Final Salary Pension - take lump sum or not

Spjm

I’m planning to take my final salary pension early at 56 with a NRD of 62.  I accept I have had to take an actuary reduction to retire at 56 but I’m pondering whether to take the lump sum or not.  I have been offered a lump sum of £145,354 to sacrifice £6770 pa which after tax would be currently £5416 pa.  Can I ask what you would do please?  I don’t have any plans for the lump sum, and imagine it will just stay in savings.  Depending on inflation etc it would look like at age 73 is the crossover to being better off not taking the lump sum. Many thanks for any thoughts.

Paul_Herring

I don’t have any plans for the lump sum, and imagine it will just stay in savings.

Can I ask what you would do please? 

Personally?
With those (limited) circumstances and numbers?
On a DB pension?

I'd probably take the increased pension, not the lump sum. Less hassle.

Other things to consider: What guarantees do you have on the pension, e.g. how does it increase per year? CPI? RPI? Capped?

Shedman

Shouldn't that be 83 for breakeven (using the post tax figure) as £145k / 5.4k is around 27 years?  It's a fairly average commutation I'd say but certainly worth considering especially if you have any health issues or other factors (such as family medical history) that might affect your life expectancy adversely and you want to leave something to your dependants.  Does taking the lump sum reduce the spouses pension if applicable (although normally it doesn't)?  What indexation do you get on the pension in payment e.g is it RPI or CPI, capped at 2.5% or better, etc.  Would you feel confident trying to match or beat that, say by investing?  

It's certainly not high enough amount to make it a no brainer but worthy of further deliberation depending on your own circumstances and attitude to risk etc.

Dox

It doesn't matter what other people would do. We aren't you, with your attitude to risk, your life expectancy, your expected outgoings...

If you have no immediate need for the whole lump sum, but like the idea of having some ready cash, it is highly likely your scheme rules will enable you to take a smaller lump sum and thus a larger pension. From your figures, it looks as if you get approximately £21.50 tax free cash for each £1 of pension you give up, so you can do some sums for yourself - but do check with the scheme administrators before making any decisions. Would that help your thought process?

Audaxer

Spjm said:

I’m planning to take my final salary pension early at 56 with a NRD of 62.  I accept I have had to take an actuary reduction to retire at 56 but I’m pondering whether to take the lump sum or not.  I have been offered a lump sum of £145,354 to sacrifice £6770 pa which after tax would be currently £5416 pa.  Can I ask what you would do please?  I don’t have any plans for the lump sum, and imagine it will just stay in savings.  Depending on inflation etc it would look like at age 73 is the crossover to being better off not taking the lump sum. Many thanks for any thoughts.

It depends what the lump sum commutation rate is, and we can calculate that if you let us know the amount of the full pension at 56 without taking the lump sum.  If it is a good commutation factor it may be worth considering taking the lump sum and investing it for income to make up the difference.

The other thing to consider when looking at taking the lump sum is that usually with DB pensions, a spouse will be entitled to a percentage, usually 50% of what the full pension would have been when you took it, even if you were to take the reduced pension and lump sum. So if you have a spouse it may benefit them if you take the lump sum.

Dox

Audaxer said:

Spjm said:

I’m planning to take my final salary pension early at 56 with a NRD of 62.  I accept I have had to take an actuary reduction to retire at 56 but I’m pondering whether to take the lump sum or not.  I have been offered a lump sum of £145,354 to sacrifice £6770 pa which after tax would be currently £5416 pa.  Can I ask what you would do please?  I don’t have any plans for the lump sum, and imagine it will just stay in savings.  Depending on inflation etc it would look like at age 73 is the crossover to being better off not taking the lump sum. Many thanks for any thoughts.

It depends what the lump sum commutation rate is, and we can calculate that if you let us know the amount of the full pension at 56 without taking the lump sum.  If it is a good commutation factor it may be worth considering taking the lump sum and investing it for income to make up the difference.

The other thing to consider when looking at taking the lump sum is that usually with DB pensions, a spouse will be entitled to a percentage, usually 50% of what the full pension would have been when you took it, even if you were to take the reduced pension and lump sum. So if you have a spouse it may benefit them if you take the lump sum.

Commutation is £21.47 (hence the reference to 'approx £21.50' in my previous post).

Spjm

thank you for all your replies. Food for thought.  The pension will increase by a mix of cpi and rpi up to a maximum of 5% per annum. Spouse pension Is the same whether I take a lump sum or not.  I got to age 73 by assuming an imaginary 3% inflation rate.  My parents both got to their Early  80’s and Im reasonably heathy 🤞.  

bigfer

I was in a similar position last year. Didn't take the lump sum. Happy to have the larger monthly pension. But that's me and others have mentioned, it's horses for courses.

Albermarle

Spjm said:

thank you for all your replies. Food for thought.  The pension will increase by a mix of cpi and rpi up to a maximum of 5% per annum. Spouse pension Is the same whether I take a lump sum or not.  I got to age 73 by assuming an imaginary 3% inflation rate.  My parents both got to their Early  80’s and Im reasonably heathy 🤞.  

I think with this calculation you have assumed that the lump sum would not grow at all .
If you saved it then it would still grow at 1 or 2 % pa . If you invested it over 20 years , it could grow up to 5% pa even in a mdium risk investment ( although that is not guaranteed ). So in reality the break even point is probably over 80 years old.
Someone of your age with no serious illness statistically will live on average until around 84. If you are passably fit, non smoker, not hugely overweight and have had a white collar job then probably you will live longer than average.

Gig1968

Do most schemes that offer final salary pensiin schemes offer this?
It is non taxable if I remember rightly isn't it?

Audaxer

Dox said:

Audaxer said:

Spjm said:

I’m planning to take my final salary pension early at 56 with a NRD of 62.  I accept I have had to take an actuary reduction to retire at 56 but I’m pondering whether to take the lump sum or not.  I have been offered a lump sum of £145,354 to sacrifice £6770 pa which after tax would be currently £5416 pa.  Can I ask what you would do please?  I don’t have any plans for the lump sum, and imagine it will just stay in savings.  Depending on inflation etc it would look like at age 73 is the crossover to being better off not taking the lump sum. Many thanks for any thoughts.

It depends what the lump sum commutation rate is, and we can calculate that if you let us know the amount of the full pension at 56 without taking the lump sum.  If it is a good commutation factor it may be worth considering taking the lump sum and investing it for income to make up the difference.

The other thing to consider when looking at taking the lump sum is that usually with DB pensions, a spouse will be entitled to a percentage, usually 50% of what the full pension would have been when you took it, even if you were to take the reduced pension and lump sum. So if you have a spouse it may benefit them if you take the lump sum.

Commutation is £21.47 (hence the reference to 'approx £21.50' in my previous post).

Thanks, I had thought you needed the amount of the full pension to work out the commutation factor, but I see now that it can be worked out by the figures already given.

That is a pretty good commutation factor in my view, so worth considering the lump sum.