Early Retirement. Full monthly Pension or Reduced pension with Lump sum

Mick70

MK62 wrote: »

It could depend on your spouse's position.........if you could finance a significant increase in your OH's pension provision with the extra lump sum between now and OH's retirement, that could be very beneficial to you as a couple.......but you'd need to run the numbers.

You'd be giving up £2900pa in return for a lump sum increase of £78500.......around 27:1, but you need to consider that the £2900 extra pension would be taxable....that makes it more like 34:1......(after BR tax that £2900pa would become £2320pa).....you'd have to confirm whether the entire extra lump sum is tax free though.....
On the flip side the extra pension is index linked RPI......any returns on the extra lump sum are not (and so could be more or less than RPI.....less if it stayed in a bank though).

lump sum tax free
but as say additional pension rises with rpi
both accessible next year, age 50.

Mick70

jimi_man wrote: »

One of the most important factors affecting the conversion rate is the age at which you can get this. My commutation rate (public sector) was 22:1 which doesn't sound too bad. However this was at age 51, which then made it extremely poor.

27:1 at age 55 is a lot worse than 27:1 at 65.

age 50 would be triggered

jimi_man

Mick70 wrote: »

age 50 would be triggered

AH. Not such a good commutation rate in that case.

Mick70

jimi_man wrote: »

AH. Not such a good commutation rate in that case.

does that mean better off with the annual pension element ?

MK62

Mick70 wrote: »

does that mean better off with the annual pension element ?

Nobody can tell you for sure (as your check-out date is unknown), but if you retire at 50 you are much more likely to see 35 years of retirement than if you retire at 65........so that might swing the pendulum in favour of the extra pension, but there may well be other factors to consider (e.g. such as OH's pension provision)

Brilley

aspers288 wrote: »

I am thinking of taking early retirement and I have a small company pension which offers a higher monthly income or a lump sum with lower monthly income.
So, which is the best option ?

Note enough info to give an answer on really.....

How much is the pension worth in both cases, and how much is the lump sum. Then do you have any high interest debt / mortgage, what other savings do you have, what is the state of your spouses pension, do you have any other pensions, have you both had a SP forecast, how long are you likely to live, what age will you be retiring at, is the pension index linked, what is your attitude to risk?

Based on no information being provided I would assume it would normally "be better" not to take the lump sum as these tend to give a maximum of about 20 years payback?

Apodemus

swindiff wrote: »

The only way of being sure which is the best options is if you know the date of your death.

...and the future inflation rate. Everyone seems to focus on the life expectancy only. The RPI linkage also needs to be factored in.

MK62

Apodemus wrote: »

...and the future inflation rate. Everyone seems to focus on the life expectancy only. The RPI linkage also needs to be factored in.

Yep, as do future market returns......though both are unknown.

While there are no guarantees, and the sequence of returns is also a factor (as is the inflation sequence), but over long periods, market returns have usually averaged higher than inflation......is it not reasonable, for the purposes of a long term forecast/comparison made today, to assume they will cancel each other out overall?
It may not turn out that way of course, nobody knows, but in order to make any comparison today, some assumptions have to be made about the unknowns......

jimi_man

Mick70 wrote: »

does that mean better off with the annual pension element ?

Not necessarily. Personally I always think that it's an individual decision. If somebody says to you that you should take it, or conversely not take it, without knowing anything about your personal, financial, medical, emotional and psychological circumstances then it's probably best not to take too much heed of their advice.

The way I looked at it (as a non expert) was in reverse. The return from leaving it in the pension scheme in my case was 4.7% + CPI. In your case, if you left it in the pension then the answer is about 3.7% + RPI (which is probably worth an extra 1% over CPI) every year guaranteed. You may be able to do better investing in the stock market, though that comes with added risk.

Something to think about.