Tax Free Lump Sums - which is best to take first?

DRS1

LavenderBees said:

MarlowMallard said:

Based on the numbers given it looks like the DB is slightly more "valuable" than the DC, so it's important to understand this DB fully . Is there an early-retirement penalty for taking at 60, or if normal age is 60, is there a late-retirement bonus if you delay to e.g. 63/65 ?    Is it CPI-linked ?  Is the TFLS "automatic" or can you trade pension for more/less TFLS, and if so what's the factor (aka commutation ratio ) ? 

Thanks so much for these questions...dare I say I have no idea, but will find out! I really wish pensions understanding was taught somewhere/somehow.

I think I am missing a brain somewhere as my spreadsheet seems to show that I never touch my DC pension pot or need to sell my wee (paid for) house to help fund my retirement after I get my state pension. I know I have cut my costs to a minimum but even so, surely that can't be right... if it is, I stop work on my birthday next month lol. I'll take a break and another look tomorrow.

But wouldn't that just be the best birthday 60th present ever! 

Forgive me but you have been setting up a spreadsheet showing income and outgoings.  Presumably one line for income will be the DB pension?  It presumably starts at £x pa but what does it become in  year 2 year 3 and so on?  Or doesn't it increase at all?

Aretnap

LavenderBees said:

So far I have calculated estimated costs going forward to 85 assuming 5% inflation each year - does that seem sensible?

That feels very pessimistic. Since 1992, UK inflation has only been at or above 5% for a total of 26 months.

LavenderBees said:

5. Am I being overly optimistic if  calculate State Pension increases yr on yr of 4%, while I leave the personal allowance at £12570?

That also feels very pessimistic, especially if you are assuming inflation of 5%. The triple lock means that the state pension will increase by more than inflation for the foreseeable future.

Obviously the triple lock will end at some point (it is self-evidently unsustainable in the very long term), but that is unlikely to be for a good few years given the political climate, and when if did end it is extremely unlikely that the state pension will not continue to rise in line with inflation at an absolute minimum.

dunstonh

That feels very pessimistic. Since 1992, UK inflation has only been at or above 5% for a total of 26 months.

It depends on how you want to plan.    Long-term average UK inflation is about 4.9%.     Many feel that UK is returning to 70s issues that drive inflation.    So, planning on 5% is probably better than planning on the period of stability and globalisation that led to that long period of low inflation.

LavenderBees

DRS1 said:

LavenderBees said:

MarlowMallard said:

Based on the numbers given it looks like the DB is slightly more "valuable" than the DC, so it's important to understand this DB fully . Is there an early-retirement penalty for taking at 60, or if normal age is 60, is there a late-retirement bonus if you delay to e.g. 63/65 ?    Is it CPI-linked ?  Is the TFLS "automatic" or can you trade pension for more/less TFLS, and if so what's the factor (aka commutation ratio ) ? 

Thanks so much for these questions...dare I say I have no idea, but will find out! I really wish pensions understanding was taught somewhere/somehow.

I think I am missing a brain somewhere as my spreadsheet seems to show that I never touch my DC pension pot or need to sell my wee (paid for) house to help fund my retirement after I get my state pension. I know I have cut my costs to a minimum but even so, surely that can't be right... if it is, I stop work on my birthday next month lol. I'll take a break and another look tomorrow.

But wouldn't that just be the best birthday 60th present ever! 

Forgive me but you have been setting up a spreadsheet showing income and outgoings.  Presumably one line for income will be the DB pension?  It presumably starts at £x pa but what does it become in  year 2 year 3 and so on?  Or doesn't it increase at all?

Hiya, apologies I spent yesterday cooking and walking, giving my brain a rest helped it to think about what I may be missing in my spreadsheet. MY DB pension does increase annually, you're right. I need to dig the paperwork out to understand what the increase is but I definitely need to add that in. Thanks for taking time to prompt on this!

I also need to add in the investment fees as the potential DC pots are skewed with investment increase of 4% and no fees. I also want to add in a potential for house maintenance/white goods etc replacement. And I'll throw in buying and running a 2 to 3 yr old car for a decade or so, and see what that looks like   

LavenderBees

dunstonh said:

That feels very pessimistic. Since 1992, UK inflation has only been at or above 5% for a total of 26 months.

