Early retirement...

Dunree

Hi Guys,

I'm looking to go soon, if I can.

I'm 53 and had enough of work...

I can get my pension of either £17k p/a and a £60k lump sum, or I can get Pension of £13094.10 a year plus a maximum lump sum of £81619.47.

My question is:

I understand that I will have to pay income tax on the pension, but in order to reduce the income tax liability, which would be the best option??

Dunree

HappyMJ

Dunree wrote: »

Hi Guys,

I'm looking to go soon, if I can.

I'm 53 and had enough of work...

I can get my pension of either £17k p/a and a £60k lump sum, or I can get Pension of £13094.10 a year plus a maximum lump sum of £81619.47.

My question is:

I understand that I will have to pay income tax on the pension, but in order to reduce the income tax liability, which would be the best option??

Dunree

There is no "best" option.

There are many factors you need to consider.

If it were me I'd take the lot, pay the tax and then invest it so I had a larger income until I could take a state pension. That's me though. It's very risky.

Linton

The lump sum is tax free so by taking a larger lump sum the less tax you pay. However you also get less income, which is very likely to outweigh the tax benefit. Look at it this way: by taking the £21619 extra lump sum you are losing £3906 income (£3125 after basic rate tax). So after 7 years you will be worse off (ignoring inflation and any investment return on the extra lump sum). If you are in average health now you can expect to live another 30 years or more.

Finst

Please don't look at your income tax liability in isolation.

If you opt for the higher lump sum, you get an extra £21.6k tax free. Or you could have an extra £3.9k per year before tax. Assuming you don't have any other pensions or income, you'll pay 20% tax on that, so £3.1k after tax.

After 7 years, you'll have made that back (7 x 3.1 = 21.7). So if you live at least until you are 60, you'll get more picking the pension. This is a simple calculation ignoring inflationary increases to the pension (if there are any) and investment returns on the lump sum, but it gives you a very rough idea.

Do you have any desperate need of the extra £20k before you are 60? Are you in poor health such that you don't expect to make it to 60?
FYI - the majority of 53 year olds will live well beyond 60.
Would you rather have more money now or in later retirement?

I would check the figures you've been given, as although taking an extra tax-free lump can often be poor value from an expected value perspective, in this case it is unusually poor (almost to the point where I don't believe it)

edinburgher

Unless you are in poor health you would be wise to take the highest income possible from your pension, even considering tax. You are still young in the grand scheme of things and could live for another 30+ years.

Nick_C

+1 to taking the higher pension.

You will pay very little income tax on a pension of £17K. With a personal allowance of £11K, you will only be paying £100 a month tax. And no NI or pension contributions. You will be as well off as someone with a salary of £20K paying 6% into a pension scheme.

Avoiding tax will mainly a problem with the income from your lump sum. Personally, I would put around £28K into current accounts and regular savers with an aim of getting as close as possible to your £1K tax free interest, and invest the rest. This is assuming you have no investments or savings currently, and no debts.

bigadaj

Dunree wrote: »

Hi Guys,

I'm looking to go soon, if I can.

I'm 53 and had enough of work...

I can get my pension of either £17k p/a and a £60k lump sum, or I can get Pension of £13094.10 a year plus a maximum lump sum of £81619.47.

My question is:

I understand that I will have to pay income tax on the pension, but in order to reduce the income tax liability, which would be the best option??

Dunree

Are those the only two pension options, check with your provider as on those numbers then taking no lump sum could significantly increase your annual pension.

Dunree

Guys,

I'm stunned, yet again, at your wonderful knowledge.

I'll look very carefully at the options then make a decision.

Though the way things are going here, it will be sooner rather than later.

My plan is to take it easy for a while then do private hire where we live. Taxis are virtually non existent at certain times of the weekend here, so that should supply the beer tokens

Unfortunately I'm not allowed to empty the pot and put it elsewhere. That would have been a big help...

Thanks again folks :T

robin61

Congratulations on your escape !
+1 for taking the lower lump sum and the bigger pension. By the time you are 60 you will start making a profit. So a much better option unless you have a very limited life expectancy.

Dunree

bigadaj wrote: »

Are those the only two pension options, check with your provider as on those numbers then taking no lump sum could significantly increase your annual pension.

No bigadaj,

Here are the other options..

Option 1 Pension of £18018.35 a year.
or
Option 2 Pension of £13094.10 a year plus a maximum lump sum of £81619.47.
or
Option 3 Pension of £20515.20 a year reducing to £14291.71 a year from 26 November 2029.
or
Option 4 Pension of £15232.67 a year reducing to £9009.18 a year from 26 November 2029
Option 4 plus a maximum lump sum of £87557.93.

The 5th one is £17k p/a and £60k lump sum.

Dunree

Ps, I don't need huge lump sums of £80+k, no need for it.

I asked for the £60k option to see how that would affect the pension p/a, and it looks favourable.

One thing though, the £17k p/a, does that increase year on year?