Pension - Higher or lower lump sum

Roberts12

I am a 60 year old women. I plan to draw on my local government pension and reduce my working hours via flexible retirement. 

I am single with no dependents and no mortgage. Do I take the higher lump sum or the lower one? 

Higher is £140.000 tax free lump sum and £ 21, 000 annual pension 

or

Lower is £48,000 tax free lump sum and £29,000 annual pension. 

I will continue to have an income when I reduce my hours of roughly £30.000 a year. 

Thank you 

MeteredOut

There's no right answer to this, but you may want to consider the "how long do i expect to live" approach, and see which would give you more over that lifetime.

eg, Assuming 20 years:

£140,000 + (£21,000 * 20) = £560,000
£48,000 + (£29,000 * 20) = £628,000

Another way to look at it is the you'd be getting an extra £92K TFLS in exchange for £8K less pension each year, so if you expect to survive more than 11.5 years, the lower tax free lump sum would be better from a pure "which provides more money" perspective.

Neither of these taking into account inflation, or how any TFLS might grow if you invest it, or whether the pension is index linked in any way.

But, with an ongoing income of £30K, you'd need to consider the 40% tax implications if you take the lower TFLS and higher pension (and also take state pension into account for when you get there).

Do you need to draw it now, and do you need the higher TFLS for a particular reason, as that should also go into your decision.

DRS1

When do you think you will stop working completely?  Will that be when you get your state pension?  Or will there be a period when this is the only income you will have?  If so can you live on £21K?
If you get a lump sum what will you do with it?  Do those plans mean you would want the higher amount?
Someone will be along to say if the commutation factor is good or bad - I have no clue - it looks like 11.5 to 1 but I have probably worked it out wrong. 
The pension will presumably increase in payment so that is another factor.

Silvertabby

I'll say it before anyone else does - the LGPS commutation rate of 1:12 (give up £1 of fully index linked pension for the rest of your life in return for a one-off tax free £12) is a pretty p.poor rate.....

Unless you have an immediate and desperate need for the extra cash, or you have a life limiting illness, then the smaller lump sum/bigger pension should give you the overall better return.  But it's very much your choice - choose wisely and don't be influenced by 90%+ of your collegues urging you to take the bigger lump sum 'because it's what they will do'. 

P.S.  You will be re-joining the LGPS in respect of your reduced hours post, won't you?  Note that any R85 protections you may have had (in respect of any pre 2008 service) won't apply to your new record, but it's still well worth having. 

BikingBud

Just done the same figures as above, an extra £68k over 8.5 yrs but by that time you will be 80.

To me when you consider those values the most important question is what do you want to do and when? And therefore what the annual cost might be?

With very limited liabilities, children and mortgage free, I would defer to the lower lump sum and seek to stop working.

That said if you really enjoy the work you may wish to stay on but for me working and paying higher rate tax would grate!

sprocket1

Your index linked pension is worth a lot.  Go for maximum pension and lower lump sum unless you have major health issues.  

Albermarle

It is a pity that with such a poor commutation rate, that there is not an option to not take any lump sum at all and get an even bigger pension.

Silvertabby

Albermarle said:

It is a pity that with such a poor commutation rate, that there is not an option to not take any lump sum at all and get an even bigger pension.

LGPS inverse commutation was phased out many moons ago.  Too expensive. 

As I've said before, over 90% of LGPS retirees go for the maximum commuted tax free cash, despite the poor rate.  Helps keep the scheme affordable, I suppose! 

ADD:  A tiny number of very old deferred records still have reserved rights to inverse commutation.  Even in my time, the cost of adding software that would hardly be used was deemed to be an unneccessary expense, so the calculation had to be done manually,  Our policy was that initial pension quotes would be based on normal/maximum tax free cash options, but we would add that an entitlement to convert automatic lump sums to extra pension existed, and to ask us for the figures.  Again, over 90% of these went for the maximum tax free cash. 

Cobbler_tone

Single, no dependents, no mortgage. Even in London, on £29k per year and a tidy lump sum I’d be retiring!

LHW99

But, with an ongoing income of £30K, you'd need to consider the 40% tax implications if you take the lower TFLS and higher pension (and also take state pension into account for when you get there).

Although you could always add more than the minimum to the new work pension, to avoid the 40% tax bracket, which could make up for losing the part time income in due course.

MeteredOut

LHW99 said:

But, with an ongoing income of £30K, you'd need to consider the 40% tax implications if you take the lower TFLS and higher pension (and also take state pension into account for when you get there).

Although you could always add more than the minimum to the new work pension, to avoid the 40% tax bracket, which could make up for losing the part time income in due course.

I did consider adding that, but wasn't sure whether the MPAA would come into play when the OP chose either option. But, even if so, I guess £10K contribution would help on an £59K income until state pension age.