Pension/investment advice

MK62

Trinity_Phil wrote: »

I'm back again people....

I have just had my confirmed pension statement sent through and the figures have now changed :-

1) Annual Pension of £25,819 with no lump sum
2) Annual Pension of £19,364 with a lump sum AFTER tax of £141884 (tax £5480)
3) Annual Pension of £19,983 with a tax free lump sum of £133,225

Does this change anyone's thinking on whether I should now go for option 2 ???

No, financially speaking, option 2 is the worst option of the 3.
You are handing over £5480 to HMRC for no real reason other than to gain an extra £8659 in lump sum now, and for which you will also forego a lifetime index linked income of £619pa.

Fair enough, BR tax would be due on that £619, leaving £496pa, and so making your breakeven point somewhere around 17 years or so.......not a great commutation (though I've seen worse posted on here tbh).
Another way to frame the question is to gauge whether you could invest that £8659 and, from that investment, generate a better sustainable net income than £496pa, index linked. It might be possible (with a lot of luck), but the odds are really not in your favour at all.

At the end of the day though, option 2 would mean a 3% pension reduction compared to option 3 - it may not be the best option overall, but as I said in an earlier post, it's not really going to make all that much difference either way.
Unless you really need that extra 8k in lump sum though, then between options 2 & 3, I'd be inclined to go for option 3.....

kidmugsy

If you go for option 2 then you are, technically speaking, aff yer heid.

Option 2 is the easy one to appraise: it's lousy. Go for 1 or 3 according to which suits your position better.

Deneb

Phil, If I recall you had previously settled on an option of taking option 3, spending approximately £80K which you had a need for, and investing the rest. You now seem to be saying that, although you have reined in your budget for a new car, you could put the extra 8K from option 2 to good use!

If you really need to put an additional 8K to good use, why can't you just spend 8K more from your option 3 lump sum, and (therefore) invest 8K less?

You will still have a £619 index linked and guaranteed income stream which you could then invest on a regular basis if you so wished. I think I would consider bunging it into a SIPP and let the tax man give me an extra £154, rather than give the tax man £5K.

I'll suggest a fourth option though, if you really are desperate for that 8K. Give me 13K and I'll send you back 8K by return. I've just saved you £1K. Good, isn't it

Audaxer

Deneb wrote: »

Phil, If I recall you had previously settled on an option of taking option 3, spending approximately £80K which you had a need for, and investing the rest. You now seem to be saying that, although you have reined in your budget for a new car, you could put the extra 8K from option 2 to good use!

If you really need to put an additional 8K to good use, why can't you just spend 8K more from your option 3 lump sum, and (therefore) invest 8K less?

You will still have a £619 index linked and guaranteed income stream which you could then invest on a regular basis if you so wished. I think I would consider bunging it into a SIPP and let the tax man give me an extra £154, rather than give the tax man £5K.

I'll suggest a fourth option though, if you really are desperate for that 8K. Give me 13K and I'll send you back 8K by return. I've just saved you £1K. Good, isn't it

If the OP doesn't need the extra £619 index-linked per year, he would probably just invest or save that extra £619 pa. If that is the case, he would be better taking the extra £8k now and invest it, as it will grow faster than an extra £619 per year, and if he does need an extra £8k for whatever reason, he will have access to it.

kidmugsy

Audaxer wrote: »

If the OP doesn't need the extra £619 index-linked per year, he would probably just invest or save that extra £619 pa.

Outrageous: saving money when he might easily live another 30 or 35 years!

Audaxer wrote: »

If that is the case, he would be better taking the extra £8k now and invest it, as it will grow faster than an extra £619 per year

That is completely unknowable. I could as well claim that it will lose two-thirds of its value over the next three years. Why is your crystal ball any better than mine?

Audaxer wrote: »

and if he does need an extra £8k for whatever reason, he will have access to it.

If he "needs" another £8k he should just borrow it while interest rates are so low. It would be foolish to pay the price the pension scheme will charge him for £8k.

kidmugsy

Trinity_Phil wrote: »

I am looking at taking the full lump sum and using £35k to pay off our mortgage which will then leave us debt free.

Aha! If he "needs" £8k he can just hold £8k back from the planned mortgage repayment. Far, far better value than the cost of £8k from the pension fund.

Deneb

kidmugsy wrote: »

Aha! If he "needs" £8k he can just hold £8k back from the planned mortgage replacement. Far, far better value than the cost of £8k from the pension fund.

Depending on the interest rate on the mortgage, it may not be worth paying it off either. I set aside a sum equivalent to what I owe on my mortgage 11 years ago and now have the funds to pay of the mortgage plus enough to cover the OP's car replacement budget.

I still feel debt free, since I know I can pay it off any time I choose to do so.

kidmugsy

Deneb wrote: »

Depending on the interest rate on the mortgage, it may not be worth paying it off either. I set aside a sum equivalent to what I owe on my mortgage 11 years ago and now have the funds to pay of the mortgage plus enough to cover the OP's car replacement budget.

I still feel debt free, since I know I can pay it off any time I choose to do so.

Yes, that's what we did. Ours was not only cheap it was flexible: we could put money in and take it out as suited us.

MoneyGeoff

Trinity_Phil wrote: »

So 8659 divided by 619 = 13.98 years for it to catch up at a flat rate (not taking into account index linking on the £619 p.a. or potential interest earned on the £8659 !) :think:

OK if you are tempted by that then I'll offer you £9K for it. So you take option 3 and I'll pay you a £9K lump sum in exchange for £619 pa, increasing by 3% pa until you die). So you get a higher lump sum, and I get an annuity 3 times better than the market rate. It's win-win!

Don't forget that in 20 years it'll be £1,117 per year you'll owe me. If we both live another 40 years you'll be forking out over £2K per year, so invest the £9K wisely.

Trinity_Phil

Thanks again, people...we do not really need the extra £8k, and our financial advisor is recommending the same as yourselves in going for the long haul in option 2, so that's what we are looking at :T