25% Lump sum

Tricia10

My husband has retired. One of his final salary pensions is offering a pension of £5,197.74 a year with no lump sum or a tax free cash lump sum of £19,478.38 and a reduced pension of £4368.52 a year (the quote states this includes a £3,670.68 Guaranteed Minimum Pension at age 65 increasing in line with consumer price inflation capped at 3% each year). I'm doubtful that either of us make it to 90, although my husband is hopeful. We're having problems deciding what to do, does anyone have any thoughts please?  

Pipthecat

I have a small DB pension due at 60 and have the same dilemma.  I don't think I will need the tax free lump, but my family history suggests that I'll never reap the long term benefits of the extra income.  I intend to take the cash and put it in my ISA.  I'm interested to hear what others think.

Marcon

Tricia10 said:

My husband has retired. One of his final salary pensions is offering a pension of £5,197.74 a year with no lump sum or a tax free cash lump sum of £19,478.38 and a reduced pension of £4368.52 a year (the quote states this includes a £3,670.68 Guaranteed Minimum Pension at age 65 increasing in line with consumer price inflation capped at 3% each year). I'm doubtful that either of us make it to 90, although my husband is hopeful. We're having problems deciding what to do, does anyone have any thoughts please?  

Just to clarify - defined benefit (aka final salary) pensions don't have a 25% tax free lump sum in the same you can take 25% from a defined contribution scheme. It depends on the rules of the individual scheme, subject to an overall maximum set by HMRC. Some DB schemes do have a 25% lump sum, but that's because their rules say so!

should it take a lump sum from my db pension will give you plenty of sites which set out general pros and cons.

Tricia10

I've tried googling already but unfortunately we still can't decide. I'd like to hear what other people think and have done. I'm doing my husband's family tree and sadly I haven't noticed anyone making it to 90 so far. Taking the lump sum and putting it in an ISA might be an option, I'll see what he thinks.  

Albermarle

It is not so simple a calculation, because the pension will increase with inflation ( capped at 3%).
If you divide the lump sum by the amount of pension reduced, you get what is called the Commutation Factor.
This can as low as 12 for some public sector pensions, but typically for a private sector DB pension it is around 20 to 23.
This one is just over 23, which is quite good .
I would not concentrate too much on how many years he may or may not live, but more on the rest of your financial situation. For example would the cash come in handy, or would it just sit in a savings account? Is the reduced pension fine to live off ?

Expotter

Is your husband also getting a state pension or any other income? If he is don't forget to take into account that he might have to pay tax on the extra income, so the extra £829 would become £663 after 20% tax. Also, it probably doesn't have to be all or nothing, you might be able to take say £10k lump sum and the rest in increased income. 

Sarahspangles

You may not pay tax on the lump sum, but inflation implies that it may be worth less than leaving it in the pension where it will attract annual increases.
However if you can invest it in some way that earns or saves you money then it may be worthwhile taking it.  For example clearing debt, or making your home more energy efficient (you have to work out the 'payback' time on that one)

Marcon

Tricia10 said:

I've tried googling already but unfortunately we still can't decide. I'd like to hear what other people think and have done. I'm doing my husband's family tree and sadly I haven't noticed anyone making it to 90 so far. Taking the lump sum and putting it in an ISA might be an option, I'll see what he thinks.  

The snag with that approach is that nobody else is in your position (family health history, attitude to risk, exact scheme rules, other savings, tax rate...), so what others have done won't necessarily give you any real help. The 'general considerations', which are set out on many websites, are as close as you're likely to get. 

Tricia10

Albermarle Thank you, I thought the Commutation Factor was quite high, but I wasn't sure if I was working it out correctly. I might ask my husband to do a spreadsheet using the maximum 3% increase to estimate the maximum his pension might achieve. Expotter The extra £829 would be subject to 20% tax as my husband has other income.  

Suzycoll

Tricia.....take the money and spend it 

gamston

I had an AVC with my company final pay pension, the rules changed on the AVC 
part of my AVC was 12/1  part was 20/1 (so £12 buys an extra £1 per yr on annual pension, £20 buys £1 etc)
I retired in my 50's so I convented the AVC part that was 12/1 into my annual pension and took 29/1 part in cash
my idea was i expected to out live the 12 yrs to get money back then enter profit, but 20 yrs not sure