Standard pension or larger lump sum

yetirider

Hi

I'm thinking of retiring shortly (age 60) but have lots of options and i'm not sure I truly understand which is the best option to take long term.
From pension days the company provides by "Wealth At Work" they always say take the largest tax free lump sum, its tax free is why wouldn't you...

But really does this just mean you have more to invest with them?
I have no current savings having just paid my mortgage off, I could work longer to save and have the option to put 50% of my wage into my pension.

So a few questions if I may, I have no real idea about pensions or investments.
Basic pension is £17,661.42 with a £52,894.26 lump sum.
Max tax free £15,331.97 with max lump sum £102,213.16

I also have options to take a higher pension but with a percentage take won't increase.

This looks like it would take one 20 years to break even, is the higher lump sum actually the best option and I assume i'd need an IFA to try and ensure its invested correctly, having worked many years I put myself as a low risk investor to protest my pension.

Any view on this from the more pension knowledgable?

Many Thanks

sheslookinhot

What annual pension do you require to ensure a comfortable or acceptable lifestyle ?

yetirider

Mortgage and debt free I could live off the £15,331.97, using the lump sum for hols etc until my state pension comes at 66.

greatkingrat

If those figures are correct, an extra £49k tax-free seems clearly better than £2330 a year taxable (£1864 after 20% tax). Even if you just stuck the lump sum in the building society earning 1% and using it to top up your pension until the state pension starts, you would almost certainly be better off unless you live to a very old age.

Thrugelmir

What would your pension be revalued by on an annual basis, CPI or RPI. Over a 20 year plus time span inflation is going to materially impact the buying power.

yetirider

It rises on CPI.

Dazed_and_confused

A factor of 12:1 is often mentioned on here and the consensus is usually it's not a great deal. Giving up your £2330 would get an extra lump sum of £28k.

But you seem to be getting 21:1. If you live a long time it could be argued you will lose out be taking the lump sum. But that doesn't take account of all sorts of variables, such as you could simply invest the £49k - 3 weeks from now you could potentially have £40k of it in a S&S ISA and that could be worth an awful lot more in 20 years.

Or you could blow it all and wish you had the extra income in a few years.

But with State Pension to come as well in a a few years additional income doesn't seem to be a priority.

Plenty of thinking to do!

Albermarle

I assume i'd need an IFA to try and ensure its invested correctly,

In fact you have a number of options if you had approx. £100K.
1) You can spend some of it and/or keep some in an easy access saving account earning 1.5%( or premium bonds )
2) Put it in a longer term savings account earning up to 2.5%
3) Invest it in relatively low risk investments and hopefully earn around 4%
4) Invest in medium /higher risk products and hopefully earn around 6%
The latter two carry a risk of losing money , especially in the short term but longer term are a sensible option. The first two are safe but only just about keeping up with inflation ( or not in the case of the easy access account)
You can teach your self about investing at a basic level , or employ an IFA , but you will have to find one and pay of course .
Of course options 1) to 4) are not exclusive and you could mix and match them to whatever suits.

msb1234

By my calculations you will actually take 26 years to break even if you take the lower pension/higher lump sum. That doesn't take into account any inflationary increases to your pension or any investment gains from your lump sum.
I have just opted for the lower pension option and will be putting much of my lump sum in a couple of 5 year fixed term accounts as recommended on here. I won't need access to the money in that time, and the returns are quite good. My additional factor is also that I will receive my state pension in 6 years, and at that point will be comfortably able to live off my income, using savings for luxuries. I'm quite risk averse with money so have done a great deal of number crunching. I'm not paying a financial advisor or investor to manage my money, but then again I'm not being risky with it.
I know how much I will need to live well on, and that should always be your starting point.