Larger annual pension or smaller and larger lump sum?

Teaandscones

I'd go with the higher pension particularly given you are only 55. The 12:1 commutation rate is rubbish and the higher lump sum is really only the best option in situations like very serious ill health or bailiffs at the door.

Suffolk_lass

As Annie said, check out inverse commutation. Taking a smaller lump sum for higher income.

Commutation is converting income to capital and is, as other have said, 12:1 and not great.

If you are going at 55 have you allowed for any actuarial reduction (5% p.a. in civil service) - you are looking at 11 or 12 years before your state pension kicks in.

Is your pension going to be fixed amount or index-linked?

Bravepants

I would take the bigger pension and smaller lump sum. But that's just me...I would prefer to know that I will have that extra regular income to fall back upon.


You might also compare your mortgage interest rate with the likely returns of some ISA wrapped investment funds. If your mortgage rate is small enough, and the investment returns (including charges, inflation etc.) beat the mortgage interest rate, it makes sense to invest your smaller lump sum and keep paying the mortgage.


Presumably your regular pension payment will also be index linked...so if you take a bigger regular pension now, by index linking your pension will increase more than the lower one.

Acquinas

It's not a political point I'm making. But fact is that sterling has crashed and shows no signs of regaining the ground it has lost. There will be a short-term boost for exporters until the tariff barriers go up, but all imports are going to rise in price. That includes oil and bulk food commodities. Inflation is already rising. I get it that there are swings and roundabouts, but anyone on a fixed income and big cash holdings has to be a relative loser compared to someone with an indexed income and debts. Weimar Germany comes to mind as a worst case, but we've been through it here in the 60s and 70s with rather less catastrophic consequences and it wasn't good.

AnotherJoe

Acquinas wrote: »

It's not a political point I'm making. But fact is that sterling has crashed and shows no signs of regaining the ground it has lost. There will be a short-term boost for exporters until the tariff barriers go up, but all imports are going to rise in price. That includes oil and bulk food commodities. Inflation is already rising. I get it that there are swings and roundabouts, but anyone on a fixed income and big cash holdings has to be a relative loser compared to someone with an indexed income and debts. Weimar Germany comes to mind as a worst case, but we've been through it here in the 60s and 70s with rather less catastrophic consequences and it wasn't good.

That crash was a one-off, so the inflation cased by that is also a one off and will work its way out of the statistics over the next 12 or so months. There may well be other sources of inflation, but not from that fall.

If the pound keeps falling, yes inflation will rise, but the 3% inflation caused by the 20% fall (or whatever it was) will only be there for 12 months. eg if a litre of petrol cost £1.20 and went to £1.25 because of the inflation, if in 12 months time petrol is still at £1.25 as theres been no chnage in the Pound, there will be zero inflation on that account.

Having said that I do agree that a bigger indexed linked income l probably trumps a bigger bigger lump sum, as long as the other uses for the lump sum arent critical

BobQ

Can someone explain, if you commute a lump sum to pension how is the tax free aspect of the lump sum addressed?

Acquinas

Joe, I'm not dogmatic. Just fearful. I honestly hope you are right. But Wilson's "one off" devaluation almost exactly 50 years ago of 14% introduced inflation like a virus that wasn't really eradicated until the mid 80s, ripping through savings and causing industrial strife in the meantime. Even us wage slaves were picking up annual "cost of living" increases in the region of 10% for years.

Acquinas

You lose the benefit. End of.

jamesperrett

As I understand it, you lose the tax free aspect. I'm also in the CS Classic scheme and I've just been on a pre-retirement course where one of the presenters was suggesting that we look very closely at taking the higher lump sum as the pension will be taxable. If your figures come from a pension estimate letter then the actuarial reduction would already be factored in (though the lump sum multiple doesn't look right as, at 55 it should be more like 3.2x for Classic).

I'd agree with Acquinas that there are multiple inflationary pressures - not only from currency devaluation but also from Saudi Arabia's decision last year to limit oil production and nudge the oil price up. That's why I will choose a higher pension when I retire in a few months time.

kidmugsy

Acquinas wrote: »

but all imports are going to rise in price. That includes ... food commodities.

How on earth will the price of food imports rise once we remove the EU tariffs on them? It's within the government's hands to make food distinctly cheaper.