DB pension options - head in a spin

GenieLBH

Sorry if this is too long to read.

My deferred DB pension can be taken soon at 60 with no reduction and I need to choose my options.

I have an AVC pot of about £25k that needs to be taken at the same time, and it can also be used to take a higher tax free lump sum.

I also have a stepped pension option where I can get a bigger pension until 67 when my pension would drop by an amount equal to the new state pension. I will be getting the full new state pension at 67.

Options are:

1. £14230 pension with the £25k tax free lump sum

2. £22661 stepped pension until 67 with the £25k tax free lump sum, then pension dropping by the new state pension amount

3. £11800 pension with £78650 tax free lump sum

4. £18300 stepped pension until 67 with £122025 tax free lump sum, then pension dropping by the new state pension amount 

I can also vary the tax free lump sum between the £25K and each option max.

Approx 45% of the pension increases uncapped with RPI
             13% increases with RPI capped at 5%
             42% increase with CPI capped at 2.5%
For the stepped pension the extra amount increases uncapped with RPI 

I have no partner so the spouse pension is not relevant. I have no mortgage and am debt free. I have a work DC pension of £105k and a SIPP of £15k. I have recently stopped working so will not be able to contribute anything more than £2880 to the SIPP each year. I have around £600k (yes I know I am very cash heavy) in fixed rate accounts and ISAs. I have an adult child who has already received their own inheritance from my parents, and I am not minded to give them another large sum right now, although I will be making gifts in the future.

My out goings are low due to me not being much of a consumer. I think whichever option I chose I would be fine but am very indecisive by nature and seem to be going round and round in circles unable to make a decision.

My initial preference would have been to go for option 1 so as to have the largest supply of regular income with some index linking in the long run and because I do not need a lump sum. 

From what I can see with basic calculations with no inflation/growth considerations option 4 would be the best until 81, with option 3 best at 82 and option 1 not until 83. If I incorporate basic rate tax into the calculations, I get option 4 would be best until 84, with option 3 at 85 and option 1 not until  86.

Sometimes I feel I should take option 4 and take out as much as possible early on to leave my adult child as much as possible in case I do die young. It seems kind of mad to choose an option that won't break even until 86. If I were to get taken out by a bus or a swift heart attack it would not matter so much, it is the thought of getting a terminal diagnosis soon after retiring on option 1 and thinking about all that potential pension wasted. I have a tendency to ruminate on bad decisions. But the simplicity of option 1 and not having a huge lump sum still appeals, as ever since dealing with my parents' estates and receiving an inheritance a few years back I seem to have developed an aversion to dealing with money.

No-one can tell me when I am going to die but I welcome any words of wisdom from random strangers on a forum to maybe help nudge me one way or the other. I wondered how other people made their decisions, how much it was based on calculations and how much on emotions.

NoMore

You haven't really stated what income you want other than its low.

With nearly 3/4 of a million outside of this DB pension, I would agree you don't really need the lump sum, so would go option 1.

Marcon

GenieLBH said:

Sometimes I feel I should take option 4 and take out as much as possible early on to leave my adult child as much as possible in case I do die young. It seems kind of mad to choose an option that won't break even until 86. If I were to get taken out by a bus or a swift heart attack it would not matter so much, it is the thought of getting a terminal diagnosis soon after retiring on option 1 and thinking about all that potential pension wasted. I have a tendency to ruminate on bad decisions. But the simplicity of option 1 and not having a huge lump sum still appeals, as ever since dealing with my parents' estates and receiving an inheritance a few years back I seem to have developed an aversion to dealing with money.

Sometimes simply reading your own post gives you your answer, because - consciously or otherwise - you've swayed the question, and in the process answered your own question...

Smudgeismydog

You also appear to be quite cautious in nature, so I would concur with @NoMore, in selecting Option 1 to provide a higher secure income, and this also means you don’t have a tax free sum to deal with.

In terms of providing an inheritance to your adult child, you noted they had already received an inheritance, and will presumably inherit the balance of your estate on death. My advice would be to prioritise securing an income for yourself as it would seem that this would provide you with peace of mind.

