More pension income vs lump sum

jamesd

saintalban wrote: »

I’ve read that it’s best to take the lump sum because it’s tax free.

It's normally best:

1. in a defined contribution scheme to take the tax free lump sum because the money can be invested in an ISA to pay tax free income or be used to buy a mostly tax free annuity.

2. in a defined benefit pension like final salary not to take a lump sum or to take only the required lump sum because the commutation rate by which income is converted to a lump sum tends to be poor.

But those are just typical results. To tell you what to do we need to know:

A. the actual commutation rate, or the various income and lump sum choices are.

B. whether there is some standard scheme lump sum that could only be converted to income at a usually even worse reverse commutation rate and what that rate is. I'll almost never be best to convert this lump sum portion to income, if the scheme is one that has it. This is what Kynthia wrote about.

jamesd

saintalban wrote: »

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

You appear to be missing something very important: the income the lump sum can produce.

One easy bit first. The state pension is increased by 5.8% for each year that a person defers taking it, pro-rated for parts of a year. Say your state pension will be £8,000 a year. Live off £8,000 after tax from the lump sum and then claim and that £8,000 has bought you £472 a year of extra inflation linked taxable income for the rest of your life. This might get you more income for your money than leaving it in the work pension.

Another easy but even more lucrative bit. What does your state pension forecast say you have accumulated so far? Is it the full single tier amount or more? If it is that, no opportunity. But if it's less there's a great opportunity. You can buy extra years for £741. Each year increases your state pension by 1/35th the single tier amount, currently £159.95 a week. 1/35th of that is £4.57 a week. That's £4.57 * 52 = £237.64 of taxable inflation linked income a year for life. There's no chance that leaving the money in the work pension will come close to this. The only questions are about how many years you can buy until you reach the maximum.

Beyond those income options you can invest the lump sum, say inside an ISA, and take income from it that way.

jamesd

saintalban wrote: »

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

You appear to be missing something else very important: the time until your state pension starts, say six years, though I'll use seven in this post.

I'm assuming that the combination of state pension and reduced work pension is higher than the work pension without lump sum.

You could take the lump sum and add 1/7th of it a year as extra income, except not going above the combination of work and state pension. That starts you on the higher combined income immediately and avoids getting so close to the can't live on level. You can use any left to defer your state pension. You should also buy any extra beneficial state pension years, taking a lower income if needed.

We don't have all of the numbers needed but it's likely that this combination is the one that will be best for you, getting that higher income now.

jamesd

saintalban wrote: »

have some savings in ISAs and bonds which aren’t keeping up with inflation

You could also usefully improve on that by investing. In this post I give a list of seven P2P places that I expect to pay an average of 7% if combined. For your amounts, skip BondMason and use £50-100 per loan were I mention using a limit.

saintalban

Many thanks to all for your interesting and wise suggestions. Yes I’m in a public sector defined benefit scheme which has a standard pension and lump sum. Commutation is 1:12 I understand. I reckon the way to manage the standard pension with lump sum would be as per Jamesd idea of using 1/7th of the lump sum each month to make up for the deficiency in the standard pension - in my case it will be 1/6th as I get my basic state pension at 66. I had an estimate a few years ago which gave a figure of about £115 a week I think for my 35 Plus yearsNI contributions. It sounds like this can be enhanced by purchasing extra years so I will do that when I approach 66...if I do! A couple have said it’s a no-brainer to take the maximum pension I can even though it gives up the tax free lump sum and this was the idea that most appealed to me originally because I think I can afford to live off this amount and it is index linked to the Consumer price index. It also avoids the hassle/stress of investing and/or having to move money between accounts!

Tom99

[FONT=Verdana, sans-serif]You need an up to date state pension forecast. It sounds as if you will find you can top up your state pension by say 6 years post 2017.

[/FONT] [FONT=Verdana, sans-serif]This will cost you about £4,500 or thereabouts and is incredible good value because the payback is about 3.5 years.

[/FONT] [FONT=Verdana, sans-serif]If you don't think you can come up with £4,500 before you are 66 then take that sum as a lump sum from you pension now as it will be better value. [/FONT]

xylophone

New state pension forecast

https://www.gov.uk/check-state-pension

https://www.royallondon.com/Global/documents/GoodWithYourMoney/TOPPING-UP-YOUR-STATE-PENSION-GUIDE.pdf

BoxerfanUK

saintalban wrote: »

Yes I’m in a public sector defined benefit scheme which has a standard pension and lump sum. Commutation is 1:12 I understand.

What PS scheme are you in because, for example, If you are in PCSPS 'Classic' then you won't get anywhere near 1:12 for inverse commutation.

LHW99

Do you have a partner? If so, there is usually a spouse's pension with a DB scheme, but that may not benefit from an increase if you commute the lump sum. You would need to check the rules.

jamesperrett

saintalban wrote: »

Yes I’m in a public sector defined benefit scheme which has a standard pension and lump sum.

As Boxerfan says, if this is the Civil Service Classic scheme then it makes most sense to take the standard lump sum (3x annual pension) as the other options aren't particularly attractive (despite what some 'advisors' might claim).