Pension options

DTLAM

Hi,

I'm a newbie and would like advice on the following sceanrio.

Retiring this summer at age 60 with a final salary pension without reduction.

I have been given two options:-

Option 1: Pension £17k pa plus £50k lump sum
Option 2: Pension £14k pa plus £100k lump sum

Future final salary pensions to follow:
2017: £4k pa (no lump sum)
2021: £4k pa (no lump sum)

Current status: Own home, no mortgage and no outstanding debts of any kind.
Saving strategy: Regular £2k pm; invest lump sum and all interest accrued.
Spouse income: £17k pa pension plus £17k pa part-time work (for next 3 years).

I would be very grateful for any advice on which option is best.

Thank you in anticipation.

kidmugsy

You're considering giving up £50k to get a pension bigger by £3k p.a. That extra pension is probably better value than any commercial annuity you could buy, though you would be giving up the tax advantage of the lump sum. Are you confident that you could invest the £50k to give you a secure income of more than £3k p.a.? Also

(i) How would your widow's pension be affected?
(ii) How sound are the finances of the scheme?
(iii) Your health, your spouse's?
(iv) Longevity in your family, your spouse's?
(v) Any foreseeable non-investment purpose for the £50k?
(vi) What is the inflation-protection provision on the pension?
(vii) Have you already got a heap of cash saved as an emergency fund, and to cover foreseeable lump sum expenditures? Or are you confident that £50k is enough for those purposes?
(viii) Would you prefer to have an eventual pension income of £31k p.a. (including a guess at your SRP)? Or would you be happier to have £3k p.a. less but a bigger lump sum?

In my view the purpose of wealth is to bestow comfort and security. I'd opt for whichever you guess will provide those better. If you have another purpose in mind - e.g. a bequest - then say so.

DTLAM

Many thanks for your response. Quick answers follow:-

(i) Widows pension is 50% of pensionable salary (either option will provide comfort/security)
(ii) Very sound (government final salary scheme, not an annuity)
(iii) Both excellent
(iv) Both 80+
(v) No
(vi) RPI
(vii) Currently £50k cash savings (ISAs etc) plus £10k short savings (holidays/emergency fund etc). Yes
(viii) ~£31k will be more than enough, even with £28k pa we are likely to still save/spend comfortably.

Either option will bestow comfort and security plus extra lump sum would help children get on housing market IF needed.

robin61

If you live until 80 plus there is little doubt that you will make an overall profit by not taking the lump sum but as you have said you should be in a comfortable position and will be OK whichever option you choose. So when would you rather have the money ? And how important is having some money earlier to help your children ? It isn' t an easy decision for sure as it' s not just about life expectancy and figures on a spread sheet.

DTLAM

Having some cash ready to help offspring is important but is totally dependent on them as to when it will be needed (too many unknown unknowns to nail down at the moment). Current predictions look like a cash input (£50k or £100k depending on what pension option I choose) for their first step on the housing ladder is no more than 5 years away.

kidmugsy

You are in a happy position. Take the bigger lump sum but don't tell the children! No need to put yourself under pressure.

If they don't need it, look upon it as your "care" fund. If one of you needs care while the other still needs the house to live in, you might be pretty pleased that you had that extra £50k. Now all you have to do is work out when to invest it, and in what. I suppose that you could tuck some of it away in extra pension contributions for your wife, as one option. She is, I assume, in a position where she could draw it back out again if required.

P.S. I'm mildly surprised that you get RPI-linking: I had thought that govt schemes had all swapped to CPI. Lucky old you.

robin61

As long as you are still going to have a decent regular income (you are) I really think there is a lot to be said for having the money while you are young enough to enjoy it. But then I am a bird in the hand man. Not everyone will agree.