Which option is best?

aphill24

Hi, i'm about to sign for my redundency package and I need to make a choice between two options. What are the pro's and con's to each option that I need to know?
Option 1: a pension of £19,500 pa with a tfls of £130,000 This is front loaded and will drop at age 67 (55yrs,8 months now) by the same amount as state pension to £10.500
Option 2: a pension of £16,500 pa with a tfls of £110.00 The state pension will then be extra when i reach 67 
My pension forcast is £160 per week and I need to pay ni contributions for another 4 yrs to obtain the max £175 pw
With both options my wife would get £12,000 pa so the risk is if I fall off the perch the £20,000 would be lost plus the £3,000 I would have given up every year.
We are mortgage free with very little debt, Hope that someone can point me in the right direction but I understand if it's just a personal choice that I have to make myself.
I am in good health at the moment 
Thanks all.

Linton

Is the £110 correct or a typo? It seems a silly amount.
Have you any need for a lump sum of £130K?  What would you do with it?
How much total income do you need to meet your normal living expenses at your desired standard of living?

aphill24

Linton said:

Is the £110 correct or a typo? It seems a silly amount.
Have you any need for a lump sum of £130K?  What would you do with it?
How much total income do you need to meet your normal living expenses at your desired standard of living?

It's typo sorry should be £110,000
The lump sum question is very difficult to answer. We have only 5k in savings and will never have another chance to have such a sum of money that would enable us to buy things in future without paying interest such as cars and it is also planned to be used for holidays without the need to save. 

Brynsam

aphill24 said:

Linton said:

Is the £110 correct or a typo? It seems a silly amount.
Have you any need for a lump sum of £130K?  What would you do with it?
How much total income do you need to meet your normal living expenses at your desired standard of living?

It's typo sorry should be £110,000
The lump sum question is very difficult to answer. We have only 5k in savings and will never have another chance to have such a sum of money that would enable us to buy things in future without paying interest such as cars and it is also planned to be used for holidays without the need to save. 

Are you getting a redundancy payment as such (i.e. cash)? 

Have you asked if there is a third option, which gives you a bigger pension/smaller lump sum than either of the options shown? There is usually some flexibility, so you could still have a decent tax free lump pension lump sum but also a bigger pension (and remember that any spouse's pension is normally calculated as if you had taken NO tax free cash - but do check that's the case here).

Linton

Looking at things very crudely.......
Suppose you live to 90:
Option1
11.3 years at £19500=£220350
23 years at £10500=£241500
Lump sum=£130000
Total: £591850
Option 2
34.3 years at £16500=£565950
Lump sum=£110000
Total: £675950
So Option 2 looks a better deal and £110000 is still more than enough for cars and a few goood holidays.
BUT
Do you have any other income?  If not, can you live for the first 11.3 years on £16500/year?  Take a part time job perhaps? Normally one would use the lump sum to make up the shortfall from not having the SP.  But if you took all the £9K/year that would use almost all of your lump sum.

aphill24

Brynsam said:

aphill24 said:

Linton said:

Is the £110 correct or a typo? It seems a silly amount.
Have you any need for a lump sum of £130K?  What would you do with it?
How much total income do you need to meet your normal living expenses at your desired standard of living?

It's typo sorry should be £110,000
The lump sum question is very difficult to answer. We have only 5k in savings and will never have another chance to have such a sum of money that would enable us to buy things in future without paying interest such as cars and it is also planned to be used for holidays without the need to save. 

Are you getting a redundancy payment as such (i.e. cash)? 

Have you asked if there is a third option, which gives you a bigger pension/smaller lump sum than either of the options shown? There is usually some flexibility, so you could still have a decent tax free lump pension lump sum but also a bigger pension (and remember that any spouse's pension is normally calculated as if you had taken NO tax free cash - but do check that's the case here).

Hi, Yes I am getting a redundancy payment also and the tfls is allowed to be changed to allow for a bigger pension. I was more concerned whether I should make use of the tax free money whole it's offered. 
I kind of think it's too personnel a question tobe asked as everyone has different circumstances.

AlwaysSomething

Just my opinion: the tax free lump sum seems very large. How many people do you think could say "I earn 19500 a year, but I've got 130k in the bank"? Why not look at it from a different angle. Figure out how much you need each year to be comfortable. Set the annual pension to provide that amount, then take whatever lump sum that leaves. Remember your pension is taxed, so if you need 20k/year, then you want a 23k annual pension.

