Should I take my final salary pension early with or without a lump sum?

simon758

I recognise first of all that I am in a very fortunate position. I have a final salary pension from a large private sector organisation who employed me for 17 years until mid-2012. Since then I have had mainly contract work and most recently I was 2 months into a 9-month contract when I was furloughed - I don't expect to be going back when furloughing comes to an end. I therefore may need to start taking my pension early (I'm 62 next month and my normal retirement date is July 2023). I recently asked for an up to date valuation of my pension comparing taking it at the beginning of October this year with waiting until July 2023. Without any lump sum, my annual pension will be £17,000pa if I take it later this year compared with £19,000pa (at today's prices) if I wait until July 2023. If I take the maximum tax free cash, this year I would receive £82.5k tax free with a reduced pension of £12,500pa compared with £92.2k tax free and a reduced pension of £14,000pa. I've tried to compare these different options looking forward over the next 25-30 years and it would appear that, in terms of total cumulative income, taking my pension this year (with full tax-free lump sum) is worthwhile up to the age of 78 - if I live longer than that, then some of the other options look preferable. I have had health issues over the last couple of years including prostate cancer which is currently in remission, so I am hopeful of living for a few more years yet! However, I also know the chances of it returning at some point are quite high. My question is, should I opt for the pension this year and if so, should I be taking the full lump sum with it? 

Dox

simon758 said:

My question is, should I opt for the pension this year and if so, should I be taking the full lump sum with it? 

Nobody can make that decision for you, but ask yourself two questions: do you need your pension at all, or do you have other savings you could draw on for a while which might give you a better outcome? If you need to draw your pension now, what would you actually do with the lump sum?

Albermarle

The reduction in pension for taking it 33 months early is about 11% which is pretty good.
The tax free lump sum offer looks less attractive compared to the pension you would lose. However this also depends on the terms of the pension. If it is linked to RPI inflation then this is a big benefit , not always immediately obvious in the initial offer .
Also is there is provision for a spouse pension if you die before them 

VXman

I was about to post a similar question so rather than create a new thread I hope you don’t mind if I put it here.

I have a teachers pension. I can take it now and it will be £20K per year with. £61K lump sum. Alternatively I could take £ 16.5K  and £109K lump sum. My wife is retiring too and In a similar situation with a few grand less PA. We have other saving/investments of about £500,000 and house is paid for. No other significant outgoings/loans/depts.

My feeling is go for the higher lump sum. It will be 13 years before it becomes less advantageous. The pension will attract inflation linked rises each year but I feel putting the money in a reasonably cautious ISA  S&S find should return at least that much. 

Advantages are paying less tax on the pension. Also part of the £500,000 is in AVC’s. 25% of that is taxable so having less pension means I can control the drawdown of that to stay in the lower tax bracket.

 I also think we are likely to spend more in the first 13  years of retirement. Hobbies of cars and travel are our main vices.

Later on state pension will kick in and we are likely to be less adventurous in travel and spending generally. There is also the possibility of purchasing a flat to help my son out...which rental coming back in on this. The lump sum will help with this. 

Any comments, positive or negative on this approach?

bigfer

In a similar position to the OP. Following discussion with FA and a few spreadsheets I decided to take my BD pension at 58. It is not taxed and pays for all living costs. I did not bother with the lump sum as I was fortunate not to require it. This has allowed me to avoid taking income from my ISAs and SIPP, but primarily gives me peace of mind especially in current circumstances. I will "break even" in mid to late 80s. 

