Am I missing something

pompeyrich

I reach the dizzy heights of 50 next month, I was made redundant earlier this year and as a result of this my final salary pension scheme pays out then, instead of 60. It wont grow anymore if I leave it so may as well draw it. I have got the figures through and need to know the pros and cons of taking the lump sum or the higher annual amount. The amounts are £6,775p.a. or £33,707 and £5056p.a. I make that a 20ish year pay back time before I take tax into account. I currently earn £32,000 a year so the bigger amount would almost certainly take me into the 40% band, also the £33,000 lump sum would make a big dent in my £39,000 mortgage. It seems to be a no brainer to take the lump sum, whack it off the mortgage, re-invest the savings made on the mortgage and stay out of the higher tax band. Or am I missing something? Thanks for any advice, Rich

EdInvestor

pompeyrich wrote: »

It seems to be a no brainer to take the lump sum, whack it off the mortgage, re-invest the savings made on the mortgage and stay out of the higher tax band. Or am I missing something? Thanks for any advice, Rich

Sounds good to me. You could use the pension to overpay the mortgage as well, and get rid of it once and for all.

Alternatively you could stash it in your annual stocks and shares ISA, so it produces a better income later on when you need it.

Andy_L

You havent allowed for the pesion increasing in line with RPI (possibly with a cap) every year in your 20 year payback time.

£38775 doesn't reach the 40% band, (although it is very close & who knows what will happen in the budget)

However the lump sum gives you flexibility (sports car/speed boat/new roof etc) & as Ed says can be used to generate tax free income via ISAs or make use of a spouse's tax allowances if there's a difference in pension provision

pompeyrich

Thanks Ed and Andy, I think I will go for the "bird in the hand" approach. The difference between the full and reduced pension is about 5.1%, which is surely reasonably easy to match and I will have the cash and flexibility that goes with it. Thanks again for taking the time to reply, Rich

Dithering_Dad

Just doing the straight sums and now factoring in any returns you'd get from investing your lump sum into ISAs (let's pretend you simply spend the lump sum on a really flash car).

£6775 - £5056 = £1719. £33,707 Divided by £1719 = 19.61.

So basically, if you don't get the lump sum, it will take almost 20 years for the additional pension payments to reach the £33,707 you get from the lump sum.

However as you're only 50, it is feasible that you could receive your retirement money until your are 75. So by taking the £33,707 you could miss out on those extra 5 years of higher pension payments - to the tune of £8595!!!

Hmnn, I'd take the cash if I were you and pay down that mortgage! The interest savings alone could cover the 8595 you lose from age 70 to 75. Just make sure you don't linger on until your nineties or you'll be kicking yourself!

jamesd

pompeyrich wrote: »

I currently earn £32,000 a year so the bigger amount would almost certainly take me into the 40% band, also the £33,000 lump sum would make a big dent in my £39,000 mortgage. It seems to be a no brainer to take the lump sum, whack it off the mortgage, re-invest the savings made on the mortgage and stay out of the higher tax band. Or am I missing something?

You're missing losing the compounded higher returns on the lump sum if you invest it at the start instead of paying off the cheapest generally available debt, the mortgage. You'll never catch up with where you could have been if you just invest the mortgage interest reductions.

If you want to reduce mortgage interest payments or term, invest the lump sum and take say 5% an income from it and use that to reduce the payments. Take the income from money in the stocks and shares ISA part of the investing, where it won't affect your tax situation. The growth part can be outside the ISA initially and you can use your CGT allowance to handle growth in that as you transfer the funds to the ISA.

So long as you invest the money instead of paying off the mortgage you're likely to be better off by taking the higher lump sum and avoiding becoming a higher rate tax payer.

Andy L is right about you not being a higher rate tax payer now but that band has been reducing compared to incomes so pay rises may well take you over it in a few years. Not a bad idea to plan to avoid it.

pompeyrich

Many thanks for your replies DD and James, seems the lump sum is the way to go, it's now a question of how to invest it, probably not the best thing to pay off the mortgage but would be nice to know the house is mine. Now where did I put that birth certificate !!

jamesd

You might want to invest gradually over the next 12 months, just in case the market takes another sudden downturn. Not delay with it all, because if it takes an upturn you'd lose out.

Browntrout_2

pompeyrich wrote: »

It wont grow anymore if I leave it so may as well draw it. Thanks for any advice, Rich

Won't grow anymore, are you saying that it is better to draw it asap even though it must be reduced value due to age?

I have a frozen final salary pension scheme, as a result of redundancy as well, although not yet 50. I have the stated value/percentage of my final salary and it increases with RPI each year until I draw it.

pompeyrich

Browntrout wrote: »

Won't grow anymore, are you saying that it is better to draw it asap even though it must be reduced value due to age?

I have a frozen final salary pension scheme, as a result of redundancy as well, although not yet 50. I have the stated value/percentage of my final salary and it increases with RPI each year until I draw it.

Same situation as you Browntrout but the pension becomes payable at 50 as the Company made me redundant it pays out in full at 50, there is no penalty for taking it early as it was a compulsory redundancy. A reduction in the pension for taking it early only applied if one took volantary redundancy.

Obviously if the factory had stayed open until I was 60 my pension would have been more as I would have had 10 more years service and a greater final salary.