Taking a tax-free lump sum and a reduced pension

EarlsCourt16

I am about to take my defined benefits pension (aged 60) and am considering taking a tax-free lump sum of £230k which would mean my annual pension would be reduced from £69k to £56k. My wife doesn't work, so if I do take the lump sum, I might put it into a fixed interest savings account or bond (for a year at least) which pays interest monthly. At approx 4% interest, this would give her a tax-free income of around £800 a month. I also plan on maximising our ISA allowance for this year (probably cash ISAs to be on the safer side). 

Any thoughts welcome around a) taking the lump sum vs a higher pension and b) how to use that lump sum in these volatile times. 

Thank you.     

Dazed_and_C0nfused

EarlsCourt16 said:

I am about to take my defined benefits pension (aged 60) and am considering taking a tax-free lump sum of £230k which would mean my annual pension would be reduced from £69k to £56k. My wife doesn't work, so if I do take the lump sum, I might put it into a fixed interest savings account or bond (for a year at least) which pays interest monthly. At approx 4% interest, this would give her a tax-free income of around £800 a month. I also plan on maximising our ISA allowance for this year (probably cash ISAs to be on the safer side). 

Any thoughts welcome around a) taking the lump sum vs a higher pension and b) how to use that lump sum in these volatile times. 

Thank you.     

It's not a terrible exchange rate and with the income given up presumably being liable to 40% tax that makes it more favourable.

But what inflation protection does your pension have?  Could that £13k escalate quickly with high inflation or are the annual increases capped?

Giving your wife £230k might be prudent from a tax perspective but I presume you realise the risk associated with such a generous gift.  Ultimately it is no longer your money.

EarlsCourt16

Thank you. Yes the income given up would otherwise be taxed at 40%. My pension increase by RPI each year (capped at 5%). 

MarlowMallard

Dazed_and_C0nfused said:

It's not a terrible exchange rate and with the income given up presumably being liable to 40% tax that makes it more favourable.

But what inflation protection does your pension have?  Could that £13k escalate quickly with high inflation or are the annual increases capped?

Giving your wife £230k might be prudent from a tax perspective but I presume you realise the risk associated with such a generous gift.  Ultimately it is no longer your money.

 If you're 60 and have been married for 20+ years, it would probably end up 50/50 anyway in the event of divorce, so that makes little difference.  Only you know whether your wife is likely to blow £230k on Birkin handbags, deVol kitchen etc. 

Phossy

With those numbers I'd take the lump sum. As the lump sum  comes from a reduction that is subject to 40% tax, then it would take 29.5 years in today's money before the unreduced pension would pay back more and I would have much more use for that money in the early years of my retirement. 

Albermarle

Any thoughts welcome around a) taking the lump sum vs a higher pension and b) how to use that lump sum in these volatile times. 

If we assume your wife is the same age as you it is likely that at least one of you, ( hopefully both) will live past 85, and one  quite possibly 95 ( based on statistics)
So what happened in the news this week, is very likely to be totally irrelevant, to how your personal finances perform over 25 or even 35 years.
Normally the recommendation would be to invest at least part of the money for a long term better result.
S&S ISAs are an ideal way to invest, as all returns are tax free and it removes the need for any admin/reporting.

katejo

EarlsCourt16 said:

I am about to take my defined benefits pension (aged 60) and am considering taking a tax-free lump sum of £230k which would mean my annual pension would be reduced from £69k to £56k. My wife doesn't work, so if I do take the lump sum, I might put it into a fixed interest savings account or bond (for a year at least) which pays interest monthly. At approx 4% interest, this would give her a tax-free income of around £800 a month. I also plan on maximising our ISA allowance for this year (probably cash ISAs to be on the safer side). 

Any thoughts welcome around a) taking the lump sum vs a higher pension and b) how to use that lump sum in these volatile times. 

Thank you.     

I have similar options on my DB pension but think I will slightly reduce my lump sum to get a higher index linked monthly pension. I don't need a larger lump sum because I have an invested inheritance.