civil service DB increased lump sum

Dazed_and_C0nfused

Driftaround said:

You're right, I'm not the gambling type.
I am really stressing out and wish the choices weren't there.
I don't need the money, but its all a gamble.
I am so confused

I genuinely don't know why you are so confused.

You can take £19.6k pension, with generous inflation protection, and £59k lump sum.

Or permanently give away nearly £4k of that inflation proofed pension in return for a one off extra lump sum of £46k.

Yes the pension is taxable income and the extra lump sum is a tax free PCLS but given this statement why do you want to want to take a potentially extremely costly extra £46k?

You could be getting the extra (inflation proofed) £4k for 30+ years.

I rarely dip into my savings, so a bigger lump sum might just sit there too, I think.

Driftaround

I'm in the Classic scheme

Dazed_and_C0nfused

Driftaround said:

I'm in the Classic scheme

And that doesn't change the observations every one has made.

Classic, like LGPS, NHS and other public sector schemes offer a pretty poor commutation rate (the £12 you get once in return for the £1/year you give away for the rest of your life).

Are you able to give us one reason why you are even considering taking the the extra lump sum?

Preferable a reason that isn't just "because it's available"

Cobbler_tone

Driftaround said:

I am so confused

Best advice is to ignore the fact that the higher lump sum is available and you can't go wrong.
With the 'break even' have you factored in the appropriate growth in each scenario?

If your exchange rate was 18-25 and you actually had a need/desire to use the money it might be something to ponder over. Your situation (from the limited info) and the pension offering seems pretty straight forward and it sounds as though (especially with the higher pension) that you are going to increase your savings anyway over time.

Otherwise, your lower pension will probably be OK to live on. You'll sit with cash in the bank and end up paying tax on the interest, or spending bits and bobs you didn't need to if you had the higher pension.

daveyjp

If you can happily live on the lower monthly amount and the lump sum will just 'sit there' it makes little sense to move the management of the lump sum to yourself.  

Consider taking the lowest lump sum and live on the amount offered if taking the higher lump sum.  The difference in pension income of £4000 a year can be saved.  After 5 years you will have about half the lump sum anyway.

Phossy

Driftaround said:

thanks for your interest and advice.
Here are the details
Original pension offer is £19654, with a £59k lump sum.
Enhanced lump sum offer is £105294 (£46329 difference), with a reduced pension of £15794.
the commutation rate is 1--12
I do not intend to retire immediately, in fact I don't know when I will. I will have to take my pension.
I am entitled to a full state pension at 67.
I would break even at 72
I think £25k would see me ok as an income, including my state pension when it comes.
I rarely dip into my savings, so a bigger lump sum might just sit there too, I think.
Can I get the equivalent of my original pension offer by investing the extra lump sum whilst

taking the lower pension offer?

For a commutation rate of 12, your 'breakeven' is 15 years (12/0.8) if you are a lower rate tax payer, and 20 years  (12/0.6) if you are a higher rate taxpayer on your pension. In your case 15 years if you stopped working at 60 and took your pension.

You can look at the lump sum in different ways. If you have no plans to use it  then take the minimum. You could also consider it as a bridge to your state pension if you stopped work altogether.

With your first option,that would equate to an income after tax of £18,237/ year in todays money plus £4,914 (£58,965/7) - so £23,151 per annum after tax (£2,222 / month income after tax). Post 67 you will have  £27,837/ annum after tax.

With your second option, that equates  an income after tax of £15,149/ year in todays money plus £15,042 (£105,294/7) - so £30,191 per annum after tax (£2,516 / month income after tax). Post 67 you will have  £24,749/ annum after tax.

It looks to me as though you could retire now if you really wanted with any option (especially as you have saving and a peoples pension too). Taking the larger lump sum allows you to live larger in the early years.

MarlowMallard

The "right answer" depends on the date you die, which you probably don't know.  The extra pension is £3860 , minus 20% tax so actually £3088 per year, but inflation-proofed which is a big deal.   
To get that by investing £48k, you'd need inflation plus 6.66%, after tax, which is impossible in a safe investment or annuity.  

So, there is some breakeven point between 73-80ish  where you're better off taking the higher pension, if you live that long. "On average" you'll live to 84 and it's better to take standard pension.  

But, some reasons why it might be better to take the larger lump sum: 
a) you have a health condition which makes it unlikely you'll live to 80 . 
b) you really need "cash soon" e.g. house deposit for children etc. 
c) you have expensive travel plans for your 60s, then plan to wind down and do much less after 70-75 (some of my parents' friends did this).    
d) you're very likely to inherit a lot of money before age 80 or so,  and you'll be well off afterwards.   
 
If none of those apply, it is probably better to take higher pension / lower lump sum. 

Driftaround

Wow!
What fantastic and frank advice.
Exactly what I wanted.
I am going to stick with the higher pension and original lump sum - that was my original thought.
My sincere thanks for such a fantastic community response to such an often asked question.
Without your collective advice, Id be constantly going over it.