Lump sum or monthly pension?

Costy

My husband has recently retired aged 55 with a final salary pension. We run a small village pub and have done for a few years, and the income from that isn't enough for us to live as we did when he had a well paid job AND the pub. So he's written to his pension company for a quotation.

We can have a monthly pension of £778.01 a month, for life (no idea if this is before or after income tax, it doesn't say on the quote), with no lump sum. This isn't bad, we have paid off our mortgage, and with the money from the pub this will do nicely. OR, we can take a tax free lump sum of £46,322.19 and have a monthly income of £579.02 a month.

We have also got a (what was) Pearl private pension plan worth about £125k for when we give up the business. I have saved like a demon over the last few years in preparation for this, and have 23k in isas.

What would be the best thing for us to do now, take the lump sum and reduced monthly income, or the £778 for life?

I don't want him to defer the pension for too long, as both my parents died very young, as did his father, you never know what's around the corner!

Help please?

HappyMJ

Costy wrote: »

My husband has recently retired aged 55 with a final salary pension. We run a small village pub and have done for a few years, and the income from that isn't enough for us to live as we did when he had a well paid job AND the pub. So he's written to his pension company for a quotation.

We can have a monthly pension of £778.01 a month, for life (no idea if this is before or after income tax, it doesn't say on the quote), with no lump sum. This isn't bad, we have paid off our mortgage, and with the money from the pub this will do nicely. OR, we can take a tax free lump sum of £46,322.19 and have a monthly income of £579.02 a month.

We have also got a (what was) Pearl private pension plan worth about £125k for when we give up the business. I have saved like a demon over the last few years in preparation for this, and have 23k in isas.

What would be the best thing for us to do now, take the lump sum and reduced monthly income, or the £778 for life?

I don't want him to defer the pension for too long, as both my parents died very young, as did his father, you never know what's around the corner!

Help please?

I would take the lot as a lump sum. I wouldn't even take the smaller monthly income. You can invest it and earn much more than £778 a month for life and live off the capital if it's not enough. Once it's all gone you'll either be no longer here or too old to enjoy it.

As you're under the state retirement age you'll need to spend much more in the early years as you won't have the state pension supplementing it. £778 a month wouldn't quite be enough without having to work so that's why I would take the lot and spend it. £778 is quoted before income tax.

Costy

I thought you couldn't take the whole lot tax free?

bigadaj

Costy wrote: »

I thought you couldn't take the whole lot tax free?

Maybe, maybe not you need to ask the question.

Is the income inflation linked, as that is an important factor.

The difference in the two options you've stated suggest a commutation factor of around 6%. If you did get that then there's no current risk free option that would pay anything like that, so it would suggest that taking no lump sum would be the best financial option.

If they did offer a lump sum option then that would suggest a very large pot, though to access this you'd have to spend a few grand potentially with an ifa to write a report, and would almost certainly have toast against that advice for the reasons above.

If you think you won't live long then that's a reason to take some or all lump sum now. However if you then live for another thirty years, as average life expectancy would suggest, then you will be worse off over that time.

daveyjp

If you are confident that you will be able to make a return of £200 a month from the lump sum for as long as the pension is drawn, plus increases to cover inflation, plus any element of widows pension which may be attached to it then you take it.

If you want an easier life of £700+ a month risk free plus inflation increases for the rest of life you consider the max monthly payout.

HappyMJ

daveyjp wrote: »

If you are confident that you will be able to make a return of £200 a month from the lump sum for as long as the pension is drawn, plus increases to cover inflation, plus any element of widows pension which may be attached to it then you take it.

If you want an easier life of £700+ a month risk free plus inflation increases for the rest of life you consider the max monthly payout.

Are there annual inflation increases? The amount doesn't reflect current quotes including inflation increases.

Costy

The letter says we can't take more than £46,322.19 as a lump sum.

So, if the £778.01 monthly payment is going to be taxed, is there any value in taking the £46,322.19 lump sum and investing it in ISAs and having a monthly income of £579.03?

