Final salary scheme - Full pension or full lump sum

tojoslaffy

Hello. I know I am really very lucky to have a final salary pension but am wondering if anyone can help me with this. I am retiring at 55 and my options are (1)To take an immediate pension of £29,811 per year, with no lump sum, or (2) Take a reduced pension of £23,837 with a maximum lump sum of £159,000. On the face of it, it would seem that taking the maximum lump sum would be best (£6000 less per year, but 26 years to make up the £159k) but is this right and sensible taking into account index linked pension lost, tax on income etc. I don't really need the lump sum to pay off debts etc. Thanks 

Dazed_and_C0nfused

At face value it's not a bad exchange rate but you have highlighted 2 crucial elements.

The £6,000 lost pension would only be £4,800 assuming basic rate tax is due on it.

The £6,000 lost pension would increase each year from whatever inflation proofing your scheme has so will be worth much more over time.  And that could easily be 40 years if you retiring at 55.

Does taking the smaller pension impact any spouses pension (if relevant)?

draiggoch

It's personal preference really, some take it because they may be in poor health others because they need the money to pay off a mortgage or to go travelling. Is the £23837 sufficient for your current lifestyle? The commutation rate is about 25 so quite decent. Have you considered compromising and taking a smaller lump sum?

tojoslaffy

Thanks Dazed. No my wife's pension wouldn't be effected. Future increases follow CPI capped at 2.5%. At 2% inflation increase I calculate that the £4800 would be worth about £ 7700 after 25 years and this is the length of time it would take for the extra 25yrs income to make up for not taking the lump sum. That being the case, and unless I've worked this out totally wrong, I think taking the lump sum might be the best option. 

MallyGirl

do you have a plan for the £159k - if you leave in cash/savings it is going to be hit by inflation; you can only get £20k per person into ISAs. What about the rest - if in a general investment account it might incur CGT? As a bare minimum you will need to distribute it across a couple of banking groups to stay under the £85k protection.
Do you think you won't make it past 80?

arnoldy

This looks like a private sector DB - so you have won the Silver medal.

If I was you I would take the full lump sum, and feed it into ISAs (£40k pa for a couple) for tax free growth and income. For the following reasons:

1. Your pension is likely to be capped at 0%-2.5%-5% - so somewhat exposed to inflation whereas the lump sum properly invested has a chance of inflation matching
2. If you croak early it softens the financial blow for your partner, usually taking the lump sum does not reduce the partner pension
3. You are giving up £5,974 of pension (but that's £4,779 after tax) for £159,000
4. £4,779/£159000 = 3% yield. FTSE All share yields more than that at the moment

Good luck with whatever you choose

af1963

I've done similar rough calculations for a friend.  Plugging in your figures I make it a multiplier of 26 based on pre-tax amount, but 33 based on the post tax amount you'll actually receive. 

Roughly speaking that means that if you can invest the money so that it *just* matches inflation, you'd receive more by taking the full pension after it had run for 33 years. That would take you to age 88. If you think your investments may not match inflation, the full pension would become the better option at an earlier age. 

Also worth considering if there may be something for which it will be useful to have a large amount of cash available, at some time in the future, even if you don't need it now. 

Tax rates may also change in future, in either direction. Politically hard for governments to raise the basic rate, but there have been suggestions made that pension income could be made liable for national insurance, although it is not affected by the current proposed NI increases / "social care" levy.

tojoslaffy

Thanks everyone...and af1963 was the 33yr calculation based on my pension and potential £159 investment both rising by inflation?

Reflecting on the above....

I became an 'accidental' landlord a few years back and it brings in about £3k net. I was going to sell the B2L to pay off my current £160k home mortgage and either then (as above) (1) take my full £29.8 pension or (2) reduced £23.8 pension + £159k lump sum.

So, selling the B2L to pay off my home mortgage would loose me £3k net income, whilst using the £159k lump sum to pay off the mortgage would cost me £4800 in net income due to reduced pension, BUT lots to think about based on the above advice - a good dilemma to have I know. So I'll go away and think about the following

(1) take my full £29.8 pension and sell the £160k B2L to pay off £160k home mortgage (£3k less income)
(2) take reduced £23.8 pension and use £159k lump sum to pay off home mortgage (but £4.8k less income, 33 yrs, investment potential etc)  
(3) take reduced £23.8 pension, sell £160k B2L to pay off £160k home mortgage, and invest £159k lump sum ....... 

Stubod

....unless you need the cash, the general advice is to max out the monthly pension..ie do not take any cash unless yoi need it for something specific or have health issues?

sheslookinhot

Stubod said:

....unless you need the cash, the general advice is to max out the monthly pension..ie do not take any cash unless yoi need it for something specific or have health issues?

My reason for taking a tax free lump sum is to get my annual DB pension below the higher rate for income tax. (Scottish Tax payer)

sheslookinhot

Thrugelmir said:

sheslookinhot said:

Stubod said:

....unless you need the cash, the general advice is to max out the monthly pension..ie do not take any cash unless yoi need it for something specific or have health issues?

My reason for taking a tax free lump sum is to get my annual DB pension below the higher rate for income tax. (Scottish Tax payer)

Disposing of the BTL might incur you a hefty CGT charge then . 

Maybe that was intended for another poster. I’m not in the BTL business.