Pension

QrizB

Clowance said:

I am not an expert, but working on the basis that it would take you x number of years to recoup the whole of the lump sum, ( I know tax payable on 75%) often you would need to live for a large number of years to get it back in increased pension.

I think you're describing the option to commute (give up) some annual pension in exchange for a larger lump sum? That's typically only offered by Defined Benefit (final salary) pensions. Some commutation rates are good, some are terrible.

That's a different thing to the OP's question, which is about the 25% tax-free that's available from Defined Contribution (money purchase) pensions.

Organgrinder

Indeed.

Some DB pensions (e.g teacher 80th's scheme) come with a lump sum as standard. Others you give up a portion depending on the commutation rates.

My final salalry schemes had commutation rates in the 20's (23 if  I remember correctly) - so cutting £1,000 of what would have been taxable pension (ie. worth £800 in my pocket) was well worth giving up for £23k of tax free cash. In the end I communted £72k at an annual cost for me of approx £3k or £2.4k after tax. 

p00hsticks

QrizB said:

Clowance said:

I am not an expert, but working on the basis that it would take you x number of years to recoup the whole of the lump sum, ( I know tax payable on 75%) often you would need to live for a large number of years to get it back in increased pension.

That's a different thing to the OP's question, which is about the 25% tax-free that's available from Defined Contribution (money purchase) pensions.

The OP doesn't actually say whether they are talking about a DB or DC pension, hence my earlier post to them asking them to clarify. 

kempiejon

Some people have a direct use for the lump sum often part of the pension plan. Ne not so much, hopefully my pension pot will have decades to grow. If I take the full 25% upfront the remaining pot will grow and it will all be taxed as I extract it. Alternative if I take smaller amounts 25% of each withdrawl is tax free. It is a bit of a play on the tax regime but my staggered withdrawl plan takes out a larger sum untaxed and there's still the option to grab the maximum lump. I held the alterative view for ages only in the past couple of years have I weighted the tax treatment as more important than extracting as much as I can before the pension rules are changed. I have ISAs I could use if I needed a lump sum.

kinger101

tacpot12 said:

It's almost never a good idea to take the lump sum. Only if your home is about to be repossessed or you are terminally ill might it be a good option. 

I'd  disagree with this. Taking £250K out of a £1M+ pot to pay off a mortgage would be very sensible thing to do.  Particularly as you  can continue to contribute fully to the pension while still earning.  Once a pot hits a certain size, you'll likely fully utilize the tax free amount anyway, so delaying and watching inflation erode the benefit might not be tax efficient.

Organgrinder

Interesting discussion. But how much annual pension did people give up for the lump sum (for those in DB).

I gave up approx £3k per annum for a £72k lump sum 

Nebulous2

It's a personal decision, depending on your own circumstances. If you need cash for a specific purpose that can sway the decision. 

If it is a public sector DB pension, then the 12 to 1 commutation rate is quite poor by comparison with some public sector ones. 

It is in many ways a gamble on how long you will live, and many people underestimate how long that will be. 

I hadn't intended to retire, became disillusioned during the pandemic, did my sums and decided I could afford to retire. I had a local government pension scheme. 

Due to my personal circumstances I didn't have an automatic lump sum, but could have given up over £8k of pension for a £100k lump sum. 

I had lived on a monthly wage for my whole life, had an 8 year gap until state pension age, so I wanted the security of having an income that met as much of my needs as possible. Over 3 years in, having had a couple of decent CPI increases to my pension, I've no doubt it was the right decision for me. 

Organgrinder

Remember, some public sector schemes had guaranteed lump sums.

The old teachers' scheme was one of these. It gave 1/80 salary per year of service and a lump sum of 3 times your pension. So if you accrued 30 years service and finished on a final salary of £40,000, you'd get 30/80ths which is £15,000 plus an automatic lump sum of £45,000, subject of course to a reduction if you retired early.

When the new 60ths scheme was introduced in 2007, existing pensioners could stay on the old scheme. 

Nebulous2

Organgrinder said:

Remember, some public sector schemes had guaranteed lump sums.

The old teachers' scheme was one of these. It gave 1/80 salary per year of service and a lump sum of 3 times your pension. So if you accrued 30 years service and finished on a final salary of £40,000, you'd get 30/80ths which is £15,000 plus an automatic lump sum of £45,000, subject of course to a reduction if you retired early.

When the new 60ths scheme was introduced in 2007, existing pensioners could stay on the old scheme. 

The LGPS was / is the same, but I moved from an English local authority scheme to a Scottish one, and transferred my pension during the 60ths period. That meant I was credited with all my previous pension at 60ths with no automatic lump sum. I got something like 33 years credit in a scheme which only ran for 7 years or so. 

It suited me as my priority was maximising pension rather than lump sum. 

Organgrinder

Everyone has different needs at different times. I know I'd have done things differently if I had my time again. That said I'm happy with my choices. Had I not made the decisions I have made I'd probably still be working full time. So a few thousand more pension at 60 would mean possibly £100k less in our pot and for me, less quality of life now. From memory the difference is about £4k gross per annum, £3.2 k net, which sounds a lot but I'd have to live 30 years to break even!