Early Retirement

sharpj

Hi,

A friend of mine is taking early retirement at the age of 58.
He has the option to take a lower sum and higher pension as a standard offering.
Or a higher lump sum and reduced pension.

So minimum cash option with a high pension, or maximum cash and lower pension.

Pro's and Con's?

Thanks

newatc

The headline pro and cons are self evident in your post. What is best for your friend will depend on his circumstances and what is the pension cost of taking a lump sum. Would need more details to give an opinion e,g if he had expensive loans then maximising the lump sum to pay off the loan(s) would be a no-brainer.

sharpj

The person does not have a mortgage and the lump sums are both tax free.
Also he doesn't need the higher lump sum cash for any specific reason. It's just that higher rate regular pension income against the higher lump sum in his account.

No debts outstanding to pay off, so loan free and mortgage free. No major home improvements needed.

Thrugelmir

sharpj wrote: »

It's just that higher rate regular pension income against the higher lump sum in his account.

What's the pension sacrifice to buy the larger lump sum?

sharpj

Thrugelmir wrote: »

What's the pension sacrifice to buy the larger lump sum?

My understanding is the pension difference per year is around £2.500, taxable..
So lower lump sum/higher pension, bigger lump sum smaller pension.

I think he still gets a good lump sum from various sources anyway and in is a decent financial situation overall, it's just whether to increase that with a bigger l/s but take a lower pension for life.

MallyGirl

Would also depend on his health/ life expectancy- if he is likely to live to 100 then bigger pension for the next 42 years would be better value, whereas if he is a heavy drinker/smoker/eater or suffering from a life limiting condition then it could be better to take the bigger lump sum and enjoy it while he can.

lotteryman

Hi
I had the same often about 5 years ago and opted for the larger lump sum and lower pension.
I considered the following
1. could I live on the lower pension without sacrificing too much of my standard of living? I also took into account of when my state pension would kick in giving me an additional monthly income
2. what could I do with the increased lump sum. I chose to invest in renovating cheaper end properties - something I have wanted to do for years. It also provided me with 'work' after work - an additional hobby that provided me with an income and keeps me active alongside various sporting activities. This has worked out really well for me. I would say don't vegetate keep active and enjoy a long retirement
3. Would I prefer for me to be 'in charge' of my money or someone else and what would happen if I popped my cloggs just a few years after retirement. I've heard so many cases of people not being able to enjoy their retirement and felt the larger lump sum would also allow me to take more holidays and do other things whilst I was fit and able to do so. So many people see retirement as the end whereas they should see it as the beginning of the end with many more years to enjoy.

I have not regretted my decision but it has to be an individual choice based on your own circumstances

sharpj

No health issues, spending money on travelling not straight forward as he has a disabled son.
I think he can afford to not work again irrespective of what he does, just a dilemma on taking the higher lump sum against the lower pension.
He is already guaranteed a decent lump sum irrespective of which option, just its that immediate even healthier bank balance (with no real immediate plans to spend), against that consistent £200 or so increased pension every month.

Also his partner is not retiring, but carrying on working. Whether he takes a part time job to occupy himself is possible, not necessarily for money reasons.

Silvertabby

If he's public sector, then the commutation rate would be a very poor 1:12.

As he has both lots of figures, he could do these calculations to find the notional value of his benefits:

Where 25 is the number of years he expects to live in retirement (alter if necessary).......

25 x standard pension plus lump sum =

25 x reduced pension plus higher lump sum =

Thrugelmir

sharpj wrote: »

My understanding is the pension difference per year is around £2.500, taxable..
So lower lump sum/higher pension, bigger lump sum smaller pension.

The difference will grow and compound over the years as inflation takes it's toll.

sharpj

Thanks for the replies, he is still undecided.

Obviously in the long term he will eventually reap the benefit of the better pension, but it's tempting having that extra cash in the bank.
Especially when state pension age kicks in, I believe around 2025.

Calculations suggest just less than £200 a month on the smaller pension but obviously that is a lifetime thing, it would take 10 years or so to get back that difference between the standard and higher lump sums.