AnotherJoe

simon758 said:

I recognise first of all that I am in a very fortunate position. I have a final salary pension from a large private sector organisation who employed me for 17 years until mid-2012. Since then I have had mainly contract work and most recently I was 2 months into a 9-month contract when I was furloughed - I don't expect to be going back when furloughing comes to an end. I therefore may need to start taking my pension early (I'm 62 next month and my normal retirement date is July 2023). I recently asked for an up to date valuation of my pension comparing taking it at the beginning of October this year with waiting until July 2023. Without any lump sum, my annual pension will be £17,000pa if I take it later this year compared with £19,000pa (at today's prices) if I wait until July 2023. If I take the maximum tax free cash, this year I would receive £82.5k tax free with a reduced pension of £12,500pa compared with £92.2k tax free and a reduced pension of £14,000pa. I've tried to compare these different options looking forward over the next 25-30 years and it would appear that, in terms of total cumulative income, taking my pension this year (with full tax-free lump sum) is worthwhile up to the age of 78 - if I live longer than that, then some of the other options look preferable. I have had health issues over the last couple of years including prostate cancer which is currently in remission, so I am hopeful of living for a few more years yet! However, I also know the chances of it returning at some point are quite high. My question is, should I opt for the pension this year and if so, should I be taking the full lump sum with it? 

Do the maths for the options but dont forget to take tax into account. That can make quite a difference. Especially with large tax free lump sums involved. Include any other pensions when they kick in, including state.

You dont say if you have a spouse and that would often be a big consideration.

My gut reaction is, in your position, having had serious health issues, I'd be inclined to take the money now in terms of the ongoing annual pension, but  the tax free lump sum would depend if i had an immediate use for it. I had a similar question recently but my TFLS meant I'd need to live to 99 to come out better taking the larger pension vs no lump sum ! 

AnotherJoe

VXman said:

I was about to post a similar question so rather than create a new thread I hope you don’t mind if I put it here.
<snip>

Any comments, positive or negative on this approach?

Yes, i think its preferable to start a separate thread, its not difficult, and one long thread with multiple different questions about which options to take becomes confusing,  especially if people read one and then reply under another without context of which they are responding to.

Plus the OP gets their thread awoken and a notification of a reply,  that's nothing to do with their Q. ( Just like they will for this but at least its following on from one only a minute previous)

jimi_man

VXman said:

I was about to post a similar question so rather than create a new thread I hope you don’t mind if I put it here.

I have a teachers pension. I can take it now and it will be £20K per year with. £61K lump sum. Alternatively I could take £ 16.5K  and £109K lump sum. My wife is retiring too and In a similar situation with a few grand less PA. We have other saving/investments of about £500,000 and house is paid for. No other significant outgoings/loans/depts.

My feeling is go for the higher lump sum. It will be 13 years before it becomes less advantageous. The pension will attract inflation linked rises each year but I feel putting the money in a reasonably cautious ISA  S&S find should return at least that much. 

Advantages are paying less tax on the pension. Also part of the £500,000 is in AVC’s. 25% of that is taxable so having less pension means I can control the drawdown of that to stay in the lower tax bracket.

 I also think we are likely to spend more in the first 13  years of retirement. Hobbies of cars and travel are our main vices.

Later on state pension will kick in and we are likely to be less adventurous in travel and spending generally. There is also the possibility of purchasing a flat to help my son out...which rental coming back in on this. The lump sum will help with this. 

Any comments, positive or negative on this approach?

Yes, I have some comments. It seems, looking at the figures, that you are swapping £3.5k a year for a £48k lump sum. That's about a 13:1 commutation rate, which seems very poor to me, though the relative value of commutation rates are age dependent and you don't say how old you are. 

Looking at it in reverse, if you left the £48k in the pension, you'd be getting an extra £3.5k per year, which equates to a 7.3% return plus inflation. Even after tax it's still 5.8% plus inflation, which is a reasonable guaranteed return.

You state that you have no mortgage and £500,000 in savings/investments so it seems unlikely that you need an extra cash lump sum and it's not likely to make any substantial difference to your savings. 

Your post suggest that this (apart from SP) is your only DB pension, and with the substantial savings you have, I'd want to maximise my pension income. I'm assuming you're in reasonable health, you don't suggest otherwise.

I'd take the lower lump sum and the higher pension, it's a fairly easy decision, especially with such a poor commutation rate. The same for your wife too. 

