Take full pension or 25% tax free lump sum/reduced pension?

royeee

Is there any advantage in taking out the lump sum and having reduced pension rather than full pension? If going for lump sum presumably for reinvestment then what options?

EdInvestor

What other pension income do you have?
How about existing savings?

What are the actual figures and timings offered?

Each case is different.

royeee

Edinvestor, I don't particularly wish to put down my financial details here in open forum though I could generalise. I already have one company pension drawn at 50, currently in employment contributing AVC to a non-contributory company pension, plan to retire at 60 next year or might continue part time for 2 years (can't draw pension till retire) and own shares. Your line of questioning implies there are certain factors, what are they?

dunstonh

certain factors would be your taxation, age 65 age allowance reduction, availability to capital, the need to even draw the pension in the first place, your overall retirement provision with your spouse considered, the income with and without lump sum taken, death benefits for spouse, indexation etc. I think that covers just a few of the points that would need consideration.

roddydogs

generally speaking Always take the lump sum, its tax Free..............unless you think you might live to 100!

royeee

roddydogs, you may be right because if you don't then it can take 20 to 30 years to receive the equivalent in on-going index-linked pension and that being taxed. How would one generally use or invest the lump sum? I read in another thread someone had a point about utilising more of the money in your more active years (60 - 70) as later you don't spend as much.

wombat42_2

roddydogs wrote: »

generally speaking Always take the lump sum, its tax Free..............unless you think you might live to 100!

It is only tax free if you immediately spend it or put it into an ISA. If you put it into a general savings account you will effectively get taxed at 20%.

Ian_W

wombat42 wrote: »

It is only tax free if you immediately spend it or put it into an ISA. If you put it into a general savings account you will effectively get taxed at 20%.

To clarify - you'll get taxed on the income [interest] it earns but the lump sum itself IS and will remain tax free.

Stephenbw

I am in a similar situation. I am 50 and retiring in 2 weeks. I have just received my LGPS letter offering me a pension of:

£10500 pa and a lump sum of £31500.

Or I can reduce my pension by up to £2067 and receive:

£8450 pa and increase the lump sum to £56380.

I have also received £10000 redundancy.

As I intend to pay off my mortgage and CC/loan debts of approx £18000 and spend around £2000 on home improvements, this will leave me with either; £21500 or £46000 to invest.

Should I take the bigger lump sum or the bigger pension?

The suggestions I have read appear to go for the bigger lump sum, but as I am only 50 will I not make more long term by keeping the bigger pension?

jamesd

royeee, if your taxable income will be above 20,000 and below 25,000 without taking the lump sum then you may avoid age allowance reduction and an effective tax rate of 33% on income between those values. Stocks and shares ISA investing is the obvious first choice for the investments to produce ongoing tax advantaged growth and income.

Stephenbw, well, you're immediately reducing the benefit of the lump sum by using it to pay off a low interest dept, the mortgage, so that that portion will deliver a return on investment of only the mortgage interest rate. If low returns like that are typical of those that you will seek to achieve then that would tend to favor taking a larger pension. Long term equity returns can easily be 12% or more so much better can be achieved with well rounded investing. Paying off debts with interest rates above your expected investment return would make sense and that probably applies to credit card debt.

Ignoring growth the lump sum increase is just 12 years of the difference in annual pension so that also tends to favor not taking the higher lump sum: you need 8.4% return on investments just to match it. You'd need to have a fairly high risk profile for investments to do better than that 8.4%and your choices at the moment suggest that you don't have that inclination. In any case, that's a pretty high target to try to beat consistently. Better to take the higher pension and invest the difference in your stocks and shares ISA each year to accumulate the lump sum yourself from the higher pension payments.

All in all it looks like the extra lump sum is a pretty poor deal for you. S&S ISA investing of the difference seems likely to place you in a better long term position with less risk.

Better still, you could not repay the mortgage and invest the mortgage portion and take say 6% a year from those investments to pay part of it off. With fairly good investments this should leave you better off in both the short and long term than repaying the mortgage with a lump sum immediately.

Investments that have a long term record of doing well include funds like Invesco Perpetual Higher Income, which has had a long term average return of around 15% a year. 21500 in such an investment might deliver you an extra income of 1300 or so a year that grows with inflation while the capital grows by an additional few percent a year on average.

Stephenbw

Thanks for the reply and advice James.

As you can see from my post count, I am relatively new to the forum as I am to savings and investments. Ignoring my occupational pension, my previous savings consisted of £50 pm salary deduction to a credit union so please forgive me if I am slow to catch on.

I had done some calculations and come up with the following:

As I will be paying basic rate tax on the pension the extra £2067 of the higher pension would give me £1653 pa which would take 15 years to reach the £24000 tax free lump sum.

I had not even considered not paying off my mortgage as Martin's calculator shows that I would have to earn more than 8.1% interest to be better off investing the capital rather than paying off my mortgage (5.49%) with it. As I will not be able to pay my monthly mortgage payments from my monthly pension I would have to keep a significant amount in an easy access account to make these payments and none of them pay above 8.1%.

You correctly deduced that I am not a risk taker and had not considered shares or investment funds beyond having a quick look at ISA S&S and getting confused by them! I was planning on investing in cash ISAs (NS&I 6.3%), and a Regular Savings Account (Yorkshire BS 7.1%?) A quick calculation suggests that if I take the extra £24000 I can make £117 net pm on it, which is only £20 per month less than the extra £137 net the bigger pension would give me and I would still have the £24000 capital.

There is of course the fact that my pension increases annually by the RPI, though this does not start until age 55, which I have yet to factor in to my calculations

I do now intend to investigate Invesco Perpetual Higher Income, and Guaranteed Equity Bonds with a view to possibly investing some of my capital this way.