LHW99

You could think about drawing down the Pearl pension over the years between now and SPA.
Not sure how the calculation would work, but if you aimed to use it all, the monthly amount would be in the ball park of what you're mentioning.
Then the DB scheme wouldn't suffer any actuarial reduction, and you would maintain the spouse benefit and inflation linking.
May be worth looking into whether this would be a better option

xylophone

Does your husband have the right to take the FS pension at 55 without actuarial reduction?

If not, how much is he losing by drawing the pension before Scheme Retirement Age? What is Scheme Retirement Age?

Is it he or you who has the Pearl pension plan or do you both have a Pearl Pension Plan?

Have you both obtained State Pension Statements?

https://www.gov.uk/check-state-pension

jamesd

Costy wrote: »

My husband has recently retired aged 55 with a final salary pension.

Is age 55 the normal retirement age for the pension or is he taking it early? taking it early is usually a bad move, best avoided by doing something like using a mortgage then repaying that out of the pension after normal retirement age.

Costy wrote: »

We can have a monthly pension of £778.01 a month, for life (no idea if this is before or after income tax, it doesn't say on the quote), with no lump sum. This isn't bad, we have paid off our mortgage, and with the money from the pub this will do nicely. OR, we can take a tax free lump sum of £46,322.19 and have a monthly income of £579.02 a month.

That's a commutation rate of 19.4:1 (19.4 times the income given up as the lump sum). That's an entirely decent deal and worth taking provided he's at the normal retirement age for the pension scheme.

You can then draw down on that, planning to use it over the time from now until state pension age to replace the state pension income that you're not getting yet.

Costy wrote: »

We have also got a (what was) Pearl private pension plan worth about £125k

Does this have a guaranteed annuity rate? If so, what is the rate and when does it apply? Something like age 60 would be quite common. Depending on the GAR it could be a good or bad idea to take this now. Again, mortgage and repay once in payment is the alternative plan if it's a better deal to wait.

Costy wrote: »

What would be the best thing for us to do now, take the lump sum and reduced monthly income, or the £778 for life?

We really need the answers to the questions asked to decide. Often the best route is the mortgage one and waiting until normal retirement age or GAR age. But also often not, just depends on the details.

Costy wrote: »

I don't want him to defer the pension for too long, as both my parents died very young, as did his father, you never know what's around the corner!

I'm more than ten years older than the age at which my father died of a heart attack and my mother also died early of circulation-related problems. Yet some recent tests showed that my own risk is pretty much normal based on CAT scans and coronary calcium score and such. If worried, why not consider spending £500-600 or so a piece for a check of the various risk factors while there's quite likely still time to do something about it? That'll be better than even the general knowledge that life expectancies have been rising.

jamesd

Costy wrote: »

I thought you couldn't take the whole lot tax free?

You can't but if the person's income is low enough the part below the personal allowance can be taken tax free. If you were not committed to running the pub and were willing to make Portugal your residence for a year then stay out of the UK for at least three years aside from short trips you could take the lot tax free under a Portugese scheme that taxes foreign pension income at 0% and using the tax treaty with the UK to prevent any additional ta on the remaining 75%.

Costy wrote: »

The letter says we can't take more than £46,322.19 as a lump sum.

You can't if you do it by the normal taking benefits route. But an alternative approach that can sometimes pay is to ask for a transfer value then transfer the whole pot to a personal pension. Then it's under normal personal pension rules. This usually doesn't make sense but occasionally the transfer value is so high that it does. Advice from an IFA with pension transfer qualification is mandatory by law before you can use this alternative option and FWIW this does not appear likely to be a good deal in your situation based on the numbers provided so far.

Costy wrote: »

So, if the £778.01 monthly payment is going to be taxed, is there any value in taking the £46,322.19 lump sum and investing it in ISAs and having a monthly income of £579.03?

Yes, provided the NRA for the scheme has been reached that looks like a good plan.