Should we take the lump sum or increased pension?

the_k_dog

My wife and I are planning to retire in April '24.

We'll have combined SIPPs worth about £450k and other ISAs worth about £250k.

I will get an inflation proof pension of about £17k.

My wife also has a DB pension. There are infinite options. The two extremes are:

• £0 lump sum and £12,600 pension

• £65k tax free lump sum and £9,700 pension

Even though we don't need the cash in a hurry, the large lump sum does look attractive (it is, to my understanding, a good "commutation ratio").

In terms of lifestyle, we reckon about £40k a year will do us (drawing on our DB pensions and tax free ISA savings so hardly even touching our SIPPs). And neither of us intends dying any time soon

Is there any way to calculate which would be the best option for my wife? 

2nd_time_buyer

What age are you retiring? Are you due full state pensions? Do you want to leave inheritance?

ewaste

What Index linking is there on the pension? even with a good commutation ratio you both appear to have plenty of liquid assets between SIPPs and ISAs. 

Stubod

If you are expecting to live for a reasonable time, it is normally considered to be more cost effective to take the higher pension.

the_k_dog

2nd_time_buyer said:

What age are you retiring? Are you due full state pensions? Do you want to leave inheritance?

Thanks. I should have said, we will be 57. And yes, we do want to leave something (although I think they will be happy with just the house:))

the_k_dog

ewaste said:

What Index linking is there on the pension? even with a good commutation ratio you both appear to have plenty of liquid assets between SIPPs and ISAs. 

Mine is an old local government pension and my wife's an old BT one. They always go up in April based on inflation figures from the previous September. (I guess they could change the rules in future?)

2nd_time_buyer

As @ewaste says you should have plenty to achieve the £40k whatever way you cut the cake. If you both have state pensions you will achieve the £40k after tax based on that and the DBs alone from 68. 

Assuming your wife also takes income from the SIPPs then she will probably be taxed on the extra income if converting the lump sum to DB.

It probably comes down to your approach to risk and at what points of your retirement you plan to spend more (or pass on money to others).

If it was me. On balance, I would preserve the lump sum for the extra flexibility it gives. 

Ali660

What age will you start drawing on your DB pensions? 

Hoenir

What's your long term plan for the money held in the SIPP's?   

Don't let tail wag the dog so to speak. 

cloud_dog

the_k_dog said:

My wife and I are planning to retire in April '24.

We'll have combined SIPPs worth about £450k and other ISAs worth about £250k.

I will get an inflation proof pension of about £17k.

My wife also has a DB pension. There are infinite options. The two extremes are:

• £0 lump sum and £12,600 pension

• £65k tax free lump sum and £9,700 pension

Even though we don't need the cash in a hurry, the large lump sum does look attractive (it is, to my understanding, a good "commutation ratio").

In terms of lifestyle, we reckon about £40k a year will do us (drawing on our DB pensions and tax free ISA savings so hardly even touching our SIPPs). And neither of us intends dying any time soon

Is there any way to calculate which would be the best option for my wife? 

Welcome over to MSE 

the_k_dog

Hoenir said:

What's your long term plan for the money held in the SIPP's?   

Don't let tail wag the dog so to speak. 

We don't have one! With our lifestyle - and certainly my wife's cautious spending habits - we would probably never dip into it. Which is a bit daft, really, after all that "going without" for years. On the other hand, if we don't use it, we'll lose it / the state would get its hands on it (father in law currently spending £1k plus a week on care fees for the mother in law).