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  • FIRST POST
    • sharpj
    • By sharpj 7th Jan 18, 4:20 PM
    • 27Posts
    • 6Thanks
    sharpj
    Early Retirement
    • #1
    • 7th Jan 18, 4:20 PM
    Early Retirement 7th Jan 18 at 4:20 PM
    Hi,

    A friend of mine is taking early retirement at the age of 58.
    He has the option to take a lower sum and higher pension as a standard offering.
    Or a higher lump sum and reduced pension.

    So minimum cash option with a high pension, or maximum cash and lower pension.

    Pro's and Con's?

    Thanks
Page 1
    • newatc
    • By newatc 7th Jan 18, 4:26 PM
    • 246 Posts
    • 281 Thanks
    newatc
    • #2
    • 7th Jan 18, 4:26 PM
    • #2
    • 7th Jan 18, 4:26 PM
    The headline pro and cons are self evident in your post. What is best for your friend will depend on his circumstances and what is the pension cost of taking a lump sum. Would need more details to give an opinion e,g if he had expensive loans then maximising the lump sum to pay off the loan(s) would be a no-brainer.
    • sharpj
    • By sharpj 7th Jan 18, 4:32 PM
    • 27 Posts
    • 6 Thanks
    sharpj
    • #3
    • 7th Jan 18, 4:32 PM
    • #3
    • 7th Jan 18, 4:32 PM
    The person does not have a mortgage and the lump sums are both tax free.
    Also he doesn't need the higher lump sum cash for any specific reason. It's just that higher rate regular pension income against the higher lump sum in his account.

    No debts outstanding to pay off, so loan free and mortgage free. No major home improvements needed.
    • Thrugelmir
    • By Thrugelmir 7th Jan 18, 4:46 PM
    • 58,876 Posts
    • 52,198 Thanks
    Thrugelmir
    • #4
    • 7th Jan 18, 4:46 PM
    • #4
    • 7th Jan 18, 4:46 PM
    It's just that higher rate regular pension income against the higher lump sum in his account.
    Originally posted by sharpj

    What's the pension sacrifice to buy the larger lump sum?
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • sharpj
    • By sharpj 7th Jan 18, 4:57 PM
    • 27 Posts
    • 6 Thanks
    sharpj
    • #5
    • 7th Jan 18, 4:57 PM
    • #5
    • 7th Jan 18, 4:57 PM
    What's the pension sacrifice to buy the larger lump sum?
    Originally posted by Thrugelmir
    My understanding is the pension difference per year is around £2.500, taxable..
    So lower lump sum/higher pension, bigger lump sum smaller pension.

    I think he still gets a good lump sum from various sources anyway and in is a decent financial situation overall, it's just whether to increase that with a bigger l/s but take a lower pension for life.
    • MallyGirl
    • By MallyGirl 7th Jan 18, 5:16 PM
    • 2,729 Posts
    • 7,738 Thanks
    MallyGirl
    • #6
    • 7th Jan 18, 5:16 PM
    • #6
    • 7th Jan 18, 5:16 PM
    Would also depend on his health/ life expectancy- if he is likely to live to 100 then bigger pension for the next 42 years would be better value, whereas if he is a heavy drinker/smoker/eater or suffering from a life limiting condition then it could be better to take the bigger lump sum and enjoy it while he can.
    • lotteryman
    • By lotteryman 7th Jan 18, 5:22 PM
    • 47 Posts
    • 39 Thanks
    lotteryman
    • #7
    • 7th Jan 18, 5:22 PM
    • #7
    • 7th Jan 18, 5:22 PM
    Hi
    I had the same often about 5 years ago and opted for the larger lump sum and lower pension.
    I considered the following
    1. could I live on the lower pension without sacrificing too much of my standard of living? I also took into account of when my state pension would kick in giving me an additional monthly income
    2. what could I do with the increased lump sum. I chose to invest in renovating cheaper end properties - something I have wanted to do for years. It also provided me with 'work' after work - an additional hobby that provided me with an income and keeps me active alongside various sporting activities. This has worked out really well for me. I would say don't vegetate keep active and enjoy a long retirement
    3. Would I prefer for me to be 'in charge' of my money or someone else and what would happen if I popped my cloggs just a few years after retirement. I've heard so many cases of people not being able to enjoy their retirement and felt the larger lump sum would also allow me to take more holidays and do other things whilst I was fit and able to do so. So many people see retirement as the end whereas they should see it as the beginning of the end with many more years to enjoy.

