Pension Options

SummerSaturdays

Hello All -
I'm taking early retirement at 55 (from the Railway) and have a number of options available. I'm after an income of about £1700, which will be paid 4 weekly. The options are;
1- Max £130000 TFLS and 19572 yly pension
2- Reduced TFLS of £95250 and 22500 yly pension
Level Pension options of ;
3- Max £130000 TFLS and 21473 yly pension reducing to 16326 on reaching State Pension age
4- Reduced TFLS £95250 and 24405 yly pension reducing to £19258 on reaching SP age

I'm not keen on the Level P options just for the fact if I live to say beyond 75 I would have lost possible income.

I intend to pay off all my debt - about 35k

My initial thoughts are to opt for No. 1 - and supplement my 4 weekly wage by £300-350 from my lump sum savings (until I get my State Pension) because No. 2 option although having more income, this would be taxed more?

I can if I want request any TFLS value between £130000 and 95250 with yearly pension adjusted accordingly.
Any thoughts folks?

Linton

Looking at things over-simply......
Taking the difference between options 1 and 2: £35250 is costing you £2928/year gross= £2342 net. 35250/2342=15. So if you lived for15 years after retirement you would be better off taking the extra pension. Assuming you are of average health you could reasonably hope to live to 85. One can argue about the method of comparision (eg inflation on the one side and investment return on the other) but one can at least say that taking the higher TFLS is not a no-brainer.


If you were simply to use the extra TFLS to replace the decrease in pension then you would probably be better off taking the higher pension. However if you dont need the extra income and have a good use for an extra £35K in cash taking the higher TFLS may be the right answer.

cloud_dog

SummerSaturdays wrote: »

Hello All -
I'm taking early retirement at 55 (from the Railway) and have a number of options available. I'm after an income of about £1700, which will be paid 4 weekly. The options are;
1- Max £130000 TFLS and 19572 yly pension
2- Reduced TFLS of £95250 and 22500 yly pension
Level Pension options of ;
3- Max £130000 TFLS and 21473 yly pension reducing to 16326 on reaching State Pension age
4- Reduced TFLS £95250 and 24405 yly pension reducing to £19258 on reaching SP age

I'm not keen on the Level P options just for the fact if I live to say beyond 75 I would have lost possible income.

I intend to pay off all my debt - about 35k

My initial thoughts are to opt for No. 1 - and supplement my 4 weekly wage by £300-350 from my lump sum savings (until I get my State Pension) because No. 2 option although having more income, this would be taxed more?

I can if I want request any TFLS value between £130000 and 95250 with yearly pension adjusted accordingly.
Any thoughts folks?

What is wrong with Option 2; it gives you exactly what you want, no?

xylophone

(until I get my State Pension)

Have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

What would you intend to do with the lump sum apart from pay off your debts?

The interest earned on £95,000 could potentially be enough to be taxable - presumably you would be taking advantage of your/spouse's ISA allowance?

Dox

SummerSaturdays wrote: »

1- Max £130000 TFLS and 19572 yly pension
2- Reduced TFLS of £95250 and 22500 yly pension

If you are looking for £1,700 a month, why not ask the scheme to confirm if you can take a pension of £20,000 (£1,666 a month) and a lump sum which will be bigger than £95,250 - they will be able to confirm how much bigger.

Invest some of your tax free cash in a bond where you can take up to 5% of the initial investment per annum tax free, and benefit from growth on the remaining value of the bond e.g. https://www.pru.co.uk/pdf/PIIBK10000.pdf

SummerSaturdays

cloud_dog wrote: »

What is wrong with Option 2; it gives you exactly what you want, no?

I wasn't quite sure, hence the question mark!

SummerSaturdays

xylophone wrote: »

Have you obtained a state pension forecast?

What would you intend to do with the lump sum apart from pay off your debts?

The interest earned on £95,000 could potentially be enough to be taxable - presumably you would be taking advantage of your/spouse's ISA allowance?

My state pension forecast is £147 per week, with a max of £168. The shortfall is because the railway pension contracted out in 1978 until 2016.
I could achieve the full amount if I 'topped' it up over the next 5 years - currently £780 a year which gets me an extra £4 a week - an outlay of £3900.

Linton

SummerSaturdays wrote: »

My state pension forecast is £147 per week, with a max of £168. The shortfall is because the railway pension contracted out in 1978 until 2016.
I could achieve the full amount if I 'topped' it up over the next 5 years - currently £780 a year which gets me an extra £4 a week - an outlay of £3900.

Its actually £168.6/35=£4.8/week

5 years X 365/7 weeks X £4.8=£1251/year for life, which is an astonishingly good deal
payback (ignoring tax)=£3900/£1251=3.1 years.

cloud_dog

SummerSaturdays wrote: »

I wasn't quite sure, hence the question mark!

The reason I ask is that based on what you've written option 2 appears to give you what you want. The fact that you think one of the other options might be better for you seems to indicate (at least to me) that perhaps you have other considerations that may need to be given more weight in the process. For example, option 1 (smaller pension / bigger lump sum) might be nice because you have other immediate needs for larger capital than ongoing income?

SummerSaturdays

cloud_dog wrote: »

The reason I ask is that based on what you've written option 2 appears to give you what you want. The fact that you think one of the other options might be better for you seems to indicate (at least to me) that perhaps you have other considerations that may need to be given more weight in the process. For example, option 1 (smaller pension / bigger lump sum) might be nice because you have other immediate needs for larger capital than ongoing income?

It's probably my heart ruling my head - a largish lump sum invested/in the bank appeals more.
To be fair once I reach SP age in 11 years time I'll have a lot more than £1700 coming in.

Most of my other colleagues have opted for the Level Pension option - feeling having more money when younger is more important!

jamesd

It's not quite clear what your "£1700, which will be paid 4 weekly" means. Could be 12x1700 before tax, 20400 a year. Or 52/4x1700 before tax, 22100. Or the gross equivalents to those two after tax, 22375 or 24500.

Option 1's 19572 is 18157.60 after tax. That's a shortfall of 3942.40 after tax vs the highest target.

Assuming that you go for maximum state pension that's 9703.20 a year. Add the lowest inflation protected income of 19572 and that's 29275.20 taxable a year. With 12500 personal allowance that's 25920.16 after tax. Well above any of your possible targets.

So the challenge is to also get above your target until state pension age.

The first crude approach takes the 3934.40 shortfall and 13 years between 55 and 68 and just multiplies to use 51251.20 of capital, tax free because there's no tax on capital. That'd leave 78748.80 of the initial 120000 capital.

But that's too pessimistic.

Using the Guyton-Klinger drawdown rules can be expected to pay 5% variable of capital as income on a 40 year plan. On 120000 that's 6000 a year initially vs 3934.40 target. So you could anticipate taking 24100 a year after tax, 1853.84 paid 13 times a year.

More likely investment performance mans you're likely to still have capital left after 40 years.

People's spending tends to drop as they get older so you could reasonably start say 6000 a year higher, deliberately building in expected reductions. That would take you to 30100 a year variable after tax, 231.38 13 times a year.

Whether you actually see reductions and how big they are depends on the investing and inflation times you actually live through and how far above 6000 from the capital you start. They'd need to be better than average to sustain 11000 from 120000 (9.1%) increasing with inflation for 40 years.

I've assumed that you're comfortable investing 65% of the 120000 in shares and 35% in bonds long term. This implies periodic drops in value of around 30%. Which could be a 36000 bounce down at the start. Worrying if you aren't used to routine drops and recoveries like that.