PENSION TO LUMP SUM help

johnpoleman

I am due to receive my pension in July when I am 50. The pension is a final salary scheme which was deferred due to redundancy 7 years ago. I thought I understood what to expect but have been offered:
£13682 pa with £40k lump sum or
£12248 pa with £75k lump sum.
Spouses pension secured irrespective of lump sum. £50k in isas, £35k in cash,£75k in shares/isa.
No debts or mortgage and another £40k in stakeholder. I am looking at working for another 3 years and will pay 40% tax during that time.
Cannot decide if it is best to take the extra lump sum and reduced pension or even finish work earlier than expected.
Ideally would look for £2k per month to live on

gaggyball

I would take the extra lump sum and reduced pension as you could die tomorrow! But you really need to get independent financial advise about this.

If you die your pension dies with you but if you take the extra lump sum the money is already in your account for your widow (if you're married?).

CLAPTON

assuming the final salary scheme is inflation linked then it gives you a 4% index linked income equivalent .... which is impossible to beat (you wont get that with the stakeholder)

dunstonh

indexation is a valuable option. However, your health status may mean taking the lump sum is a better option. Personal tax status may come into it as well along with your overall savings/investments and liabilties and what you have planned in retirement.

mark55man

May be dense here, but (assuming ignoring the growth in your pension income over time - or rather cancelling it against the likely growth in income from your extra lump sum). It looks like you get 35K more now, for 1400 or so less a year. On simple calculations that would last you about 25 years.

Now I am sure you are planning an active retirement in yor 60s and early 70s, but a recent conversation with my FIL suggested that around 75 you will need less income just through natural lifestyle choices as you get older. SO I think in planning your decision it is more about the amenity of money now, against money later

of course the initial assumption is what you need advice on but may well require future gazing as to whether long term savings beat your indexation

redimp98

The lump sum advantage lasts until mid-80's, after which you would have been better off with the higher annual income. Personally, in a similar situation recently, I took the lump sum because it allowed me to do away with the mortgage. It also depends if you feel confident in managing what you've got. Plenty of investment companies out there clamour to manage the money for you, not surprisingly as annuities are just about the biggest rip-off ever invented, along with those home-equity release plans.

jamesd

I suggest that you consider:

1. Transfer all of the existing cash ISA money to stocks and shares ISA. If you don't have something you're comfortable putting the money in, take a look at BlackRock UK Absolute Alpha and CF Arch Cru Investment Portfolio (see details).
2. Neither of those two options pays dividend or interest, instead they add it to the capital as growth, so they use your CGT allowance. That makes them good options outside any tax wrapper as well. A decent place to park money until it can be moved into an ISA or pension.
3. Take the larger lump sum.
4. Put the lump sum into ISA wrappers as rapidly as you can.
5. Start a personal pension and put as much as possible of your higher rate income into it to get higher rate tax relief. Preferably all of it. Or use the stakeholder, but it probably can't hold interesting options like the earlier two, so moving it to a personal pension with lots of investment options may well be best. Perhaps consider a moderately priced SIPP like the one from Hargreaves Lansdown, though it's possible to beat it.
6. Once you fully retire take a lump sum from the new personal pension if desired and consider income drawdown for the rest so you have flexibility about whether to take it or not. Taking it at the highest possible rate and using that to move money into a S&S ISA to get future tax free income is helpful.
7. Consider using investments like those earlier for a fair bit of your cash as well.
8. Arrange an overdraft facility of at least a few months of income so that you can use it as an emergency fund while you sell investments if the amount you need exceeds the reduced cash holding.

You can take about 6% from investments (allowing for enough growth to cover inflation and assuming 10%+ in total growth) so you'd get perhaps 14,100 from all of your non-pension assets. Most of that could be in tax free (ISA or capital growth) investments so add about 10,900 for after tax income from the reduced pension. That takes you to about 25,000 in annual income, 2080 a month. Another 1900 or so a year from the stakeholder pension takes you to about 2240 a month.

So, you're around your target income. The large amount of income that is from ISAs or capital growth investments means that you'll be able to avoid the reduction in extra personal allowance that those over 65 get, when you eventually reach that age.

Not a lot of safety margin so working for a few more years and adding more to pensions during that time looks prudent.

If you have a spouse, say something about their situation, since you each get a personal allowance and good planning can let you use both allowances to save even more tax.

johnpoleman

Many thanks to all concerned I think the answer is to take the additional lump sum and sort out all my investments.
I really appreciate the replies,
Many Thanks