Should I take a cash lump sum with an annuity?

randomsuccess

I am 64 years old. I am due to receive the benefits from what was a DB pension, but has now been taken over by the Pension Insurance Corporation, as an annuity, with the same benefits as the DB pension.

I have just received a quotation from PIC and I can choose between an annual income of £20.7k a year with no lump sum or £13.9k pa plus cash lump sum of £92.7k. I understand that the lump sum will be tax free but either choice of income will be taxable. I do not need the lump sum. So it best to take the full amount with no LS with it's annual increases or take the reduced amount and invest the LS? I am due to receive full SP at 66.

DE_612183

is this your only source of income?

Marcon

randomsuccess said:

I am 64 years old. I am due to receive the benefits from what was a DB pension, but has now been taken over by the Pension Insurance Corporation, as an annuity, with the same benefits as the DB pension.

I have just received a quotation from PIC and I can choose between an annual income of £20.7k a year with no lump sum or £13.9k pa plus cash lump sum of £92.7k. I understand that the lump sum will be tax free but either choice of income will be taxable. I do not need the lump sum. So it best to take the full amount with no LS with it's annual increases or take the reduced amount and invest the LS? I am due to receive full SP at 66.

Lots of threads on this topic, so possibly have a browse through those to decide what is best for you - it isn't a yes/no answer, but depends entirely on your overall circumstances such as tax rate in retirement, attitude to risk, other retirement provision etc.

Albermarle

Losing £6.8K of pension income for a lump sum of £92.7K, gives a commutation rate of less than 14. Normally this would be seen as a poor deal, especially if the pension has some kind of annual inflation linking ( most do, although often capped).

 take the reduced amount and invest the LS?

To invest £92K to produce a regular £7Kpa increasing each year, you would have to be a very good investor !

Linton

One way of comparing the options would be based on using the lump sum to buy an annuity matching your DB pension...

If you go for the cash you will gain £92.7K but lose 0.8 X (£20.7K-£13.9K)/year = £5.44K/year.  5.44/92.7=5.8%.

Now is your DB pension index linked? If so is it with a cap? 

 - Annuity rates for someone aged 65 are now  about 7.3% for a fixed annuity.  If so taking the cash would be justifiable since you could buy a larger pension than you lost..

 - For a fully inflation linked annuity the rate would be 4.6%. In this case taking the TFLS is a bad deal.

But if your DB pension is capped at say 3% then the values could be fair to both sides.  Bearing in mind that your DB rension is implemented as an annuity by an insurance company this would seem to be the most likely case.

A rational choice would then be based on other factors.  For example if you were to be a higher rate tax payer in retirement then the TFLS could be attractive. Similarly if you had serious debts or something you particularly wanted to spend  the money on., or simply wanted the flexibility of a relatively large sum of money.  Another use of the TFLS could be to provide extra money for your spouse than would be paid by the DB pension on your death.

On the other hand if you needed the full income from the pension to support your day to day living expenses the security of a larger DB pension could be more valuable to you.

NannaH

For maximum flexibility, I would take the lump sum, especially if you have a Spouse, you can get 6% interest in a fixed rate product at the moment and feed it into an isa.   That money is then always there in case of need, or even to gift if you don’t need it.  

For me, the flexibility overides the higher income and you could always buy another annuity at age 80 or whatever. 

randomsuccess

DE_612183 said:

is this your only source of income?

No. I get about £7k pa from ISAs plus £18k pa from a DC pension. The latter will run out in just over two years from now. 

xylophone

 am 64 years old. I am due to receive the benefits from what was a DB pension, 

 You are male?

Is any part of your pension a GMP?

Was any part of the GMP accrued pre 88? And post 88?

If there is a GMP, what does the scheme guide/PIC have to say about how your pension in payment will increase (escalate) once you have reached GMP age (65 M)?

randomsuccess

Linton said:

Now is your DB pension index linked? If so is it with a cap? 

Yes. 15% increases with CPI and is capped at 3%. 60% of it increase with RPI and is capped at 5%. The rest is non-increasing.

randomsuccess

xylophone said:

 am 64 years old. I am due to receive the benefits from what was a DB pension, 

 You are male?

Is any part of your pension a GMP?

Was any part of the GMP accrued pre 88? And post 88?

If there is a GMP, what does the scheme guide/PIC have to say about how your pension in payment will increase (escalate) once you have reached GMP age (65 M)?

• Yes
• Yes. About 43% in total.
• About 27% pre 88 and 16% post 88.
• Yes. 15% increases with CPI and is capped at 3%. 60% of it increases with RPI and is capped at 5%. The rest is non-increasing.
  

randomsuccess

Albermarle said:

 take the reduced amount and invest the LS?

To invest £92K to produce a regular £7Kpa increasing each year, you would have to be a very good investor !

Although as @Linton pointed out. It’s actually £5.44k that would be required to match, not taking the LS, as I would be paying tax at 20% on the annuity income.