It depends on how you want to plan.    Long-term average UK inflation is about 4.9%.     Many feel that UK is returning to 70s issues that drive inflation.    So, planning on 5% is probably better than planning on the period of stability and globalisation that led to that long period of low inflation.

I think I do feel pretty pessimistic about where this country and the western world is heading. Hope I'm wrong but I'd rather plan pessimistically and be pleasantly surprised. However, I guess really, it's trying to get a balance, isn't it? Plan so there is some contingency for belt tightening if needed.

LavenderBees

Aretnap said:

LavenderBees said:

So far I have calculated estimated costs going forward to 85 assuming 5% inflation each year - does that seem sensible?

That feels very pessimistic. Since 1992, UK inflation has only been at or above 5% for a total of 26 months.

LavenderBees said:

5. Am I being overly optimistic if  calculate State Pension increases yr on yr of 4%, while I leave the personal allowance at £12570?

That also feels very pessimistic, especially if you are assuming inflation of 5%. The triple lock means that the state pension will increase by more than inflation for the foreseeable future.

Obviously the triple lock will end at some point (it is self-evidently unsustainable in the very long term), but that is unlikely to be for a good few years given the political climate, and when if did end it is extremely unlikely that the state pension will not continue to rise in line with inflation at an absolute minimum.

I think these are 2 areas where I feel I can't be in control so I've been pessimistic rather than optimistic. Do you have any figures in mind to estimate in a spreadsheet? Happy to look at various alternatives. I don't want to be the richest corpse in the graveyard. I do want to enjoy my freedom. It's so much more difficult to plan than I thought, given the use by date is unknown lol 

LavenderBees

DRS1 said:

I confess I am confused about your assumptions on inflation investment return and increases to the state pension. 5% for inflation could be right could be very wrong (not that long ago it was 10% for a year).  It is a thing which gets discussed on here and some people think it is easier to just work in todays figures.
But when you say 4% investment return do you mean 4% flat or 4% above inflation?  Most people would assume it is 4% above inflation.
When you say 4% for the state pension that surely can't be 4% above inflation but if it is 4% flat then you are assuming it will be less than inflation.  Maybe it should be but the triple lock is supposed to give higher increases.

On the DB lump sum there is nothing wrong with taking it (and you seem to have a very good reason for doing so) but you may want to consider how it works.  Is the lump sum automatic or do you get it by commuting part of your pension?  If the latter then what is the commutation rate?  A common one is 12:1 (ie give up £1 of pension for £12 of lump sum) and that is considered a poor rate which is why people would say don't take a DB lump sum.  Worth looking into.

ooh interesting...I was just thinking 4%, so flat not above inflation, so I am being pessimistic if ,in my spreadsheet, inflation is running at 5%. Same for state pension. I am so used to getting pay "rises" that are well below inflation that I'm conditioned to expect pay cuts. Not joking....

Thanks for the info on DB TFLS - I need to get that paperwork out. What is a decent commutation rate??

Albermarle

Thanks for the info on DB TFLS - I need to get that paperwork out. What is a decent commutation rate??

Probably anything above 20. Most private sector DB pensions are in this area, but most public sector pensions are less.

Cobbler_tone

LavenderBees said:

DRS1 said:

I confess I am confused about your assumptions on inflation investment return and increases to the state pension. 5% for inflation could be right could be very wrong (not that long ago it was 10% for a year).  It is a thing which gets discussed on here and some people think it is easier to just work in todays figures.
But when you say 4% investment return do you mean 4% flat or 4% above inflation?  Most people would assume it is 4% above inflation.
When you say 4% for the state pension that surely can't be 4% above inflation but if it is 4% flat then you are assuming it will be less than inflation.  Maybe it should be but the triple lock is supposed to give higher increases.

