DB Pension take lump sum or not?

Littleowl007

My wife has an old DB pension.She has been offered a couple of options at the moment which are Full pension £12270pa or reduced pension of £9250 pa plus lump sum of £61560. She still has 8 years before she collects her state pension ,I'm already getting my state pension and have some small pensions which I will look into taking soon.We also have some savings isas etc but can't decide which option to take.Any advice would be much appreciated.Also she has the option to take smaller lump sums.

Thankyou

Aylesbury_Duck

The answer is "it depends". The full pension is almost certainly the best option if you want to maximise total income and if she expects to live a long time, not so much if she has a life-limiting health condition or any other reason to believe she might die sooner than most. What would you do with the lump sum if you took it? Do you need it for something? Could it be invested and its value keep pace with what is presumably an index-linked higher annual pension that she could have taken?

There's no right answer anyone can give you, but taking into account all of the above, plus other people's challenge on it, will help.

xylophone

She might consider taking a reduced lump sum of £40,000 , enabling a full contribution to an ISA for each of you, (next financial year if your allowances have already been used).

af1963

A lump sum of 20x the annual amount given up is not too bad a deal. Also consider that if she takes the extra £3k as additional income, it will be liable to tax - certainly after her state pension starts, and possibly between now and then if she has other income - which would reduce the £3k to £2400 per year.

Would it make a difference to your lives to have £60k of additional accessible savings, now, rather then an extra net £2400 per year when you're older ? Will you have enough regular income coming in from other pensions to meet your needs ? Only you can decide that.

Also worth checking how the pension will increase in future. If it's fully linked to inflation, that makes it more valuable. Some DB pensions get limited increases, or no increases at all, or have different historical chunks of the pension which increase at different rates. If the pension isn't going to keep up with inflation, that would be another point in favour of taking the lump sum.

Phossy

If I am reading this right then your wife is ~ 60 and reaches state pension age at 68.

Are the figures you quoted on the DB pension assuming the pension is taken at 68 or is it based on taking that pension now ?

Littleowl007

https://forums.moneysavingexpert.com/discussion/comment/82037016#Comment_82037016

Thanks for your comments,also would you say this is a good commutation rate ?

Littleowl007

Mistake on my behalf yes my wife is 60 but gets her state pension at 67

Littleowl007

Yes quotes for pension are for now 60

Cobbler_tone

https://forums.moneysavingexpert.com/discussion/6672780/db-pension-take-lump-sum-or-not

You should be able to work this one out for yourself quite easily.

You'll either be comfortable with adding her income of £9250 to yours until state pension age, or £12270 might feel a lot more comfortable. Then you'll either make good use of £61560 (or whatever lump sum) or you will stick it in the bank. If the latter, I'd personally take the higher pension, especially as it will use her tax allowance nicely until her state pension kicks in. If £9250 plus yours is ample, then you are going to be loaded at SPA, so take the £61560 and treat yourself to something that you never would have bought before. Your main 'risk' is only between now and 67 really but then you need to think about how the other one would be left if the other wasn't around.

Littleowl007

With the full pension rising with inflation after a couple of years she will be over her personal allowance and will be paying tax ?

QrizB

Paying tax is good. It means you've got enough income to pay tax.

Or put another way, don't let the tax tail wag the income dog.