    I have not regretted my decision but it has to be an individual choice based on your own circumstances
    • sharpj
    • By sharpj 7th Jan 18, 5:39 PM
    • 27 Posts
    • 6 Thanks
    sharpj
    • #8
    • 7th Jan 18, 5:39 PM
    • #8
    • 7th Jan 18, 5:39 PM
    No health issues, spending money on travelling not straight forward as he has a disabled son.
    I think he can afford to not work again irrespective of what he does, just a dilemma on taking the higher lump sum against the lower pension.
    He is already guaranteed a decent lump sum irrespective of which option, just its that immediate even healthier bank balance (with no real immediate plans to spend), against that consistent £200 or so increased pension every month.

    Also his partner is not retiring, but carrying on working. Whether he takes a part time job to occupy himself is possible, not necessarily for money reasons.
    Last edited by sharpj; 07-01-2018 at 5:50 PM.
    • Silvertabby
    • By Silvertabby 7th Jan 18, 6:26 PM
    • 2,843 Posts
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    Silvertabby
    • #9
    • 7th Jan 18, 6:26 PM
    • #9
    • 7th Jan 18, 6:26 PM
    If he's public sector, then the commutation rate would be a very poor 1:12.

    As he has both lots of figures, he could do these calculations to find the notional value of his benefits:

    Where 25 is the number of years he expects to live in retirement (alter if necessary).......

    25 x standard pension plus lump sum =

    25 x reduced pension plus higher lump sum =
    Last edited by Silvertabby; 07-01-2018 at 9:43 PM.
    • Thrugelmir
    • By Thrugelmir 7th Jan 18, 6:41 PM
    • 58,876 Posts
    • 52,198 Thanks
    Thrugelmir
    My understanding is the pension difference per year is around £2.500, taxable..
    So lower lump sum/higher pension, bigger lump sum smaller pension.
    Originally posted by sharpj
    The difference will grow and compound over the years as inflation takes it's toll.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • sharpj
    • By sharpj 8th Jan 18, 6:39 PM
    • 27 Posts
    • 6 Thanks
    sharpj
    Thanks for the replies, he is still undecided.

    Obviously in the long term he will eventually reap the benefit of the better pension, but it's tempting having that extra cash in the bank.
    Especially when state pension age kicks in, I believe around 2025.

    Calculations suggest just less than £200 a month on the smaller pension but obviously that is a lifetime thing, it would take 10 years or so to get back that difference between the standard and higher lump sums.
    • kidmugsy
    • By kidmugsy 8th Jan 18, 7:00 PM
    • 10,833 Posts
    • 7,418 Thanks
    kidmugsy
    Calculations suggest ... it would take 10 years or so to get back that difference between the standard and higher lump sums.
    Originally posted by sharpj
    Ten years? At age 58? Then take the bigger pension. If he needs some capital in the meantime, borrow it. Borrowing is still said to be cheaper than it's been in 5,000 years.
    Free the dunston one next time too.
    • sharpj
    • By sharpj 8th Jan 18, 7:33 PM
    • 27 Posts
    • 6 Thanks
    sharpj
    Ten years? At age 58? Then take the bigger pension. If he needs some capital in the meantime, borrow it. Borrowing is still said to be cheaper than it's been in 5,000 years.
    Originally posted by kidmugsy
    He won't need capital irrespective of which lump sum he chooses he already is mortgage and debt free plus has savings in the bank.

    It's just a once in a lifetime chance to take a larger tax free lump sum, against that is the reduced pension v. smaller lump but better pension by around £200 per month- but he will get state pension in 2025 to supplement income.
    • enthusiasticsaver
    • By enthusiasticsaver 8th Jan 18, 8:28 PM
    • 6,597 Posts
    • 13,782 Thanks
    enthusiasticsaver
    I am in the same position in that I am 58 in few weeks time and retired a week ago. I can opt for a higher lump sum and lower pension but no way will I be doing that as the lump sum is only 12 times as much as the annual reduction. As I am fairly confident of living past 70 I will be taking the 25% TFLS only. We are lucky though in that we still have not touched my DHs lump sum when he retired at the end of 2016 and have plenty of savings and investments.