(If I could I'd take no lump sum at all and increase the pension - not sure if that's an option.) 

simon758

Dox said:

simon758 said:

My question is, should I opt for the pension this year and if so, should I be taking the full lump sum with it? 

Nobody can make that decision for you, but ask yourself two questions: do you need your pension at all, or do you have other savings you could draw on for a while which might give you a better outcome? If you need to draw your pension now, what would you actually do with the lump sum?

Many thanks for your reply. In answer to your questions:
1. I have about £20k in savings in the bank but nothing in ISAs or longer term savings. I also have a crystallised private pension with Prudential currently valued at c£130k - I have already had to take the tax free cash from this, so the balance is in a drawdown account currently untouched. I also have another small pension from previous employment with Scottish Widows which is uncrystallised and currebtly valued at c£30k. I have thought that I perhaps should use the drawdown to provide an income for the next 3 years until my 65th birthday - I think it would just about last until then based on needing about £36k pa after tax.
2. If I drew the pension now, the lump sum would be used to boost our income going forward. I am able to get my state pension at 66 and my wife has a small local government pension worth c£8k pa with a lump sum of £25k payable in June 2022. Unfortunately, she won't get her state pension until she is 67 which is in 2029.

simon758

Albermarle said:

The reduction in pension for taking it 33 months early is about 11% which is pretty good.
The tax free lump sum offer looks less attractive compared to the pension you would lose. However this also depends on the terms of the pension. If it is linked to RPI inflation then this is a big benefit , not always immediately obvious in the initial offer .
Also is there is provision for a spouse pension if you die before them 

Many thanks for your response. In answer to your questions:
1. Yes, the pension is RPI-linked.
2. Yes, my spouse would receive two-thirds of my pension for life.

simon758

AnotherJoe said:

simon758 said:

I recognise first of all that I am in a very fortunate position. I have a final salary pension from a large private sector organisation who employed me for 17 years until mid-2012. Since then I have had mainly contract work and most recently I was 2 months into a 9-month contract when I was furloughed - I don't expect to be going back when furloughing comes to an end. I therefore may need to start taking my pension early (I'm 62 next month and my normal retirement date is July 2023). I recently asked for an up to date valuation of my pension comparing taking it at the beginning of October this year with waiting until July 2023. Without any lump sum, my annual pension will be £17,000pa if I take it later this year compared with £19,000pa (at today's prices) if I wait until July 2023. If I take the maximum tax free cash, this year I would receive £82.5k tax free with a reduced pension of £12,500pa compared with £92.2k tax free and a reduced pension of £14,000pa. I've tried to compare these different options looking forward over the next 25-30 years and it would appear that, in terms of total cumulative income, taking my pension this year (with full tax-free lump sum) is worthwhile up to the age of 78 - if I live longer than that, then some of the other options look preferable. I have had health issues over the last couple of years including prostate cancer which is currently in remission, so I am hopeful of living for a few more years yet! However, I also know the chances of it returning at some point are quite high. My question is, should I opt for the pension this year and if so, should I be taking the full lump sum with it? 

Do the maths for the options but dont forget to take tax into account. That can make quite a difference. Especially with large tax free lump sums involved. Include any other pensions when they kick in, including state.

You dont say if you have a spouse and that would often be a big consideration.

My gut reaction is, in your position, having had serious health issues, I'd be inclined to take the money now in terms of the ongoing annual pension, but  the tax free lump sum would depend if i had an immediate use for it. I had a similar question recently but my TFLS meant I'd need to live to 99 to come out better taking the larger pension vs no lump sum ! 

Many thanks for your response. I have looked at the tax situation based on my current personal allowance and the option of taking the reduced pension now with full lump sum is preferable - with regard to other pensions including state, please see my reply above to Dox for details of other pensions. I do have a spouse - again see details above of her pension. As you say, given the health issues I've had, it seems sensible to take the money now, especially the lump sum if I was unlucky enough only to live for a short time. A crystal ball would be useful sometimes...........................................