Is it worth taking TFLS if pension payout is index-linked?

itm2

My wife has a deferred pension with BP which becomes payable in a few months time. The scheme benefits from RPI-linked annual increases (up to a maximum of 5%). Given this, we were pondering the benefits of not taking the tax-free lump sum. The fund value is around £56k. She is currently a basic rate taxpayer, with rental income from a property just about using up her personal tax allowance.
Any views on the wisdom of taking the TFLS? 

FIREDreamer

itm2 said:

My wife has a deferred pension with BP which becomes payable in a few months time. The scheme benefits from RPI-linked annual increases (up to a maximum of 5%). Given this, we were pondering the benefits of not taking the tax-free lump sum. The fund value is around £56k. She is currently a basic rate taxpayer, with rental income from a property just about using up her personal tax allowance.
Any views on the wisdom of taking the TFLS? 

What’s the commutation rate?

i.e. How much lump sum is given for each £1 of pension given up.

If it is £12 then probably keep the full pension. If £30 then take the tax free cash.

A DB pension doesnt have a fund value, just a transfer value. The tax free cash won’t be 25% of the transfer value, it will be calculated as a function of the pension.

GunJack

Firstly, this sounds like a DB pension so there may well be a built-in tfls (or rather a PCLS, pension commencement lump sum) which you don't have a choice to take or not. 

First thing you need to do is check your wife's scheme and understand it properly...

itm2

These are the figures - I guess the commutation rate would be £20?

FIREDreamer

itm2 said:

These are the figures - I guess the commutation rate would be £20?

I’d probably take the PCLS here, especially if the pension becomes taxable.

Spouse pension unaffected (pretty standard) by your decision.

af1963

20x commutation on a pension that will be taxable and is inflation linked up to 5% - you could make a case for either choice. 

What age is she ? Assuming age 60, you'd pay about 23x the annual amount to buy an RPI linked annuity ( with no 5% limit) which puts in broadly in the same place as 20x commutation.   (Not suggesting you do that, but it provides a 'price comparson' for the commutation rate.)

It also depends on how it fits with your other finances. The regular payments provide more certainty, while taking and investing the lump sum provided the possibility that it might grow ( but also the possibility it could shrink.)

Which is better for you will  depend on what other current and future sources of income you both have.  And maybe on whether you have something you'd do with a lump sum that you couldn't do with a stream of regular income. But it's not a clear case where one is obviously much better than the other,

itm2

Yes she will be 60 in a few months.
We're fortunate enough that she does not need to depend on these payments - we have other sources of income to provide a more than adequate safety net, as well as substantial retirement savings between us - most of which is currently invested in a combination of S&S ISAs, SIPP and savings accounts.
My instinct is that it would make sense to take advantage of the immediate £14k lump sum, as it would be 20 years before that amount was matched in monthly pension payments.

DRS1

itm2 said:

Yes she will be 60 in a few months.
We're fortunate enough that she does not need to depend on these payments - we have other sources of income to provide a more than adequate safety net, as well as substantial retirement savings between us - most of which is currently invested in a combination of S&S ISAs, SIPP and savings accounts.
My instinct is that it would make sense to take advantage of the immediate £14k lump sum, as it would be 20 years before that amount was matched in monthly pension payments.

So does she have a SIPP?

Bear in mind that the £14k will count against the lump sum allowance if she takes a lump sum from a SIPP in future.  Of course that may not be an issue as the LSA is currently over £260k.

itm2

DRS1 said:

itm2 said:

Yes she will be 60 in a few months.
We're fortunate enough that she does not need to depend on these payments - we have other sources of income to provide a more than adequate safety net, as well as substantial retirement savings between us - most of which is currently invested in a combination of S&S ISAs, SIPP and savings accounts.
My instinct is that it would make sense to take advantage of the immediate £14k lump sum, as it would be 20 years before that amount was matched in monthly pension payments.

So does she have a SIPP?

Bear in mind that the £14k will count against the lump sum allowance if she takes a lump sum from a SIPP in future.  Of course that may not be an issue as the LSA is currently over £260k.

No - only I have a SIPP

Albermarle

itm2 said:

Yes she will be 60 in a few months.
We're fortunate enough that she does not need to depend on these payments - we have other sources of income to provide a more than adequate safety net, as well as substantial retirement savings between us - most of which is currently invested in a combination of S&S ISAs, SIPP and savings accounts.
My instinct is that it would make sense to take advantage of the immediate £14k lump sum, as it would be 20 years before that amount was matched in monthly pension payments.

As said by a previous poster, taken on its own the decision is a bit 50:50, so it depends more how each option interacts with your other finances/objectives.

It would not take 20 years due to the inflation increases. That £700 pa could well be close to  £1000 pa in just 10 years. On the other hand the lump sum is tax free.

itm2

Albermarle said:

itm2 said:

Yes she will be 60 in a few months.
We're fortunate enough that she does not need to depend on these payments - we have other sources of income to provide a more than adequate safety net, as well as substantial retirement savings between us - most of which is currently invested in a combination of S&S ISAs, SIPP and savings accounts.
My instinct is that it would make sense to take advantage of the immediate £14k lump sum, as it would be 20 years before that amount was matched in monthly pension payments.

As said by a previous poster, taken on its own the decision is a bit 50:50, so it depends more how each option interacts with your other finances/objectives.

It would not take 20 years due to the inflation increases. That £700 pa could well be close to  £1000 pa in just 10 years. On the other hand the lump sum is tax free.

Yes sorry the 20 years was probably a slight exaggeration. With RPI at a steady 5% I estimate it would be just over 15 years before £14k would be paid out (ignoring tax). By which time the monthly payments would have risen to around £1,400.