NHS pension lump sum decision

campbellw

Hi all,
I'm taking partial retirement from the NHS next year, I'll be 55 (I have MHO status). I plan to take 100% of my 1995 scheme and continuing working 60% of my full time hours. My big decision is what to do about my lump sum?
I'll will automatically get 90K with a £32k a year pension, but have the option to commute at a rate of £1 to £12  take the max of £170k with a £25k a year pension. 
We won't have any debt or mortgage to pay off and have no other big plans for this money.
I suppose the question I'm asking is: Can I invest the money wisely enough to offset the £7k I'm losing in pension each? In the knowledge that I'll make the £80k back in 11-12 years.
Appreciate any advice

Silvertabby

The only way to work this out for sure is to factor in one vital piece of data.  Your date of death.

The public sector commutation rate of 1:12 is generally held to be a p.poor rate, so if you have a healthy lifestyle and good genes then you may find that keeping the fully index linked pension will give you a better return than the one-off lump sum, regardless of how well you invest it.

By all means play with your own figures, but start with the average of 85 as your date of death:

In return for the extra £80K tax free cash, you'd be giving up 30 X £7K = £210K.  But that doesn't include uncapped cost of living increases, so - best guess - that could be nearer £300K.  Minus 20% tax = £240K.  

campbellw

Hi Silvertabby,
Thanks, you've really confirmed what I was already thinking and f I was retiring at 65 I think different. 
Thanks again

Cobbler_tone

campbellw said:

We won't have any debt or mortgage to pay off and have no other big plans for this money.

I think you answered your own question there.

The only thing it means though is that you will be even better off by the time you get the state pension, although I am sure you can have plenty of fun with £90k as opposed to £170k.

I reckon you will have an income of around £62k+ a year by the time you get the state pension but who knows what the tax bands will be in 2036 of so?

Moonwolf

I had an interesting conversation with a colleague with Punjabi heritage recently. He is convinced he will die earlier and it is certainly true that heart disease and diabetes are more common in his community.

The problem is a more tailored date of death prediction.

An alternative date of death prediction I have come across is the average (mean) date of death of your grandparents plus five years.  It it still a guess but it does take genetics into account.  For me this gives 84 which is basically the same as the ONS predictor, but it gave 73 for him.

Lowtrawler

My grandparents all made it into their early 90's and my parent's, Uncles and Aunts as well. None with serious health issues. I'm doing my best to buck the trend with over-eating and drinking but I know of at least one white collar pension scheme that now assumes an average life expectancy of over 90. My guess is, if you are financially comfortable and all your family live a long-life, you need to assume living to 90+.

Personally, I'm assuming I will live an active lifestyle until 93 and that I have sufficient pension after 93 to live comfortably but doing less.

One of my friends is convinced he will not live into his 70's. His mother and father both died in their early 60's as did his grandparents. He is now mid 50's and been suffering various health issues. As a result, he has not made much pension provision and would always take the maximum lump sum. Whether that proves to be correct, who knows?

Cobbler_tone

Moonwolf said:

I had an interesting conversation with a colleague with Punjabi heritage recently. He is convinced he will die earlier and it is certainly true that heart disease and diabetes are more common in his community.

The problem is a more tailored date of death prediction.

An alternative date of death prediction I have come across is the average (mean) date of death of your grandparents plus five years.  It it still a guess but it does take genetics into account.  For me this gives 84 which is basically the same as the ONS predictor, but it gave 73 for him.

Jeeez I hope not. Both of my grand dads died in their early 50's before I was born in 1969.
My parents are still going at 83 (mum) and 88 (dad) respectively. Genetically I lost my hair like my grand dads and my dad still has his....let's hope the rest doesn't follow suit!

Got any good news?

Moonwolf

Cobbler_tone said:

Got any good news?

It is just a different rule of thumb, I mean without taking income, current health and all the other things the actuaries use, the ONS calculator is pretty rough and ready.

This one has the advantage that it is more personal to your genetics. it has the disadvantage that it still ignores lifestyle. For me, the two grandparents who died youngest were smokers and were both a lot poorer than I am.

kassy64

I presume like other Government pensions you could also consider somewhere in the middle, if like mine you can choose the amount of lump sum between the 'max' and compulsory lump sum. 
Its a very personal choice and like others have said, you need a crystal ball to see how long you will live.
I took the max lump sum as it meant I could have more to 'enjoy' whilst in my late 50's and into my 60's (I retired from Civil Service at 57). I still have a very good annual pension and with state pension now only 6 years away by the time that comes around will have more than enough. It also gave me a sense of security knowing I can/could do what I want when I want. From a strictly financial point of view, unless you pass away at a relatively young age you will probably better off taking the increased pension. Good luck with your decision.

crv1963

Hello OP, it all rests on your health and life expectancy and your wife pension/ old age provision. If has been said you are in robust health and expect a reasonably long life then pension over lump sum and vice versa. What provision has your wife for old age? If substantially smaller than your provision could the extra from the lump sum be invested and provide her a greater income using Pension or ISA wrappers?

I took larger lump sum simply because having had a heart attack a couple years before retirement I wanted to ensure Mrs CRV had the cash available should I shuffle off as it does not affect the Survivors Pension.

saucer

I ran various scenarios, assuming (or hoping) for life expectancy of 85, including taking max nhs lump sum vs min lump sum. Even allowing for tax (some at higher rate) better annual pension works out preferable. If you think you’ll shuffle off this mortal coil significantly earlier then lump sum might be more appropriate.