Higher lump sum or annual income?

IndecisiveCat

Hi there, I’m taking early retirement in September and trying to decide between the 2 remedy period options for my defined benefit pension. The 2nd option would increase my annual pension by £900 but I would lose £13300 from my tax free lump sum. Is this a good trade off? I would pay tax on the £900, so it’s really £720 per year I’m gaining. It will increase with CPI and isn’t capped. I’m 57, in good health (I think!), have significant savings, no debt and my husband has a DB pension and state pension. I will get another DB pension in 3 years (both my pensions together will take my income back up to my current part time salary). I initially decided to take the higher income but then wondered if the additional lump sum might outpace inflation in an ISA (I’m too risk averse to invest it!)? I know everyone has different circumstances and preferences, but is there anything else I should be thinking about to help me make a decision?Thank you.

dunstonh

he 2nd option would increase my annual pension by £900 but I would lose £13300 from my tax free lump sum. Is this a good trade off?

You are only 57, so you will recover that well within your lifetime unless you have short life expectancy

Is your pension being reduced by taking it earlier than scheme age? If so, it may be worth deferring it. Or at least, at a minimum, comparing the options of taking it or deferring it until scheme age

 initially decided to take the higher income but then wondered if the additional lump sum might outpace inflation in an ISA (I’m too risk averse to invest it!)?

Cash savings are awful for beating inflation. You say you're too risk-averse to invest it, but you're replacing investment risk with shortfall risk and inflation risk. Having no investments and being cash only can actually increase your risk rather than reduce it compared to taking a sensible level of risk.

IndecisiveCat

https://forums.moneysavingexpert.com/discussion/comment/82065429#Comment_82065429

Thank you for replying. Yes, I’m losing 11% for retiring 3 years early but calculated I would be well into my 80s before deferring would be more beneficial. In terms of investing, I just don’t want to risk my capital - even if it means possibly missing out on a higher gain than savings interest.

mrklaw

if you don’t need the money and would just leave it in a cash ISA - IMO take the income.

It’s not just the £720 per year. It’s inflation linked and guaranteed.

NormalNorman

In less than three years I will be claiming two of the four DB schemes at 60. Up until recently I was minded to take the lump sum from the one with a decent commutation rate.

But say I live till 90 that’s 30 years to fund likely in very good health going by the last MOT. Not sure I want to curate too many chunks of cash, ISAs and DC schemes etc. There is also the 50% spouse pension to consider. For example, after mum passing dad gets 50% of her pension guaranteed on top of his own pensions so quite well off. He was moaning about HRT but that’s only because the scheme paid three months at 100%. Then inflation which is massive risk nowadays. No doubt there will also be downward pressure on thresholds and wrappers.

Lastly, the way life works is say you take the lump sum, guaranteed something will come along to spend it on. Over 30 years lumps of cash will be long forgotten.

I have other cash for the gogo years so base income needs to be secured. Die with nothing principal.

leosayer

From the circumstances you describe, you have no use for the cash lump sum so I think you should take the unreduced pension and enjoy the benefit of it annual inflation increases.

Also, the commutation rate is not very attractive so another reason to avoid taking the cash

ellenvan

I would definitely take the higher pension rate and no lump sum. In fact that is what I did.

Inflation rises on your pension will definitely be better than you can earn without investing.

horsewithnoname

I do know that most people consider that the commutation rate is not very good for extra lump sum, so unless you have a specific need for the extra lump sum, you are probably better off having the pension. Unless like some you know your life is limited and you want the extra lump sum to leave to someone, like a couple of friends I had did.
The rate is £12 of lump sum for £1 of pension, and I gather that to buy £1 of index linked pension costs about £25.

sheenas

personally with no knowledge of your total personal situation its hard to recommend. If you're over pensioned take the money else keep it there unless you specifically need for it. Consider kids and inheritance also consider that maybe you or your partner might need a care home later in life. Changing the house deeds might be a smart move too

infj

Remember those not so far off days when you were lucky to scrape 1% interest on your savings! They could easily return.

Compared to guaranteed CPI on the future pension until you die (despite tax) - it's a no brainer to me.

But as most everyone else says - it does depend on your circumstances.

DRS1

The OP mentions remedy period options. I am wondering if the trade off between lump sum and pension is the only difference between the options. What about spouse's pension for example?