HillsideRetired

There is no right or wrong answer to these type of questions , as each option may be better for different individuals and there  retirement strategy ,

you need to determine how you see your retirement . and how much it will cost , .. do you wish to buy a camper van and tour the world . world cruise perhaps ? holiday home? , Lamborghini ? ( to quote George Osborne ) 
what's your appetite for risk ? 
does it make you feel more comfortable having large cash reserves  at hand ? 
does it make  you feel more comfortable having higher monthly income index linked ? 

different answers and retirement strategy's will fit each option you have . 

i would not overthink it , you are in a good position , perhaps excellent position as you have hinted that your spending aspiration's are modest . 
enjoy your retirement , you have earned it 
 

Cobbler_tone

You can read a very similar post of mine.
Ultimately with £600k and modest requirements it doesn’t really matter.
I’d personally look at option 4 with no lump sum. You certainly don’t need more cash and option 4 would provide you more than enough guaranteed income between your DB and state pension for the rest of your life, before considering touching your other assets.
No right/wrong answer.

GenieLBH

Thank you all for your comments. It has made me feel a bit more clear headed and less stressed about trying to make the 'perfect' decision. I do tend to overthink things.

LHW99

If you end up with more income than you need, regular gifts from income are out of IHT (unless changed in future) so could pass on some of your wealth to your adult child / favourite charity while you are there to see how it helps them.

Albermarle

 It seems kind of mad to choose an option that won't break even until 86. If I were to get taken out by a bus or a swift heart attack it would not matter so much, it is the thought of getting a terminal diagnosis soon after retiring on option 1 and thinking about all that potential pension wasted.

Just FYI, a 60 year old will on average live for another 25 years. So yes you could die before then, but also you have a 50% chance of living longer than that and a 25% chance of reaching your 90's.

Cobbler_tone

Albermarle said:

 It seems kind of mad to choose an option that won't break even until 86. If I were to get taken out by a bus or a swift heart attack it would not matter so much, it is the thought of getting a terminal diagnosis soon after retiring on option 1 and thinking about all that potential pension wasted.

Just FYI, a 60 year old will on average live for another 25 years. So yes you could die before then, but also you have a 50% chance of living longer than that and a 25% chance of reaching your 90's.

The more saliant points are probably....
1. Would you even notice/care if you could have been technically 'better off' by the time you pass 86, if that was the number? You'll be even more comfortable by this point, starting with £600k, adequate pension provisions and low outgoings. Potentially a millionaire.
2. What didn't you do that you could have done if you had the (pension) money earlier?
3. Are you likely to need a more modest income as you get into old age? Or effectively a flat income for the rest of your life taking a bridging/state pension. 
4. Are you leaving behind wealth, with the amount not making too much difference?

The only argument I can think of is will there be slightly less left in the event of funding care for your final years, which again is an unknown. I think it would be extremely sad and pessimistic to target your lifelong purpose to having as much money as possible for that. 
I wouldn't mind the home on 'A Man on the Inside' with cocktail parties in the afternoon. You won't get in there on a state pension.

Albermarle

Cobbler_tone said:

Albermarle said:

 It seems kind of mad to choose an option that won't break even until 86. If I were to get taken out by a bus or a swift heart attack it would not matter so much, it is the thought of getting a terminal diagnosis soon after retiring on option 1 and thinking about all that potential pension wasted.

Just FYI, a 60 year old will on average live for another 25 years. So yes you could die before then, but also you have a 50% chance of living longer than that and a 25% chance of reaching your 90's.

The more saliant points are probably....
1. Would you even notice/care if you could have been technically 'better off' by the time you pass 86, if that was the number? You'll be even more comfortable by this point, starting with £600k, adequate pension provisions and low outgoings. Potentially a millionaire.
2. What didn't you do that you could have done if you had the (pension) money earlier?
3. Are you likely to need a more modest income as you get into old age? Or effectively a flat income for the rest of your life taking a bridging/state pension. 
4. Are you leaving behind wealth, with the amount not making too much difference?

The only argument I can think of is will there be slightly less left in the event of funding care for your final years, which again is an unknown. I think it would be extremely sad and pessimistic to target your lifelong purpose to having as much money as possible for that. 
I wouldn't mind the home on 'A Man on the Inside' with cocktail parties in the afternoon. You won't get in there on a state pension.

I was going to add to my post, that with the OPs level of funds, it probably did not matter too much financially how long they lived ( got distracted by a phone call !)