DB Pension: Lump sum yes/no? NPD or earlier?

cloud_dog

I know this may be bleeding obvious but, when looking at commutation factors, is it not worth viewing these from a net tax position?  For example with my DB scheme I will lose c. £10k income pa when taking the full PCLS, but I would be be taxed on that extra £10k pa, so in reality the benefit is only £8k.  In essence that changes my 16x commutation factor to a 20x.

mark55man

I agree - avoiding the LS will just mean you pay tax or more of your income in excess of your PA which post state pension will be most of it.  My decisions were based on net tax - the broad impact of which was to delay the timeline which makes taking the lump sum worse in terms of total return (or making taking LS a year earlier more acceptable).  In my case breakeven was delayed to mid 80s which, as above, I literally will live with. 

cloud_dog

I (we) are in a similar position to yourself regarding DBs etc.  We will be stopping work by the end of the calendar year, and I'll have another 7 years until the main DB scheme kicks in (age 65), so I have plenty of time to continue running some numbers, but at the moment I am leaning towards not taking the DB benefit earlier than NRD and taking the PCLS.

The only fly in my ointment at the moment is trying to second guess the impact of ageing on our mental faculties / myself not being around (my partner has zero knowledge or interest in finances), and how managing an element of drawdown might be supported in our older age.  So not a financial efficiency question more of a practical consideration.  Having helped my mother after losing our father and then supporting her with dimentia, it opens up a lot of other perhaps non-financial efficient/effective questions.

LHW99

This may point to either taking an annuity with all / part of the pot (perhaps age 75-80ish) or getting familiar with an IFA to move things over for them to manage / deal wih the practicalities.

Something we will consider in due course.

squirrelpie

LHW99 said:

This may point to either taking an annuity with all / part of the pot (perhaps age 75-80ish) or getting familiar with an IFA to move things over for them to manage / deal wih the practicalities.

Or relatives or friends if available/suitable.

BarbaraG2000

Albermarle said:

Why take all the 25% tax free from the pension?
For example you can take some tax free and some taxable income each year, with most modern pensions.
Also saves on the hassle of opening new accounts to put the lump sum in.

Now that is a very helpful suggestion, which I will give some thought to.

BarbaraG2000

MX5huggy said:

If your figures are correct with the DB at 63 vs 65 it would take you 35 years to make up for waiting 2 years. Inflation would reduce this somewhat, but not by much and if you just banked (invested) the £24k then waiting maybe never catches up. 

The choice of lump sum vs bigger pension comes down to the ratio offered public sector pensions generally offer 12:1 ie £12000 of lump sum for loss of £1000 of annual pension this is poor value especially as you seem to have enough lumps of cash available already if it’s not like 25:1 then more thought is needed.

The lump sums on offer are:

£54,793 at 63 (with the pension reduced by £3993.60 to £8218.92)
£56,956 at 65 (with the pension reduced by £4351.08 to £8543.52)

I don’t fully understand commutation, but simple maths tells me that the lump sum is 13.7 years’ worth of the lost pension at 63, but only 13 years at 65.  So if I take it at 63, then I will be 76.7 before I start being worse off having taken the lump sum, whereas if I take it at 65, I will be 78.

I had always worked on the basis that I would NOT take the lump sum, so as to maximise income. After all, if you have more income than you need, you can always save it.  But a former financial advisor kept on saying we always suggest people take the lump sum, because it’s tax free.

Still leaves me with the question of whether to take this particular pension at 63 or 65 (or any other age…. those were just two examples). I do have plenty of resources to subsist on if I leave it to 65.

EDIT: just re-read your comments, and based on the commutation figures and different pension amounts I’ve been offered, the conclusion would appear to be wait till 65 and don’t take the lump sum.  I am however going to set up an appointment with PensionWise, as the personal pension provider really wants me to do this before they will let me get my hands on my money!

PropertyGuru_Wannabe

There's no hard and fast answer.  It largely depends on you and what you are planning on doing with the lump sum if you take it.  If you don't know what to do with the lump sum, then don't take it.  Especially given the low commutation factor, the pension being index linked, and that you don't seem to be hitting the higher tax threshold when you receive the state pension.

The issue with not taking the lump sum is as your financial advisor suggests, you'll lose the tax free benefit of the lump sum, and you lose the ability to invest that lump sum over the years to make up for the loss of residue pension.  Add that to the possibility that you will be 78 when you catch up to the lump sum and start to make gains, you might lament having lost out on some things that you wish you had done when you were more able to.