Teachers' pension - lump sum vs higher pension

purpleelephant60

I'm 63 and thinking about taking my pension early. My options are a pension of £11,053 pa and no lump sum, pension of £7,106 pa and lump sum of £47,370 or something in between the two. I have no mortgage and already receive another (small) pension from my previous career. I spoke to an advisor who recommended taking the highest possible lump sum and investing it to provide an income, but I'm not convinced as the computation rate isn't great. But I'm not an expert by any means (in fact I'm pretty inept, financially) and they presumably are! Any help in understanding my financial situation would be greatly appreciated!

paul090971

I'm not an advisor but I assume they did the maths for you.   
£11053 less £7106 is £3947 a year.  
You have to make that £47370 earn you £4000 a year or more. I think thats quite a tough prospect 

L9XSS

Take the higher pension amount, unless you will run in to serious income tax liabilities (probably not from the limited information you have provided) or require cash immediately.
As the above poster states you would struggle to achieve 10% growth to compensate for the lower pension. 

Andy_L

That is the standard 1:12 ratio for most (all?) Public Sector pension schemes.

It is an incredible poor value deal, but sometimes the utility off the lump sum can make it attractive. 

As Paul090971 said its a tough investment ask & the suggestion to do so would make me doubt the competence of the advisor 

Pipthecat

I'm no expert either, but trying to match £4k of (inflation increasing?) pension with a £50k lump sum could be a challenge.  Unless you are anticipating a shorter retirement, the 12:1 commutation rate would have me taking the pension.  On the other hand investing the cash does mean its available too you should you ever need or want it.  Depends on your circumstances as to what's best for you.

Stubod

..IMHO and in general I would always opt for the lowest possible lump sum and maximise the income ..(unless you have health issues which mean you have a limited lifespan)...

Linton

purpleelephant60 said:

I'm 63 and thinking about taking my pension early. My options are a pension of £11,053 pa and no lump sum, pension of £7,106 pa and lump sum of £47,370 or something in between the two. I have no mortgage and already receive another (small) pension from my previous career. I spoke to an advisor who recommended taking the highest possible lump sum and investing it to provide an income, but I'm not convinced as the computation rate isn't great. But I'm not an expert by any means (in fact I'm pretty inept, financially) and they presumably are! Any help in understanding my financial situation would be greatly appreciated!

Compare taking about £47,370 tax free at the cost of about £4K/year=£3200 guaranteed inflation linked income  after tax:

Assume the £47370 is moved into an S&S ISAs as quickly as possible.  £47370 invested at say 60% equity could reasonably safely sustain an initial drawdown of 3.5%X£47370=approx £1660/year increasing with inflation for the rest of your life.  Clearly taking the pension appears to be a much better deal for securely financing your needs for the rest of your life.

However if you dont need the extra £3200/year to be inflation linked and guaranteed for the whole of your life and you wish money to be left for your beneficiaries after you die or have some other good use for the capital then taking the lump sum could be justified.

eastcorkram

Ignore. Misread the OP!

daveyjp

I'd be wary of any advisor who suggested removing money from an inflation proof, zero risk 'investment' which already provides an annual income, to invest in something which will be far from zero risk and will probably provide a lower annual income.

rnj

Personally I'd take the lump sum - but this is my own circumstances. It would take a number of years to get the equivalent lump sum, anything could happen in this time.

AlanP_2

If your circumstances are such that you NEED a lump sum, to pay off mortgage / debt, buy a new Porsche or whatever then fine.

Or, your circumstances are such that you DO NOT NEED inflation linked, guaranteed income for the rest of your life because you are so rich already / have other guaranteed and inflation linked income sources then fine.

For most people, in most circumstances, giving up £1 of annual pension for £12 of lump sum (standard public sector rate) is financially the wrong decision over the rest of their lifespan. If they die early they would lose out I know, but they won't care anyway.

Private sector schemes typically offer better commutation rates which can tip the scales in favour of taking the lump sum.