FULL PENSION V LUMP SUM & REDUCED PENSION

mlhogg

I am looking for some guidance. I am 56 and wishing to retire possibly next year and have been offered from my DB pension: either 11.5K per annum or 8.2K per annum and a 54K lump sum ( commutation rate of about 16:1). I also have 175K in a DC works pension which I am still contributing too & an emergency fund for 2 years. My wife who is 59 will also retire next year with an LGPS of approx 7K per annum. We are wishing to have more to spend in the earlier years and use flexi access drawdown to allow this. Would I be correct in thinking to take the lump sum so I can withdraw the 54K before entering drawdown from the DC pot.?
If so, how can I reinvest the 54K without breaking recycling rules? Any thoughts appreciated.

El_Torro

A commutation rate of 16:1 sounds OK. People often mention figures ranging from 12:1 to 25:1. 

There are various things to consider though. Would you get a bigger DB pension if you waited until you were older to take it? 57 seems quite young to take a DB pension. One option would be to live on your other savings / investments (e.g. your DC pension) before drawing down on your DB pension. 

If you want to reinvest the £54k you can put it in a Stocks& Shares ISA, £20k of it at least. Then again if all you want to do with the money is invest it then why take it at all? Perhaps the bigger annual DB pension would be more suitable. 

mlhogg

Due to the acturial reduction my DB pension will only increase by roughly 1K per annum and I am wishing to retire at 57 as well. I just assumed it is more tax efficient to use the tax free lump sum as income before reducing the DC pot? I have roughly only 25K in other savings as an emergency fund. I have modelled it on the Guiide website and it seems to show I am better taking the lump sum and able to increase the income before State Pension years.

Albermarle

No need to post in CAPITALS or in bold.

A commutation rate of 16:1 is not great but it depends on the terms of the pension.
Inflation linked, spousal pension when you die etc ?

mlhogg

Apologies for the choice of type - it's my first post.

The pension is inflation linked to CPI max capped at 5% with spouse getting 50% at death. I just found it surprising when modelling on Guiide we are able to achieve more income in the early retirement years to enjoy and not until my late seventies would there be breakeven. Seems almost a no brainer to take the PCLS and smaller pension in my case - guess I'm just trying to reassure myself .

QrizB

mlhogg said:

 I just found it surprising when modelling on Guiide we are able to achieve more income in the early retirement years to enjoy and not until my late seventies would there be breakeven.

With a 16:1 commutation factor and assuming you're a 20% taxpayer, it'll take 20 years to break even. If you retire at 57, that will be 77.

You're likely to live to your mid-80s, and you could be active until then. My parents are ~80 and are currently planning their next motorhome trip to Greece (they were camping in Spain and Portugal until a few weeks ago).

mlhogg

I'd like to think i'll be active then like your parents which is great to hear . Like most people I will be relying on State Pension to get by. We don't live extravagantly and should manage on 3k a month I reckon. No debts or mortgage either .

Cobbler_tone

mlhogg said:

Apologies for the choice of type - it's my first post.

The pension is inflation linked to CPI max capped at 5% with spouse getting 50% at death. I just found it surprising when modelling on Guiide we are able to achieve more income in the early retirement years to enjoy and not until my late seventies would there be breakeven. Seems almost a no brainer to take the PCLS and smaller pension in my case - guess I'm just trying to reassure myself .

Sounds like you might have a bridging option. Works well for most people to enable early retirement and levels out lifetime income allowing for the state pension. If that’s the case it should show one number from now to 67 and a lower one from 67.

mlhogg

Yes a bridging option using my lump sum & savings.

Cobbler_tone

mlhogg said:

Yes a bridging option using my lump sum & savings.

I meant a DB in isolation can have a bridging option. Bigger lump sum, bigger pension (time limited) and smaller pension aligned to the start date of the state pension. On mine the additional amount is the exact same as what the state pension is at the time of commencement.
You can of course supplement a standard DB with whatever you have at your disposal.
Maybe yours doesn’t give that option, not all DB’s do.

mlhogg

I think the largest lump sum in mine is about 25% of its transfer value and is not aligned to state pension.