    The only pro I can see to your friend taking the larger lump sum now is if he has debts or a high interest rate mortgage or is unwell. Almost certainly it is poor value to commute more of the pension but it does depend on the pension scheme and commutation rate. Mine is LGPS so as someone else has already said it is just 1 in 12. Unless he will end up with a very large annual pension taking part of his annual pension away may leave him vulnerable on income in a few years time when the lump sum has gone.
    Debt free and mortgage free and early retiree. Living the dream

    I'm a Board Guide on the Debt-Free Wannabe, Mortgages and Endowments, Banking and Budgeting boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Pease remember, board guides don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com
    • sheslookinhot
    • By sheslookinhot 8th Jan 18, 9:14 PM
    • 1,122 Posts
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    sheslookinhot
    If he doesn't need the lump sum then he should take the higher monthly pension.
    Mortgage Free
    Planning for Retirement
    • sharpj
    • By sharpj 9th Jan 18, 5:35 AM
    • 27 Posts
    • 6 Thanks
    sharpj
    I am in the same position in that I am 58 in few weeks time and retired a week ago. I can opt for a higher lump sum and lower pension but no way will I be doing that as the lump sum is only 12 times as much as the annual reduction. As I am fairly confident of living past 70 I will be taking the 25% TFLS only. We are lucky though in that we still have not touched my DHs lump sum when he retired at the end of 2016 and have plenty of savings and investments.

    The only pro I can see to your friend taking the larger lump sum now is if he has debts or a high interest rate mortgage or is unwell. Almost certainly it is poor value to commute more of the pension but it does depend on the pension scheme and commutation rate. Mine is LGPS so as someone else has already said it is just 1 in 12. Unless he will end up with a very large annual pension taking part of his annual pension away may leave him vulnerable on income in a few years time when the lump sum has gone.
    Originally posted by enthusiasticsaver
    He has another lump due of approx 26k due in 18 months, add to that
    the fact he will have considerable savings the lump sum probably won’t be gone anyway.
    He is also going to get state pension in 2025.
    With his wife’s salary, albeit not huge and some benefit he gets for his disabled son even on the lower pension he would still have an income
    close to 3k a month.

    It’s obviously a tough one as the higher pension is for life however the savings he has wouldn’t necessarily reduce over time.
    • sharpj
    • By sharpj 9th Jan 18, 8:59 AM
    • 27 Posts
    • 6 Thanks
    sharpj
    Just to give some figures I believe the lower pension is around 18,800 per year opposed to higher pension of 21,300

    The difference between lump sums is around 28,000
    • lotteryman
    • By lotteryman 9th Jan 18, 11:11 AM
    • 47 Posts
    • 39 Thanks
    lotteryman
    Back to what I said earlier

    If you can live comfortably on the lower pension and you are otherwise financially stable; you will be getting your state pension (around £500 - £600 pm if full contributions) Enjoy life ... you are a long time dead !
    • sharpj
    • By sharpj 9th Jan 18, 11:32 AM
    • 27 Posts
    • 6 Thanks
    sharpj
    Back to what I said earlier

    If you can live comfortably on the lower pension and you are otherwise financially stable; you will be getting your state pension (around £500 - £600 pm if full contributions) Enjoy life ... you are a long time dead !
    Originally posted by lotteryman
    Thanks, and yes we feel we can be perfectly fine on the lower pension.
    I actually gave phoned HMRC for a rough guide on tax and she kind of recommended the lower pension route due to what tax I will pay.
    • kidmugsy
    • By kidmugsy 9th Jan 18, 12:28 PM
    • 10,833 Posts
    • 7,418 Thanks
    kidmugsy
    It's just a once in a lifetime chance to take a larger tax free lump sum, against that is the reduced pension v. smaller lump.
    Originally posted by sharpj
    I can well understand the fancy for having a large capital sum available. But if he doesn't even know what he wants to spend it on is it really worth paying the price in terms of pension given up?

    Put otherwise, would he really want the capital sum irrespective of whether he's looking at a pay-back time of 5 years, 10 years, or 20 years?

    Anyway the thing he should certainly do is check whether his decision will affect the eventual widow's pension.
    Free the dunston one next time too.
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