Larger pension or lump sum/smaller pension

TheRealBigEasy

Hi,
I have a final salary pension maturing in Mar 2020 (Aged 60) and would like some advice.

I have been offered
£24,000 annual pension or
£110,000 tax fee lump sum + £16,500 annual pension.

I am not working, nor intend doing so, and I am mortgage and debt free.

I also have a £100,000 FSAVC policy maturing at the same time and was thinking of taking this in lump sums of £10,000 or £20,000 a year.

Would I be better off taking the larger pension or the lump sum and smaller pension.

Thanks for any advice.
Jon L

MallyGirl

do you need a lump sum of cash - what would you do with it?
Do you have reduced life expectancy?

not enough info to answer

TheRealBigEasy

Sorry for the lack of info.

I do not need a lump sum of cash as I have no mortgage to pay off, have no debts and do not need to make any large purchases.
I feel I am in good health and there have been no health issues in my family.
I am 60 in March so hopefully have a few years to live.

Regards
Jon

Linton

You are asking which is better, £7500 with 20% tax each year til you die, I assume index linked, or £110,000 tax free cash.


80% X 7500= £6000. £6000/110000=5.45%. As a rough rule of thumb the safe inflation linked return from a lump sum is about 3.5% of initial capital.


So comparing equivalents, and all other things being equal, the extra pension is worth much more than the cash.

MK62

As the previous poster said, without knowing your date of death, there is no way to say which option would leave you better off.
What we can say is that the break even age is around 78, so up to then, the lump sum and smaller pension would probably be the better choice, but beyond around 78, you'd be better off with the larger pension.....you then have to decide on the chances of living beyond 78......no guarantees but statistically you have a good chance of that happening.

In the same boat, I think I'd be likely to take the larger pension.....at 60 and in good health, I'd be expecting to live beyond 78, and so would plan for that eventuality.
You still have your FSAVC plan which you could use for big ticket items......

Albermarle

I am 60 in March so hopefully have a few years to live.

The average life expectancy for a male who has already reached 60 , is around 85.
This means 50% will live longer and if you have good health , are reasonably intelligent with no very bad habits and with financial security , then you are more likely to be in this 50%

SonOf

You take whatever is best for your objectives.

Taking your PPP (ex FSAVC) like you plan probably is not a good idea compared to taking less tax free cash and greater income from the main scheme. It depends on the indexation and your tolerance to investment risk.

If you die before age 75, the PPP pays out tax free. The breakeven point is 78 (going by post above - I haven't personally checked it). Someone in good health at retirement is likely to make it into mid to late 80s.

So, on a very limited amount of information, I would be trending to greater income on the main scheme and not drawing on the PPP. However, not enough to go on to be absolutely sure and your unknown date of death is always going to make any decision a judgement call.

Brynsam

TheRealBigEasy wrote: »

I have been offered
£24,000 annual pension or
£110,000 tax fee lump sum + £16,500 annual pension.

Don't forget that it is not (usually) an 'either/or' choice. If you might be emotionally wedded to taking some tax free cash, you can take any amount between £0 and £110,000, with the pension being adjusted accordingly.

From the figures you've given, the rate at which pension is converted to cash appears to be just under 14.7 (i.e. for each £1 of pension you exchange, you get a tax free lump sum of approximately £14.70), so it is easy for you to do a few of your own calculations to see how the pension element varies. Might be wise to get the pension scheme administrators to confirm you've got the sums right before taking any definite decision.

Albermarle

The breakeven point is 78 (going by post above - I haven't personally checked it). Someone in good health at retirement is likely to make it into mid to late 80s.

Statistically a 60 year old man has a 50% chance to reach 83. However this is based on recent history .
I believe that the actuarial calculation ( so looking forward ) is working on a couple of years more , to be on the safe side I suppose.

GunJack

Can't you use the AVC for the lump sum and keep the annual pension intact at £24k??

Linton

Albermarle wrote: »

Statistically a 60 year old man has a 50% chance to reach 83. However this is based on recent history .
I believe that the actuarial calculation ( so looking forward ) is working on a couple of years more , to be on the safe side I suppose.

I dont think actuaries add on a bit more for luck!


A more likely reason is that the cohort of people reaching their 60's now are much healthier than those people who are dying now were at that age and it is they who form the basis of the statistics: less smoking, fewer cases of industrial diseases, better health care when younger.


Estimated life expectancies can be even greater once you try to account for future improvements in health care.