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

LavenderBees

Thanks for all the responses! I will dig out paperwork this evening and report back, update my spreadsheet and ponder a bit more. I am as ever truly in awe of the depth of knowledge you all have, and are willing to share. 

LavenderBees

Ok, my Lovelies, I have had my head in the DB pension paperwork, and this is my understanding....

I can take a TFLS & reduced pension OR a pension and no lump sum. I am waiting on uptodate figures but 2.5 years ago, the prediction was £41k TFLS and £6200 pension per yr or £8060 per yr with no TFLS. It seems a no brainer to take the TFLS. This is if I take it at 60 yrs ish. 

If I leave it til 65, TFLS rises to about £75k and £11k pension per yr    

To me the annual increases are complicated as it talks about Guaranteed Minimum Pension pre and post 1988 (pre = zero increase & post = the lower of 3% or increase in CPI).

The final salary pension accrued before 1999 is the increase in RPI

The final salary pension accrued 1999 to 2010 (I left in 2005) increase is the lower of 5% or the increase in RPI. 

So, no idea how to represent any of this in my spreadsheet or indeed how on earth will I know if I am being paid correctly lol. 

Any comments either on the pros and cons of taking TFLS now v 65, very gratefully received. And I was thinking maybe an across the board increase of 4% - yes conservative but I can't think how else to do it in my spreadsheet.

Thank you!  

Vitor

5% inflation is rather high unless you are modelling 'worse case'; use 2.5–3%. 
Check actuarial reduction on the DB pension. 
Combine DC pots only if flexibility and costs still align. 
Use realistic growth rates (nominal 4–5%, real 1–2%). 
Model income smoothing to avoid high tax later. 
Keep assumptions consistent (nominal vs real) 

NB Planning only to 85 is a statistical trap. Life expectancy is an average, not a finish line. Someone reaching 60 today has roughly a 1 in 4 chance of living past 95 (for women, it’s closer to 1 in 3). If the money runs out at 85, that last decade can turn grimly frugal. A good spreadsheet sould therefore model two horizons: Base case – perhaps to 85, for everyday planning. Longevity case – to 95, to stress-test the plan.

DRS1

LavenderBees said:

Ok, my Lovelies, I have had my head in the DB pension paperwork, and this is my understanding....

I can take a TFLS & reduced pension OR a pension and no lump sum. I am waiting on uptodate figures but 2.5 years ago, the prediction was £41k TFLS and £6200 pension per yr or £8060 per yr with no TFLS. It seems a no brainer to take the TFLS. This is if I take it at 60 yrs ish. 

If I leave it til 65, TFLS rises to about £75k and £11k pension per yr    

To me the annual increases are complicated as it talks about Guaranteed Minimum Pension pre and post 1988 (pre = zero increase & post = the lower of 3% or increase in CPI).

The final salary pension accrued before 1999 is the increase in RPI

The final salary pension accrued 1999 to 2010 (I left in 2005) increase is the lower of 5% or the increase in RPI. 

So, no idea how to represent any of this in my spreadsheet or indeed how on earth will I know if I am being paid correctly lol. 

Any comments either on the pros and cons of taking TFLS now v 65, very gratefully received. And I was thinking maybe an across the board increase of 4% - yes conservative but I can't think how else to do it in my spreadsheet.

Thank you!  

So that looks like a commutation rate of c22:1 - which I don't think is bad but I am sure others may say it is not that generous.

The figures do seem to increase quite a lot if you wait till 65.  I'd be tempted by that.

For the increases you are going to need to do some sums.  First would be to work out how your pension is made up - and maybe have separate rows for pre 88 GMP post 88 GMP  pre 99 excess and post 99 excess.  Then decide if your inflation figure is CPI or RPI (I would say you could assume CPI will be 1% below RPI.  So if your RPI assumption is 5% then your two excess figures will actually both increase by 5%.  If CPI is 4% then the post 88 GMP only increases by 3%

As to working it out in real life the pension scheme will tell you what RPI/CPI numbers they use and what the annual increase is as a result then it is just a matter of using a calculator to check their figures.  I would expect they would have the breakdown of pre 88 GMP etc as above so you're not guessing what the starting figures are.

PS you talk about taking the TFLS (at 60 or 65) but of course you would be taking the TFLS AND the pension at the same time. 

LavenderBees

Thanks for working that out. You're a star! I was so tired by the time I finished last night. Best night's sleep ever!

I think what I need to do is keep going down the track of TFLS AND pension (yes, I realised this at the weekend) at 60ish and see how that works out. Then do a different spreadsheet taking DC drawdown at 60ish and leave DB pension til 65. 

I fear I'll be 65 by the time I work this out lol  

LavenderBees

Vitor said:

5% inflation is rather high unless you are modelling 'worse case'; use 2.5–3%. 
Check actuarial reduction on the DB pension. 
Combine DC pots only if flexibility and costs still align. 
Use realistic growth rates (nominal 4–5%, real 1–2%). 
Model income smoothing to avoid high tax later. 
Keep assumptions consistent (nominal vs real) 

NB Planning only to 85 is a statistical trap. Life expectancy is an average, not a finish line. Someone reaching 60 today has roughly a 1 in 4 chance of living past 95 (for women, it’s closer to 1 in 3). If the money runs out at 85, that last decade can turn grimly frugal. A good spreadsheet sould therefore model two horizons: Base case – perhaps to 85, for everyday planning. Longevity case – to 95, to stress-test the plan.

Yes, all good points, thank you. I am getting some base figures in my spreadsheet and will then take a step back to spot any income smoothing opportunities etc. Because of DB pension and SP, I won't ever have no income at all, just possibly won't have enough - I haven't got there yet in my spreadsheet.  I'll see what it looks like, however, I don't have children to leave anything to, so am aiming to use up my savings as smoothly as I can without becoming destitute. I forgot about investment fees and added those in last night...poo...they do make a difference! 

Gaberdeen

Can't offer advice on what you should do, but in your position, this is what I would do;

1. Leave taking your DB pension until you're 65 - that's a decent jump in TFLS and a materially higher annual pension for a 5 year wait.

2. Combine your two DC pensions into whatever has the best (lowest) fee's, be careful not to lose any entitlements that either policy might give you - if they both have benefits - consider keeping them separate.

3. Take your TFLS from DCs as soon as you stop working - max out your ISA allowance so that at least some of the growth/income of that will be tax exempt. If you're skittish about stocks and shares, stick with cash ISA's, but if you want low risk monthly returns on your TFLS, invest through your ISA in Money Market funds (very close to how cash performs) - these can pay ~5% and don't swing around like other investments will.

4. Draw down your DC pension (paying tax on withdrawals above your tax-free-allowance unfortunately) do this as and when you require with a view to accommodating additional income and TFLS from your DB at 65.

5. At 65, withdraw your DB TFLS. add what you can to your existing ISA with it (every year if you can), start drawing your £11k per year - make adjustments on withdrawing from your taxable DC pot to keep your tax exposure minimal

6. Use any non-ISA TFLS first to supplement expenditure over your tax-free allowance until your state pension kicks in and once this has been depleted, move on to the ISA -wrapped TFLS you invested in earlier.