Defined Benefit Pension - Tax free lump sum or larger pension?

Mark__H

Sorry, appreciate this question has been asked and answered a fair few times on this forum, but opinions do differ dependant on the numbers and individual circumstances, so looking for any pearls of wisdom which might get me ‘off the fence’ on this one.

In a nutshell:
Married. Coming up to 60. Decent health. Mortgage paid off. No debt at all. Circa £400k in savings between us, mainly fixed rate ISA’s. Risk adverse.  Both now retired. Other half already drawing DB pension.  

Looking to take my DB pension in a few months’ time.  Numbers received from Pension Administrator - £21340 p.a. pension OR £106500 tax free cash lump sum + £15980 p.a. pension.

My thoughts: £5360 p.a. difference less 20% tax = £4288.
Cash lump sum £106500/£4288 = circa25 years before worse off.

Obviously not that simple. Will lose growth on part of pension pot taken as lump sum (RPI but capped at 5%).

Was leaning towards the bigger pension given no need for the lump sum in view of existing savings pot but the commutation figure seems generous compared to other posts I’ve seen on here, so I really am in a quandary? Any thoughts which may sway me in one direction? Thanks in advance

El_Torro

It does seem generous, yes. However you already have £400k in savings, what will you do by adding an additional £100k or so to it?

Generally speaking if you don't need the money (it seems you don't) then you're better off having a bigger annual pension. Do your pension payouts grow with inflation? If so then all the more reason to have more reliable monthly income. 

Sure, you might die the day after you start taking the pension. If you live to 100 though the bigger pension will serve you well. 

dunstonh

In a nutshell:
Married. Coming up to 60. Decent health. Mortgage paid off. No debt at all. Circa £400k in savings between us, mainly fixed rate ISA’s. Risk adverse.  Both now retired. Other half already drawing DB pension.  

Just picking up on the risk-averse comment.     Whilst you may have been averse to investment risk, you have actually increased inflation risk and shortfall risk by sticking 100% with cash.   Risk is not on or off.  Its a scale and being too heavy at the low end can be just as risky as being too heavy at the high end in terms of investment risk.

Was leaning towards the bigger pension given no need for the lump sum in view of existing savings pot but the commutation figure seems generous compared to other posts I’ve seen on here, so I really am in a quandary? Any thoughts which may sway me in one direction? Thanks in advance

The figures also lean towards income rather than lump sum, in part because you will not invest the money and will be subject to low returns on it. You also have £400k, which, for most people, would be more than enough to see their capital needs taken care of over the remainder of their lives.
Health needs to be considered.   No point going with a long-term breakeven point if your health points towards a shorter period.

Linton

In my view It mainly depends on your circumstances. A need for the full pension to cover normal day to day expenses could be a strong reason not to take the risk of a lump sum. On the other hand if your expenses are more than covered you may well prefer the flexibility of taking the excess income as a lump sum.

i don’t think that working out which option gives the maximum return at death is very helpful. Your quality of life in the meantime is far more important.

bjorn_toby_wilde

RPI capped at 5% is a very good guaranteed increase. I doubt there are many DBs giving that across the board outside the public sector.  Mine gives that on a portion but the rest is CPI capped at 2.5% or discretionary increases.

I get jealous when I see my wife’s annual rises on her public sector pensions 😂

Ultimately that and the fact you have no need for the lump sum at present would sway me towards the full pension. That’s me though, and only you know what your objectives are.

SnowMan

On top of the options to take £106,500 or no tax free cash, remember you have the option to take any level of cash between £0 and £106,500 with a pro-rata reduction in pension. So for example you could opt for £53,250 cash and £18,660pa pension.

Cobbler_tone

Whatever the views given on here it is totally impossible to know which is the 'best' decision. However, I totally get you dilemma in making the decision. Ultimately I don't get the impression that either way is going to leave you in poverty in old age. Go with your gut and stick by your decision. Chances are you will never fully understand whether you were 'better off' or not. 

If you want simplicity and a higher pension (with your OH's) which supports your monthly outgoings better then you could do that, purely from a financial admin perspective. Plus of course it will grow a little quicker. Assuming the normal retirement age is 60 too, otherwise you could probably live off some cash for a while.

Marcon

Mark__H said:

Was leaning towards the bigger pension given no need for the lump sum in view of existing savings pot but the commutation figure seems generous compared to other posts I’ve seen on here, so I really am in a quandary? Any thoughts which may sway me in one direction? Thanks in advance

Not sure why commutation rates other people have posted about would influence your decision, especially as they won't be on a like for like basis. The rates in private sector schemes reflect the actuarial estimate of the value you are giving up - and a higher cap on increases (5%, RPI) and a pension starting at a 'younger' age (60 rather than say 65) would go a long way to impacting on that value.

Cobbler_tone said:

Whatever the views given on here it is totally impossible to know which is the 'best' decision.

Probably about the most sensible advice you'll hear, with this coming a close second:

SnowMan said:

On top of the options to take £106,500 or no tax free cash, remember you have the option to take any level of cash between £0 and £106,500 with a pro-rata reduction in pension. So for example you could opt for £53,250 cash and £18,660pa pension.

pterri

I’ll be watching discussions like this with interest, I’ve got three years to make a decision. The ‘admin’ part is also a factor, an RPI linked lump dropping into my acou t every month with no management from me is attractive, I don’t want to be juggling investment decisions and HMRC reporting when I’m 80

Albermarle

SnowMan said:

On top of the options to take £106,500 or no tax free cash, remember you have the option to take any level of cash between £0 and £106,500 with a pro-rata reduction in pension. So for example you could opt for £53,250 cash and £18,660pa pension.

I think only some DB pensions offer such flexibility. Mine only had the option to take all the cash, or half of it. Not sure that even some pensions even offer that.

katejo

I have to make a similar decision. My instinct was to slightly reduce the lump sum to increase my index linked monthly pension. Earlier this week a financial advisor suggested the possibility of taking a larger lump sum and buying an annuity which would take into account my health at the time of purchase. This hadn't crossed my mind at all. Is there any benefit?