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

MallyGirl

With the changes in IHT coming, if you have more than you need and enough that there will be IHT to pay, then maybe having the extra lump sum would support giving it away to children (or a n other). You can gift from excess income but that requires admin to track it

Nebulous2

chubsta said:

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.

I'm in a similar position. Retired and moved, freeing up capital, which gives us more money than we have ever had before. The intention was to spend it, or a chunk of it to bridge the gap in the run up to SPA.

I also took a part-time job, as I was struggling with the transfer from working full-time for 40 years, to being economically inactive.  That has meant drawing down much less capital than we intended. The part-time job has also drifted on longer than I intended. 

I've become fond of having the money there as a sort of security blanket, and am reluctant to spend it. 

I didn't take a lump sum at all from my DB pension. As a public sector scheme the commutation rate is poor at 12:1 and I've had two decent CPI linked rises since putting my pension into payment. I don't have the same reluctance to spend my monthly pension. It has simply replaced my wage from when I was working. 

Some of the psychological effects of retiring and moving to decumulation are fascinating. I work in care, had a lot of knowledge on a professional level of human behaviour, and it still caught me unawares.  

Silvertabby

Mark__H said:

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.

If your GMP really is a small fraction of your total pension, then it's not so much of an issue.

I'd still ask your pension provider what their policy on paying post retirement GMP increases is, though.  Just for clarity.

Cobbler_tone

I’m going to have to juggle my DB/DC and lump sums carefully. On a second relationship and mortgage free (I don’t own it) and want enough to be comfortable and bung the 3 kids a lump sum each with the message that anything else is a bonus! At 55 my cut off is 58, although not adverse to some pocket money if I get bored.

poseidon1

Mark__H said:

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

The compounding effect of a good inflation linked DB pension cannot be overstated

A relative took early retirement in 2016 with a starting pension of £48k. As of April this year this has now risen to £76k plus the  full state pension now kicking in.

He 'sacrificed' £100k of TFC to increase the starting pension from £32k, so a generous commutation.

Albermarle

Marcon said:

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.

Thanks, I was not aware that most DB private sector pensions had this flexibility ( maybe some public ones as well ?).
On the other side my administrator ( Mercer now Aptia) struggled for months to just give me a simple black and white alternative of lump sum or no lump sum. If I had the option of a more flexible arrangement and maybe asked for say four different options with different lump sums, I suspect I would still be waiting for the answer now !

Albermarle

chubsta said:

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.

A common affliction for posters on these forums !

katejo

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.

I am exactly like that. I will spend some of lump sum but won't feel comfortable about doing so! 

Cobbler_tone

Mine (DB) starts with a 25% lump sum and sliding scale that increases the starting pension if you reduce it by any amount. I assuming (wrongly by the look of it) that they all do that.

ali_bear

"It won't change my life"