On the DB lump sum there is nothing wrong with taking it (and you seem to have a very good reason for doing so) but you may want to consider how it works.  Is the lump sum automatic or do you get it by commuting part of your pension?  If the latter then what is the commutation rate?  A common one is 12:1 (ie give up £1 of pension for £12 of lump sum) and that is considered a poor rate which is why people would say don't take a DB lump sum.  Worth looking into.

Thanks for the info on DB TFLS - I need to get that paperwork out. What is a decent commutation rate??

You often see it only quoted as a number but it may well not be fixed. Although there may well be schemes where it is.
e.g. at 65 my commutation rate is 16.1, at 60 it is 18.5 at 57 it is 19.8. With the bridging pension option it is slightly different again, so retirement age is a factor.

Best to look at the options on your scheme and you can make a balanced decision on your overall needs and financial position.

DRS1

LavenderBees said:

DRS1 said:

I confess I am confused about your assumptions on inflation investment return and increases to the state pension. 5% for inflation could be right could be very wrong (not that long ago it was 10% for a year).  It is a thing which gets discussed on here and some people think it is easier to just work in todays figures.
But when you say 4% investment return do you mean 4% flat or 4% above inflation?  Most people would assume it is 4% above inflation.
When you say 4% for the state pension that surely can't be 4% above inflation but if it is 4% flat then you are assuming it will be less than inflation.  Maybe it should be but the triple lock is supposed to give higher increases.

On the DB lump sum there is nothing wrong with taking it (and you seem to have a very good reason for doing so) but you may want to consider how it works.  Is the lump sum automatic or do you get it by commuting part of your pension?  If the latter then what is the commutation rate?  A common one is 12:1 (ie give up £1 of pension for £12 of lump sum) and that is considered a poor rate which is why people would say don't take a DB lump sum.  Worth looking into.

ooh interesting...I was just thinking 4%, so flat not above inflation, so I am being pessimistic if ,in my spreadsheet, inflation is running at 5%. Same for state pension. I am so used to getting pay "rises" that are well below inflation that I'm conditioned to expect pay cuts. Not joking....

Thanks for the info on DB TFLS - I need to get that paperwork out. What is a decent commutation rate??

LavenderBees said:

DRS1 said:

I confess I am confused about your assumptions on inflation investment return and increases to the state pension. 5% for inflation could be right could be very wrong (not that long ago it was 10% for a year).  It is a thing which gets discussed on here and some people think it is easier to just work in todays figures.
But when you say 4% investment return do you mean 4% flat or 4% above inflation?  Most people would assume it is 4% above inflation.
When you say 4% for the state pension that surely can't be 4% above inflation but if it is 4% flat then you are assuming it will be less than inflation.  Maybe it should be but the triple lock is supposed to give higher increases.

On the DB lump sum there is nothing wrong with taking it (and you seem to have a very good reason for doing so) but you may want to consider how it works.  Is the lump sum automatic or do you get it by commuting part of your pension?  If the latter then what is the commutation rate?  A common one is 12:1 (ie give up £1 of pension for £12 of lump sum) and that is considered a poor rate which is why people would say don't take a DB lump sum.  Worth looking into.

ooh interesting...I was just thinking 4%, so flat not above inflation, so I am being pessimistic if ,in my spreadsheet, inflation is running at 5%. Same for state pension. I am so used to getting pay "rises" that are well below inflation that I'm conditioned to expect pay cuts. Not joking....

Thanks for the info on DB TFLS - I need to get that paperwork out. What is a decent commutation rate??

Nothing wrong with being pessimistic.  And you are still assuming a positive return on investments even if it is less than inflation.  I think the state pension should go up with inflation (I know there are different flavours of inflation but CPI is going to be headline rate as RPI gets phased out)

Others have given you figures on commutation rates and of course there are all sorts of variables not least the pension increases on the pension you give up.  A pension which does not increase is not as valuable as one which does.  But just to confuse things some schemes come with an automatic lump sum or a minimum/standard lump sum where the commutation rate is not an issue (unless the scheme allows for inverse commutation - ie turn the lump sum into pension.  In that case the lower the rate the better!).

I am sure we are making this all sound complicated but hopefully it will be a lot simpler when you know what your scheme actually provides rather than what it might.