Taking pension early - Is it better to take a larger lump sum with lesser payments PA or vice versa?

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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Gavbo2013Gavbo2013 Forumite
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Hi - one of my parents have decided to take early retirement and have asked for my recommendation regarding one their pensions, so I'm looking for some help as I'm far from an expert!

Circumstances are as follows -

64 yo - no mortgage, no loans or other outgoings other than just general bills.

The pension in question options are approximately as follows -

Higher amount PA / lower lump sum
£8275PA with lump sum of £24826

or

Lower amount PA / higher lump sum
£6649PA with lump sum £44332

I believe the higher lump sum option is tax free and the higher PA payment is taxed?

So by my reckoning they don't really need to take the higher lump sum as they don't really need it for anything but then again it would be tax free. Also the longer they live, the more they would benefit from the lower lump sum/higher payment PA option.

Just looking for any advise please? Thanks!

Replies

  • xylophonexylophone Forumite
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    The lump sum is the pension commencement lump sum which is tax free.

    This is a defined benefit pension with annual increases linked to inflation?

    Is any of your father's pension GMP?

    If so, how much is pre 88 and how much is post 88?

    Has your father obtained a new state pension statement?

    https://www.gov.uk/check-state-pension
  • ApodemusApodemus Forumite
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    Remember to take into account whether the annual payment has any index-linking. If it is a pension from a governmental agency, the link to CPI would shorten the pay-back period compared to the lump sum and potentially also proved extra comfort about their long-term income levels keeping pace with their costs.

    EDIT: (Cross-posted with xylophone who has also asked about the inflation linkage).
  • SilvertabbySilvertabby Forumite
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    This is a commutation rate of 1:12 (public sector?) which isn't particularly generous.
  • MarconMarcon Forumite
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    If your parents can't make their own decision about how much tax free cash to take, do they have the financial knowledge (and enthusiasm!) to manage close on £45K if they take maximum tax free cash? Just because it's tax free doesn't automatically mean it's the better option, especially if the parent in question is a basic rate taxpayer rather than higher rate.
  • cloud_dogcloud_dog Forumite
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    Why are they taking it early?

    What are their needs? If they are not 'hard up' for ongoing cash/income and they are worried about income tax then consider deferring SP for a period.

    Re the pension itself, does it provide for a spouses pension? What is the pension situation regarding the spouse, i.e. do they have adequate pension in their own right?

    It is not just about an amount of money, rarely is for pensions.
    Personal Responsibility - Sad but True :D

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  • zagubovzagubov Forumite
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    Typically people that age should expect at least two decades of needing a pension. If it's an index-linked pension and they take the lower lump sum and the higher pension, after a bit over twelve years later they'll be receiving more money in total, than they'd have if they took the enhanced lump sum.

    Unless they're financially savvy enough to know how to invest large sums of money for massive future returns.
    There is no honour to be had in not knowing a thing that can be known - Danny Baker
  • Gavbo2013Gavbo2013 Forumite
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    It's an NHS pension so is index linked - retiring early as they have had enough!
  • Gavbo2013Gavbo2013 Forumite
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    Thanks for responses

    It's an NHS pension so is index linked.

    They are semi-retiring early as they have had enough! Although not fully retiring just reducing number of days worked and drawing pension.

    As I say, they don't particularly need a large lump sum, so as some of you have mentioned I think the lower lump sum option is best as it will pay more in the long run especially if they live longer.
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