It is generally thought that your annual spend goes down as you get older (less likely to take a world tour, or bail out the offspring at 75 than at 65), so the option for a larger pension up front, decreasing when state pension kicks in, has some merit.

badmemory

AlwaysSomething said:

It is generally thought that your annual spend goes down as you get older (less likely to take a world tour, or bail out the offspring at 75 than at 65), so the option for a larger pension up front, decreasing when state pension kicks in, has some merit.

I have always wondered about this.  Unless your working expenses are great, like a very expensive commute, I think this is debatable.  It will be truer for 2 than it is for 1 as if you are 2 the other can often continue to do what one can no longer.  But bad back = need a gardener, can no longer climb a ladder without being likely to fall = need a decorator.  If you are very lucky of course these things never happen to you, but it is better to be prepared in case they do than have to do stuff which you would really be better not doing.  Unless you do everything together please don't bank on going down to a 1 car household.  The one thing my mother really liked about my father popping his clogs was that she no longer had to consult anyone before she used the car after having had her own for a very long time.

BritishInvestor

badmemory said:

AlwaysSomething said:

It is generally thought that your annual spend goes down as you get older (less likely to take a world tour, or bail out the offspring at 75 than at 65), so the option for a larger pension up front, decreasing when state pension kicks in, has some merit.

I have always wondered about this.  Unless your working expenses are great, like a very expensive commute, I think this is debatable.  It will be truer for 2 than it is for 1 as if you are 2 the other can often continue to do what one can no longer.  But bad back = need a gardener, can no longer climb a ladder without being likely to fall = need a decorator.  If you are very lucky of course these things never happen to you, but it is better to be prepared in case they do than have to do stuff which you would really be better not doing.  Unless you do everything together please don't bank on going down to a 1 car household.  The one thing my mother really liked about my father popping his clogs was that she no longer had to consult anyone before she used the car after having had her own for a very long time.

Not sure if you've read this (figures 3 and 4 are worth a look)

https://ilcuk.org.uk/wp-content/uploads/2018/10/Understanding-Retirement-Journeys.pdf

aphill24

Linton said:

Looking at things very crudely.......
Suppose you live to 90:
Option1
11.3 years at £19500=£220350
23 years at £10500=£241500
Lump sum=£130000
Total: £591850
Option 2
34.3 years at £16500=£565950
Lump sum=£110000
Total: £675950
So Option 2 looks a better deal and £110000 is still more than enough for cars and a few goood holidays.
BUT
Do you have any other income?  If not, can you live for the first 11.3 years on £16500/year?  Take a part time job perhaps? Normally one would use the lump sum to make up the shortfall from not having the SP.  But if you took all the £9K/year that would use almost all of your lump sum.

Thanks Linton.There is the state pension to take into account also.
Option 1 
11.3 yrs at £19,500 = £220,350
23 years at £10,400 (DB pension) + £9,100 (state pension) = £450,800
Lump sum £130,000
Total: £801,150
Option 2 
34.3 yrs at £16,500 = £565,950
23 yrs at £9,100 (state pension) = £209,300 (From age 67 to 90)
Lump sum £110,000
Total £885,250
So £84,100 more 

Time4T_Accounts

BritishInvestor said:

badmemory said:

AlwaysSomething said:

It is generally thought that your annual spend goes down as you get older (less likely to take a world tour, or bail out the offspring at 75 than at 65), so the option for a larger pension up front, decreasing when state pension kicks in, has some merit.

I have always wondered about this.  Unless your working expenses are great, like a very expensive commute, I think this is debatable.  It will be truer for 2 than it is for 1 as if you are 2 the other can often continue to do what one can no longer.  But bad back = need a gardener, can no longer climb a ladder without being likely to fall = need a decorator.  If you are very lucky of course these things never happen to you, but it is better to be prepared in case they do than have to do stuff which you would really be better not doing.  Unless you do everything together please don't bank on going down to a 1 car household.  The one thing my mother really liked about my father popping his clogs was that she no longer had to consult anyone before she used the car after having had her own for a very long time.

Not sure if you've read this (figures 3 and 4 are worth a look)

https://ilcuk.org.uk/wp-content/uploads/2018/10/Understanding-Retirement-Journeys.pdf

Thanks for this link : I’ve been looking for something like this for a long time.