Lump sum or no lump sum that is the question?

dbs

My wife has final salary pension from Boots @ 60yrs old in May;

1. No lump sum £7,147 per year.

2. £34,000 lump sum £5.217 per year.

We have no debts, 18 year old daughter living at home.

State pension at 67yrs old £6,914 per year.

1. No lump sum plus state pension income £14,061 may pay tax.

2. 34k lump sum plus state pension £12,131. Lump would go in an isa to earn money spend as required. But will lose index linked increase on £1,930 per year from 60yrs old but pay no tax.

A rough calculation means she would be worse off taking the lump sum at 78 years old by £2,000 per year after that, have I done this right have I missed anything?

I suppose its a gamble on how long a person will live and being fit and able to enjoy it.

Live it up while you can take lump or go for no lump sum what would you do?

Thanks.

Dazed_and_confused

1. No lump sum plus state pension income £14,061 may pay tax.

2. 34k lump sum plus state pension £12,131. Lump would go in an isa to earn money spend as required. But will lose index linked increase on £1,930 per year from 60yrs old but pay no tax.

Not sure you've got that right. Isn't the standard methodology to only use the current values, which you have presumably done for the pensions but not the Personal Allowance - option 1 and 2 will both leave her paying tax as the PA has only just become £11,850.

So allowing for inflation on both she is likely to still be paying tax on each option when state pension kicks in.

Are you considering the following,
Wife opening a pension with some of the lump sum to get the 25% uplift on £2880. She can take it out before State Pension kicks in and although 75% will be taxable she has spare allowances so could be in a position where no tax is payable

Wife paying voluntary NI to get full new state pension of £163.45/week - usually seen as a good return on the "investment" as it's an extra £4.70/week for life for about £740

Persuading wife to apply for Marriage Allowance for each year it will benefit you and not make her pay extra tax

Silvertabby

Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.

Your break-even point of age 78 sounds right.

What about your own pension(s)? Have you calculated your joint pension income, using both options, and the income for the one left behind in the event of the other's death? May be worth you having a look at those numbers before deciding.

kidmugsy

Minor point: she could expect to get better interest outside ISAs than inside at the moment. After 18/19 and before her State Pension begins she will have no tax to pay on interest because of the Savings Interest Allowance and the Starting Rate Band for Savings. (That's assuming that she will have no other material taxable income).

Major point: if you don't have much disposable capital between you at the moment it might be very comforting to have £34k salted away. If you already have a comfortable amount of capital then you might incline to the higher pension.

http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/

dbs

Dazed_and_confused wrote: »

1. No lump sum plus state pension income £14,061 may pay tax.

2. 34k lump sum plus state pension £12,131. Lump would go in an isa to earn money spend as required. But will lose index linked increase on £1,930 per year from 60yrs old but pay no tax.

Not sure you've got that right. Isn't the standard methodology to only use the current values, which you have presumably done for the pensions but not the Personal Allowance - option 1 and 2 will both leave her paying tax as the PA has only just become £11,850.

So allowing for inflation on both she is likely to still be paying tax on each option when state pension kicks in.

Are you considering the following,
Wife opening a pension with some of the lump sum to get the 25% uplift on £2880. She can take it out before State Pension kicks in and although 75% will be taxable she has spare allowances so could be in a position where no tax is payable

Wife paying voluntary NI to get full new state pension of £163.45/week - usually seen as a good return on the "investment" as it's an extra £4.70/week for life for about £740

Persuading wife to apply for Marriage Allowance for each year it will benefit you and not make her pay extra tax

Yes I was second guessing the P.A. would go up but forgot so would her pension.

I have suggested paying extra into the State Pension thanks for confirming it is a good idea.

Need to sort my pension out before deciding what to do with her lump sum as I think this is her preferred option.

Audaxer

I'm currently in a similar situation in trying to decide whether or not to take the lump sum. Your wife's commutation rate works out at 17.6, which means for each £1 pension given-up, she gets £17.60 of lump sum. I think that is quite a good rate but if the higher income is required to live on, I would go for the full pension.

dbs

Silvertabby wrote: »

Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.

Your break-even point of age 78 sounds right.

What about your own pension(s)? Have you calculated your joint pension income, using both options, and the income for the one left behind in the event of the other's death? May be worth you having a look at those numbers before deciding.

I was thinking of taking both my pensions at 60 yrs old in four years time when my wife is 64yrs old.

St Gobain deferred pension payable at 65 take early at 60yrs old £8,431 with 43k lump sum.

Current railway pension payable at 60 yrs old £7,000 a year with 40k lump sum but is under review again not enough in the pot and I am not age protected so they could increase the age to 65 with a 50% reduction at 60 if I am unlucky.

So ideally at 60yrs old £15,000 plus 80k lump sum.

Currently working 12hr shifts including night shifts and travelling 50 miles starting to feel my age so want to stop doing this job when I am 60yrs old but depends what happens with the pension review.

Death in service wife would get 100k not sure about yearly pension on top of that, think £3,000 a year

When I retire if I die I don't know what pension my wife would get.

I get £3,500 per year if my wife dies when she takes her pension on both options.

dbs

kidmugsy wrote: »

Minor point: she could expect to get better interest outside ISAs than inside at the moment. After 18/19 and before her State Pension begins she will have no tax to pay on interest because of the Savings Interest Allowance and the Starting Rate Band for Savings. (That's assuming that she will have no other material taxable income).

Major point: if you don't have much disposable capital between you at the moment it might be very comforting to have £34k salted away. If you already have a comfortable amount of capital then you might incline to the higher pension.

http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/

We have £35k of savings needs to spend about £25k of that on the house we bought five years ago so its maintenance free as possible, but I could finance half of that that with my wages

My wife stopped working at Boots 24 years ago to become a full time mum so the pension quote is very good. She is currently working as a midday school supervisor 5days a week and spends quite a lot of time caring for her mum who has dementia I think she will take the lump sum to enjoy it whilst she has good health. I just want her to have all the information before she decides.

jamesd

Lump sum split over ISAs in say five to ten peer to peer lending platforms could be a good move. Couldn't do it all in one year because of the one of each type rule but her starting rate for savings would cover it anyway. Around 7% after bad debt is easy enough to achieve. Unbolted is easy to use and delivers me about 9%.

7% not inflation linked doesn't look too bad at £2,380 a year compared to £1,930 lower pension.

If her health is good getting more state pension years could be a wonderful deal, definitely investigate.

State pension deferral adds 5.8%per year of deferral. 1 / 0.058 = 17.24 so not great vs the commutation factor but handy if only some extra guaranteed inflation-linked income is wanted.

jimi_man

Silvertabby wrote: »

Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.

You're not really comparing like for like though. The public sector retirement age is higher - 67 in most cases, so in the OPs case they would be giving up seven more years extra pension.

Commutation rates on their own are pretty meaningless, you need the age that you would get it also. Consequently you can only compare commutation rates if the retirement ages are the same.

Based on that they are both probably broadly similar rates.

Silvertabby

Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.

Originally posted by Silvertabby

jimi_man wrote: »

You're not really comparing like for like though. The public sector retirement age is higher - 67 in most cases, so in the OPs case they would be giving up seven more years extra pension.

Commutation rates on their own are pretty meaningless, you need the age that you would get it also. Consequently you can only compare commutation rates if the retirement ages are the same.

Based on that they are both probably broadly similar rates.

No, the commutation rate is nothing to do with any actuarial reduction for early payment. Sounds like OP's wife's NRA is 60 - but NRA for a long term deferred LGPS pensioner could also still be 60.