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

Brie

The other thing that no one seems to have mentioned is that you are married. 

So what happens if you start taking your pension and then die?  Does the DB pay out to your spouse until they die?  Or is it a fixed period? How will your spouse be effected financially by your death? Are they younger and fitter than you or are you a buff toy boy?? 

ali_bear

Take the higher pension. You already have more than enough cash. 

Cobbler_tone

Brie said:

The other thing that no one seems to have mentioned is that you are married. 

So what happens if you start taking your pension and then die?  Does the DB pay out to your spouse until they die?  Or is it a fixed period? How will your spouse be affected financially by your death? Are they younger and fitter than you or are you a buff toy boy?? 

The spousal element isn’t usually impacted by the lump sum taken on ‘most’ DB schemes, so he can probably leave the world with that peace of mind!

Marcon

Albermarle said:

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.

That's extremely unusual. Most schemes have considerable flexibility. Some which used to offer an automatic lump sum now have a provision for 'reverse commutation' where the lump sum can be turned into pension payments.

Silvertabby

That commutation rate and the 5% capped do seem generous but, assuming that your pension was contracted out until 2016 at the latest,  what about GMP increases?  Will your provider pay full increases on both your pre and post 1988 GMP from age 65, or will they stick to the legal minimum and pay zero on pre 1988 GMP and 3% capped on post 1988 GMP? 

If the latter, then that could reduce the annual increases to well below CPI/5%

Triumph13

If you are the type of people who are 'careful' with their money, you may find it easier to give yourselves permission to spend the regular income than the lump sum.  A lump sum that just sits there is a waste.

jimi_man

The commutation rate isn’t that generous - slightly under 20x. If you were 67 then I’d say it was fairly reasonable but obviously the younger you are, the worse that rate is. 

Ultimately though, there are many reasons to take it or not take it and they aren’t always financial. Emotion plays a part too. So only you can decide. 

Mark__H

Much appreciate the responses to date. Very helpful, thank you.  

chubsta

Triumph13 said:

If you are the type of people who are 'careful' with their money, you may find it easier to give yourselves permission to spend the regular income than the lump sum.  A lump sum that just sits there is a waste.

That is the killer for me - I didn't commute any of my db pension to increase the (already decent) lump sum as I felt that I would rather have guaranteed monthly income for the rest of my life, just a personal thing.

So the Lump Sum is just sitting there - it gets interest every month but I have a real phobia against actually spending it 'just in case'. In my entire life I have never had so much money just sitting around unallocated but instead of splurging it all on shiny things it just sits there. Ex-colleagues have bought motorbikes, expensive holidays each year etc etc, but mine just sits there.

So, ask yourself, are you more likely to spend what you have coming in each month and enjoy your lump sum too, or will it just be added to a pot and you can feel all good about having a further £50,000 in the bank that you will never use?

These sort of questions are incredibly important, and ones I asked myself, and still do, but all anyone can do is offer options really, not advice as only you know how you will deal with it, and even that won't be certain until the moment arrives and you are retired - I had all sorts of plans for mine but, you know, I don't really NEED to do them...

Retirement, money and spending are completely different worlds to what has gone before in my view.

Mark__H

Silvertabby said:

That commutation rate and the 5% capped do seem generous but, assuming that your pension was contracted out until 2016 at the latest,  what about GMP increases?  Will your provider pay full increases on both your pre and post 1988 GMP from age 65, or will they stick to the legal minimum and pay zero on pre 1988 GMP and 3% capped on post 1988 GMP? 

If the latter, then that could reduce the annual increases to well below CPI/5%

Yes, I was contracted out. Must admit I've never really understood the GMP figure despite it featuring on my pension statement each year when I was working. It was quite a small fraction of the overall pension figure that I've never investigated it more thoroughly.