Retirement lump sum

planefixer

Taking early retirement next year and Im fortunate enough to be in a DB pension. I intend to take a lump sum of £186K and will draw a pension of approx £27K. I fully intend to take advice from a professional but wonder what anyone else in the same position might have done with the lump sum. My attitude to investing is safe or minimal risk. I realise this limits my options. So suggestions or ideas would be welcome. Thank you.

HappyHarry

planefixer wrote: »

Taking early retirement next year and Im fortunate enough to be in a DB pension. I intend to take a lump sum of £186K and will draw a pension of approx £27K. I fully intend to take advice from a professional but wonder what anyone else in the same position might have done with the lump sum. My attitude to investing is safe or minimal risk. I realise this limits my options. So suggestions or ideas would be welcome. Thank you.

Can you take a larger pension and a reduced lump sum?

dunstonh

I fully intend to take advice from a professional but wonder what anyone else in the same position might have done with the lump sum.

Often with DB schemes, not taking the lump sum or taking a reduced lum sum is financially the best option.

What was the breakeven point for your DB scheme on max lump sum vs minimum lump sum?

My attitude to investing is safe or minimal risk.

What risks are you referring to?
In respect of income, there is no safe option. All options carry risk. You may be just referring to investment risk but there is also shortfall risk and inflation risk. So, which risks concern you?

if you are really low down the investment risk scale then this again points to taking less lump sum.

planefixer

HappyHarry wrote: »

Can you take a larger pension and a reduced lump sum?

Yes I could take a reduced lump sum the figures I mentioned are the max lump sum

planefixer

dunstonh wrote: »

Often with DB schemes, not taking the lump sum or taking a reduced lum sum is financially the best option.

What was the breakeven point for your DB scheme on max lump sum vs minimum lump sum?



What risks are you referring to?
In respect of income, there is no safe option. All options carry risk. You may be just referring to investment risk but there is also shortfall risk and inflation risk. So, which risks concern you?

if you are really low down the investment risk scale then this again points to taking less lump sum.

Not sure what the break even point is or what it means? As for risk its the risk to my capital that Im referring to.

xylophone

What is the commutation rate on your pension?

https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/06/what-is-commutation/

Audaxer

planefixer wrote: »

Taking early retirement next year and Im fortunate enough to be in a DB pension. I intend to take a lump sum of £186K and will draw a pension of approx £27K. I fully intend to take advice from a professional but wonder what anyone else in the same position might have done with the lump sum. My attitude to investing is safe or minimal risk. I realise this limits my options. So suggestions or ideas would be welcome. Thank you.

I know the lump sum is tempting, but as you want to take it to invest rather than have a need to spend it, it is firstly worth checking the commutation factor of the DB pension. That is how much lump sum you are getting compared to how much pension you are giving up. If you are getting more than £20 lump sum for every £1 of pension you are giving up, then it may be worth taking it to invest. If it is under about £15 lump sum to every £1 of pension given up, then I would say that is not a very good commutation rate, and it would be better to take the full pension. Can you tell us how much your pension would be if you took the full pension with no lump sum, and we will be able to work out the commutation rate?

If the commutation factor is good and you do decide to invest, you would be as well doing some research on here and sites like Monevator about learning to DIY invest, as consulting an Independent Financial Advisor will be expensive and eat into your lump sum, thereby reducing returns.

xylophone

See also

https://forums.moneysavingexpert.com/discussion/5764600/more-pension-income-vs-lump-sum

Berkshire_Beancounter

Well I was in a not dissimilar position to you about 18 months ago, although my annual income and lump sum were a bit higher. I too have a reasonably cautious attitude to investing although occasionally I'll invest a small amount in something that's higher risk. From your query, I'm assuming you're looking to save / invest most if not all of your lump sum rather than spend the majority of it.

Being 'new' to retirement, I wasn't sure how my expenditure would work out - I realised that when I was at work, there was little opportunity to spend money as I was in the office all the time! But now I'm going out several days a week (museums, galleries, National Trust properties, lunches with friends etc - even with membership cards for various places to get free entry, there's usually parking, coffees etc).

Hence initially I put some of my lump sum into fixed rate bonds with banks / building societies, and kept some of it in instant access accounts, mindful of the £85k FSCS limit with any one financial institution, until I worked out a pattern of expenditure. I did have a couple of short holidays and a few home improvements are earmarked. Once I'd worked out how much 'spare' lump sum I had, over time I drip fed around 50% of the total into stocks and shares - I use my ISA allowance in full each year, my intention is to 'Bed and ISA' those investments into my stocks and shares ISA over the next few tax years. I didn't whack it all into the stock market in one go, but looked for buying opportunities if the stock market fell a little. Even with recent stock market corrections, my investments are generally still slightly up (with a couple of exceptions on individual shares).

I'm very fortunate in that my pension plus income from investments (outside of an ISA) pushed me into the higher rate tax bracket. Hence I tend to hold investments (shares, unit trusts) with the highest yield in my ISA; and investments with a lower yield but (hopefully) potential for capital gains outside of my ISA.

In terms of specifics, I like smaller company unit trusts as they seem to do reasonably well - I hold Standard Life Global Smaller Companies and Merian (formerly Old Mutual) UK Smaller Companies.

I also hold Lindsell Train Global Equity which has gone up by 16% on various investments I made between June 17 and March 18.

Having once heard a pension investment manager give a talk on investments and hearing him talk in favour of biotech companies, I hold Axa Framlington Biotech.

I also hold a few smaller amounts in things like Jupiter India and Blackrock Gold and General, both not doing so well recently!

I do also put some money into bond funds such as Vanguard UK Long Duration Gilt Index, L&G All Stocks index linked Gilt Index, M&G Global Macro Bond. I tend to use Hargreaves Lansdown's Wealth 150 funds for ideas in where to invest. The ones I've mentioned are by no means my total holdings; I tend to hold quite a lot of funds, but relatively small amounts in each. I know that unit trusts pool investments and there may not be much difference between some, so there may not be much point in holding lots of individual trusts; but I've got some money invested in Japan, China, Europe, and UK specific funds as well as the above.

I still keep the remainder of the lump sum in fixed rate bonds and some in instant access accounts, either for unexpected expenditure, a spur of the moment decision to go on holiday, or potentially to put more into the stock market as and when it falls. I doubt I'd put much more into the stock market though; I may be missing out on some returns, but I do like to heave a reasonable amount in cash.

dunstonh

planefixer wrote: »

Not sure what the break even point is or what it means? As for risk its the risk to my capital that Im referring to.

The breakeven point is where the increased income breaks even with the amount paid to the lump sum taken. The income is guaranteed for life and increases annually.

This is something you should know and have calculated before you decide how much lump sum you are going to take from the pension.

Risk to your capital is not just investment risk. You have shortfall risk (whatever you decide not giving you enough resulting in you having to use your capital and see it erode in value for that reason). You also have inflation risk (if inflation is 2.5% and you are earning 1% then your value is going down in real spending power).

If you are drawing an income from the lump sum, then inflation risk and shortfall risk are extremely high and the likelihood of medium to long-term losses can be greater than a sensible investment risk portfolio.

Linton

Taking as large a DB pension and as small a lump sum as possible is by far the most lucrative completely safe option there is, assuming you have an average life expectancy.