More pension income vs lump sum

saintalban

I’m coming up to 60 and thinking of retiring in the next 6 months as my health isn’t what it was even a few years ago and I will be able to retire now without the dreaded actuarial reduction! I’ve been asked whether I want to take pension income plus a tax free lump sum or a higher pension income with no lump sum. I worked out I can afford to live ok on the pension income with no lump sum (approx £23k) but not on just the pension income if I took the lump sum as well. I find myself a bit torn on this issue. I’ve no mortgage and have some savings in ISAs and bonds which aren’t keeping up with inflation so it makes sense to surrender the lump sum for more index linked pension income. However I’ve read that it’s best to take the lump sum because it’s tax free. I would be interested to hear views on this and what you would do.

OldBeanz

Without knowing the figures then no one can help. So what are the respective figures offered or how much pension do you lose for each pound.

PeacefulWaters

How much is the lump sum?

How much will your pension income be if you take the lump sum?

Is your health situation likely to shorten life expectancy?

Are you sure you couldn't live mortgage free on less than £23k?

Tom99

[FONT=Verdana, sans-serif]Sounds like you have a defined benefit pension?

[/FONT] [FONT=Verdana, sans-serif]If that is so and the lump sum is optional, they often offer very poor multiples of the annual pension given up. At my last employer I think it was 12x.

[/FONT] [FONT=Verdana, sans-serif]To buy an indexed linked pension at age 60 would probably cost you at least 30x the annual pension.[/FONT]

Silvertabby

As Tom says, it depends on the commutation factor. If it's 1:12 (as it will be if you are public sector) then that isn't particularly good value, even after taking the tax free element into account.

chucknorris

I will not be taking any lump sum from my DB pension, with a (net of tax) computation of 1:20 (1:12 ignoring tax) I would rather buy more pension than sell it. At the moment I have bought the max allowed (TPS) but when I join the 2015 scheme in 2020 I will start to buy more again.

Audaxer

saintalban wrote: »

I worked out I can afford to live ok on the pension income with no lump sum (approx £23k) but not on just the pension income if I took the lump sum as well. I find myself a bit torn on this issue.

I can't really see why you are torn on the issue. If you can't afford to live on the reduced pension income if you took the lump sum, why would you considering taking a lump sum? If you did you would need to invest the lump sum to try and make up the income. The only reason I would take the lump sum would be if the reduced pension gave me enough to live on, and I wanted to use the lump sum for a big purchase like a car.

chucknorris

Audaxer wrote: »

I can't really see why you are torn on the issue. If you can't afford to live on the reduced pension income if you took the lump sum, why would you considering taking a lump sum? If you did you would need to invest the lump sum to try and make up the income. The only reason I would take the lump sum would be if the reduced pension gave me enough to live on, and I wanted to use the lump sum for a big purchase like a car.

I also think that it is a 'no brainer' to opt for the pension.

atush

Is there a figure between the smaller/larger pension you could live on? It ony has to be until you get yoru SP as then your income will go up.

If there is a figure, take a smaller lump sum and that amount of pension.

Kynthia

Is there an automatic lump sum? If so the reverse commutation factor for giving that up might be even worse than 1:12. So your figures are really needed for further discussion. However it does sound like an easy decision if you cant live on your pension if you don't give up the lump sum.

jamesd

saintalban wrote: »

my health isn’t what it was even a few years ago

Do the health issues affect life expectancy? A person who has life expectancy significantly below scheme average may be better off transferring out of a scheme and buying annuities. The annuity income will allow for the reduced life expectancy, the defined benefit scheme won't.

To assess this you'd need an annuity quote then transfer value.