Larger annual pension or smaller and larger lump sum?

grumpyoldgal

Just considering my options as i plan to retire later this year.

I have the option of taking a larger lump sum and smaller annual pension, or the other way round, the larger annual pension but smaller lump sum.

Either way is manageable but taking the bigger lump sum allows me to pay off the remainder of the mortgage which would be £300 a month less outgoing, and would still leave me sufficient to manage on, and a bigger amount still left banked for a rainy day. The other way round would obviously give me the same monthly saving, but would result in me having less of a lump sum put away for the rainy day, but more money left in my purse at the end of eveyr month.

I am leaning towards the larger lump sum......but really wonder if that is the right thing to do or is it purely personal choice?

thank you

kidmugsy

Give us the numbers, old gal.

grumpyoldgal

20870 pa with lump sum of 62340

16700 pa with lump sum of 111330

O/s mortgage = 48k although I am not sure if paying it all off incurs penalties or if I should pay off for example 46k

I will be 55 so many years to go before my State pension


thank you

Annie1960

What will your monthly expenditure be after you retire?

Will you want to buy a new car/take a world cruise/move house/spend money on your existing house?

Play around with the scenarios you think will be most likely, and your answer may well be somewhere in between the options you posted above.

I did an inverse commutation when I retired as I already had enough savings in other places, and wanted to increase my monthly income. I recall being able to choose the amount of lump sum I wanted to swap for income, so I imagine yours may be similar.

Silvertabby

Looks like a commutation rate of 1:12, which isn't brilliant - but is standard for the public sector, if that applies to you?

Ball park figure for breaking even is 14 years - ie, if you die within 14 years of retirement then you will have been better off with the bigger lump sum, but the longer you live beyond 14 years the better off you'd be with the standard lum sum and bigger pension.

However, this doesn't take into account your plan to pay off your mortgage, so you need to factor in how much interest you would save by paying if off XX years early.

There is really no right or wrong answer to your question - only what is best for you and your circumstances.

kidmugsy

grumpyoldgal wrote: »

20870 pa with lump sum of 62340

16700 pa with lump sum of 111330

I will be 55 so many years to go before my State pension

Giving up £4k p.a., presumably index-linked, for a measly extra £50k when you are only a girlish 55 seems a poor idea to me.

If the mortgage is a nuisance you could consider remortgaging at a low rate, perhaps a low fixed rate, while you are still in employment.

BoxerfanUK

@ only 55 you have a potentially much longer life expectancy and taking the smaller pension you will be losing 4K pa index linked.


I had the same options as you also @ 55 and I decided to stick with the std pension and lump sum.

xylophone

Have you obtained a new state pension statement? Will you need/wish to make voluntary contributions?

The lower lump sum (3x pension) is mandatory in your scheme? Even with the lower sum you would have enough to pay off the mortgage if you wished.

1:12 is not a generous commutation rate.

quotememiserable

I'd go bigger pension all the way. What you would do with the extra money anyway - if you invest it, it's unlikely you'll match the extra pension, plus you need to take the exchange rate, interest rate and inflation rate risks yourself, instead of having someone else carry all those for you.

Acquinas

I think you may find that if you compare the sums for an inverse commutation with those for a commutation that your employer is incentivising you to commute rather than inverse commute. Which pretty much tells you what they would like you to do, i.e. pay you off with a bigger bird in the hand and cut down their ongoing commitments. So if it benefits them then it almost certainly disbenefits you. All things being equal, take the bigger annual pension. Brexit is going to inflict years of inflation on us. You need to be riding that indexation wave rather than be stuck with a shrinking capital sum. Inflation will also eat into the real value of your mortgage debt so I would be tempted to keep it provided I could lock into a low rate for 3 years or so.

kidmugsy

Acquinas wrote: »

Brexit is going to inflict years of inflation on us.

How does that work, then?

Is that the same Brexit that was going to ruin us the next morning, make all our hair fall out, and damage our manly organs?