you die?
If you're in good health then you can expect to make around 88 on average.
If you take the bigger monthly pension and smaller lump sum you will be in profit every year after 79.
If you have no need of the lump sum then go for the bigger pension.

kidmugsy

mgdavid wrote: »

If you take the bigger monthly pension and smaller lump sum you will be in profit every year after 79.

You'll possibly be in profit earlier if there's any inflation in the meantime. If, on the other hand, you took the lump sum with remarkable good luck just at a market trough, and bunged it into shares and whatnot, you might outperform the pension. As the man didn't quite say, are you feelin' lucky, punk? Put more formally, you are unlikely to find your lump sum outperforming your pension unless you invest it with a fair degree of risk. Plus, do you want to have the hassle of managing a lot of money in your later years? The fear isn't just muddle, it's theft.

The case for a lump sum is strongest when there's something you very much want to spend it on. A second case would be if you want to diversify from over-reliance on a single DB pension. A third would be if you hadn't built up an emergency cash fund and would like to do so.

In my case I took the bigger lump sum because (i) My health had been poor, (ii) We had debts to clear, (iii) Our two biggest DB pensions seemed a bit shaky, (iv) The terms for the extra lump sum weren't too bad, and (v) I was (most unusually) breezily optimistic that I'd find investments that would outperform the pension. And I did: I stumbled across the merits of deferring the old-style State Pension. What luck!

saver861

PT18 wrote: »

Old DB pension 65 in July approx 12.5 k pension + 30 k tfls or 9.5 k pension + 70 k tfls won't need lump sums to live on. Which should I take?

The breakeven point will take you to around 80 or so. Generally the bigger pension is better the younger you are.

The decision lies on how effective the additional money will be to you after the breakeven point of when you are about 80 or so. Generally speaking you use more money earlier in retirement than later - other than needing care costs etc later.

brewerdave

Not a good commutation rate - £40k LS for £3k pa is only 13.
I took the max lump sum when I finished because a) the rate I got was ~ 20 and b) Interest rates for cash at the time were ~ 7.5% !!

PT18

Thanks to all my consideration was to take the higher tfls thereby paying less income tax and draw on the ls should I need to supplement my monthly income, does that make any sense?

mgdavid

PT18 wrote: »

Thanks to all my consideration was to take the higher tfls thereby paying less income tax and draw on the ls should I need to supplement my monthly income, does that make any sense?

No; arithmetically speaking, and across your expected life span, it does not make sense. As said, if you take the lower pension and bigger lump sum, then supplement the pension up to the higher level, you run out of lumpsum money at 79 or 80.
I think it's just human nature to want to get your hands on the cash 'a bird in the hand...' and all that. Best resist it if you can!

Linton

PT18 wrote: »

Thanks to all my consideration was to take the higher tfls thereby paying less income tax and draw on the ls should I need to supplement my monthly income, does that make any sense?

Taking tax into consideration puts the 3K gross pension loss down to £2400 for £40K. £40K is not enough to give a long term broadly inflation proofed income of £2400. At 65 assuming you are in average health your life expectancy is around 87. 40K/2400 = 17 years. So I think the previous advice remains - all other things being equal the pension is still the best value. However, there could be reasons arising from your circumstances that lead you to take the cash.