Non index linked defined benefit pension - lump sum

Silverbay

Hi,

Forums are so helpful especially for people like us who really struggle with financial decisions. This is a difficult decision for us although suspect very straightforward to some of you.

Husband taking a pension soon at 60. It is defined benefit but apart from a small part of it which is GMP, with guaranteed increases after age of 65,  the rest of the pension only has annual increases made  at the discretion of the pension board. Reading the  Pension newsletters and paperwork it looks as though few increases to pensions in payment over the last 20 years. One newsletter says that there will be no increases while the fund is in deficit and it is in deficit now although from reading newsletters they are trying to address this and have been for last 20 years.

Comments welcome on whether this means taking the full 25% lump sum is more attractive  than if the pension was index linked. The smaller pension will give us enough to  fund our modest life style. We are fortunate to have also local government pensions and will get nearly full state pensions with mine starting next year at 66. We have no immediate need for a lump sum at this point and have reasonable savings and no debt. We have two married adult children.

Full pension with no lump sum £9600.

Reduced pension £6250 with £43,000 lump sum.

I know that generally the advice is to take the larger pension but we are  tempted to keep pensions  overall low enough to avoid paying too much tax and the lump sum may give us some financial flexibility. Does the lack of index linking make taking  the lump sum a more  sensible financial option than normal for a DB pension?

Albermarle

You will lose £3,350 pa in pension in return for £43,000. In the jargon this is a commutation factor of less than 13 , which is very much at the low end . In other words if he lived longer than 13 years he would be worse off. A 60 year old man will live on average another 24 years. So normally it would not be recommended to take this lump sum . However you are quite right to say that the fact that the pension is not index linked makes the lump sum option more attractive , or more correctly less unattractive, as the pension will reduce in real value each year due to inflation.
If he will be a taxpayer in retirement than the  fact the lump sum is tax free is also another benefit.
So as always in these 'lump sum vs pension ' questions there is no clear answer, it is up to you/him. 
If you do take the lump sum and do not need it you should probably consider investing it for the long term, rather than it languishing at the bank. 

Brynsam

People get far too hung up (sometimes) on tax considerations. If you've got no immediate need for the lump sum, think hard about what you'd actually do with it to get any sort of decent return.

You might also check when your husband's GMP was built up - if it was 'earned' before 6 April 1988, it won't be increased by either the scheme or the state. 

xylophone

We are fortunate to have also local government pensions and will get nearly full state pensions 

Have you checked on the possibility of increasing to full NSP?

https://www.royallondon.com/siteassets/site-docs/media-centre/good-with-your-money-guides/gwymg-8-new-state-pension.pdf

Does your husband have pre 88 GMP/post 88 GMP/both?

Does he have a CETV for the pension?

AlanP_2

I have a similar deferred DB pension - small GMP and discretionary increases not being paid out for last 14 years.

If not taken at 60 mine increases by 7% a year until age 65, or taken, so if you don't need the cash now it could be worthwhile asking what happens if not taiken at 60.

My plan is to transfer the CETV out to a personal scheme as the lack of any meaningful inflation linking makes that a much more attractive option.

Like you we have LGPS pensions and full state to look forward to that should cover normal expenses once retired. The transferred CETV will be for big ticket items.

Silverbay

Thank you all for replying and raising useful  points.We will have a good look at all of these.  We did look at paying in to NSP but decided against this but will check again. Also we have asked the pension company what would happen if we deferred taking this pension and we are waiting for a reply on this. We hadn’t really thought about doing this but someone we spoke to mentioned it was worth checking although with so much uncertainty especially at present we sort of feel best maybe to take what we can now rather than a bit more later.

Thanks for the comment about tax as well. We can look at the figures again and keep this in mind. Same with the comment about looking at how we use the lump sum. We are very low risk savers which means we are not doing well with looking after the savings we have. 

We really should spend more time on this site!
As with most people we have worked to get to this position and should try to make the best of what we have now.
Great to get these thoughts to help us with our decision.

Albermarle

We hadn’t really thought about doing this but someone we spoke to mentioned it was worth checking although with so much uncertainty especially at present we sort of feel best maybe to take what we can now rather than a bit more later.

I would not base any decision on 'current uncertainty' . This crisis will pass and in the financial world it has so far been a relatively mild crisis compared to some others in the past .