Retiring on Teachers Pension Final Salary Scheme - How much lump sum should I take?

VXman

I posted this on someone else’s thread as it was a similar situation but thought it might be better in its own thread.

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. That’s an extra 48K for a drop of 3.5K in salary. 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. Retiring 2 years early at 58.

My feeling is go for the higher lump sum. By my calculations 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. Another reason for taking more lump sum now is that there is also the possibility of purchasing a flat to help my son out...which rental coming back in on this. 

Any comments, positive or negative on this approach?

Gary1984

Taking the lump sum is very poor value for money unless you have some health condition you're not telling us about. A 58 year old in average health can expect to live much longer than 13 years.

And there is very little chance a cautious S&S ISA will return the nearly 6% plus inflation required to replace the lost income after tax. 'Safe' withdrawal rates are usually considered to be 3-4%. You're letting the tax tail wag the dog here.  Furthermore you talk about both investing it and also spending it. You need to be clear what you'd actually be using it for and using it to replace the lost pension is a non-starter. 

Given you have so much ready capital available already I'd keep the guaranteed inflation proofed income for life as this is where you're looking a bit short. I'd also delay your state pension when you become eligible for the same reason.

Enjoy spending your £500k if you like but try and guarantee as good a quality of life as possible for when it's gone. When the savings and investments are gone you'll be glad of the extra pension. 

VXman

Gary1984 said:

And there is very little chance a cautious S&S ISA will return the nearly 6% plus inflation required to replace the lost income after tax. 'Safe' withdrawal rates are usually considered to be 3-4%. 

Could you explain this? Don’t quite understand what you are getting at. 

Current rise is TP is 1.7%. I would expect to achieve around 2-3%  for investments. Plus the tax saving in taking a reduced pension.

I get your concerns about 13 years not being a long time.

Gary1984

If you invest your additional 48k and then take from it to replace your lost £2,800 post tax income then you need to take out 5.8% every year and increase this for inflation each year going forward. At this rate chances are that the 48k will run out before you die. 

To buy an inflation linked income of £2.8k from 58 until death from an insurer would probably cost around £150k. This is a valuable benefit you'd be giving up for relative peanuts. 

LHW99

And you are gambling on inflation remaining low. If it increases and you want what you withdraw from your additional £48k to increase with inflation, it will last even fewer years. With the current Covid situation, there is no guarantee inflation will rise - but then again there's no guarantee it won't, as inflation can be a tool to "get rid of" debt - as was tried in the 1970's

tigerspill

So if I have this right, giving up £3,500 of pension gives £48,000 cash?  So under 14:1 exchange rate.
Is that not appalling in terms of value?  My pension offers more than twice that currently.
My wife is in TPS and will be retiring next summer and I have rejected the bigger lump sum out of hand as it is a joke in my view.

zagubov

Teachers retiring at 60 are expecting to live to their late 80s. Every year you're alive adds another 11 weeks to your life expectancy. There are even online calculators that can give you a rough idea of how long you might have.

The Teachers Pension has something like a 12:1 exchange rate, so when I took early retirement at 59 I wasn't tempted to take an extra lump sum. When I'm dealing with pensions I prefer to take a long-term view.

Are you thinking of working part time when you've retired? Apparently the happiest retirees are those who work part-time in a familiar job. 

jimi_man

I did post this on the other thread, but I'll repost it here. It echos what others have said.

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.) 

mollycat

As per the last few posters above; NHS 1995 section had a 12:1 commutation rate......for some reason that I could never fathom, most of my contempories thought this was a fantastic deal, a "no brainer" if you will, and took the larger lump sum.

IMVHO, in the realms of that type of commutation rate, (yours is 13:1), unless you have some kind of limited life expectancy, or some very urgent need of the larger lump sum, (you would not appear to given your level of savings), I would contend it's a "no brainer" to take the larger pension.

As I did. 

stephenadarglas

Another retired teacher here who agrees with taking the smallest amount of lumps sum. 

jem16

I'm a retired teacher who did not take the higher lump sum. With a 12:1 commutation rate you need  a return of 8.33% just to break even. Impossible 5 years ago when I retired and even more impossible today.