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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 2
    • sharpj
    • By sharpj 9th Jan 18, 12:39 PM
    • 27 Posts
    • 6 Thanks
    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.
    Originally posted by kidmugsy
    Itís only a pension difference a month of around £150 though based on gov.uk calculations, plus he has his state pension to come in between what would be around 11 years approx to recoup the lump sum difference.
    • sharpj
    • By sharpj 9th Jan 18, 1:20 PM
    • 27 Posts
    • 6 Thanks
    sharpj
    Can someone expand further on what they mean by commutation rate and 1 12?

    The lump sum difference is 28,000 and pension difference around 2,500 per year.
    Last edited by sharpj; 09-01-2018 at 2:34 PM.
    • AlanP
    • By AlanP 9th Jan 18, 2:55 PM
    • 1,204 Posts
    • 866 Thanks
    AlanP
    At a 1:12 commutation rate 2.5k would convert to £30k so that rate is just over 1:11.

    It is simply the factor / ratio between £ of annual pension and £s of lump sum.

    1:12 is typical in public sector schemes, private sector can often be better.
    • sharpj
    • By sharpj 9th Jan 18, 3:04 PM
    • 27 Posts
    • 6 Thanks
    sharpj
    At a 1:12 commutation rate 2.5k would convert to £30k so that rate is just over 1:11.

    It is simply the factor / ratio between £ of annual pension and £s of lump sum.

    1:12 is typical in public sector schemes, private sector can often be better.
    Originally posted by AlanP
    Ok thanks well the difference in lump sums is 28k, having done rough calculations on gov.uk the higher pension pays just over £150 more per month, obviously more tax in a higher amount.

    So just over 11 years to even out, but in 2025 he gets state pension also.
    Is that state pension not one of the main factors, given that starts well before that 11 year evening out timescale?
    Last edited by sharpj; 09-01-2018 at 3:34 PM.
    • sharpj
    • By sharpj 10th Jan 18, 6:34 AM
    • 27 Posts
    • 6 Thanks
    sharpj
    Can someone confirm if I am checking the calculation right?

    Higher pension is 21,339 per year lower pension 18,879 per year, based upon tax code 789L which is due to change in April this year as some money owed is paid off.

    Off gov.uk tax using 'estimated take home pay' for tax and ni figures are approx. £1422 against £1283 monthly
    Only shows a difference of £139 per month

    Times that by 12 = £1668 (again that's a rough figure), which in itself seems odd as the difference between the 2 yearly pension amounts is £2460 - why the big difference then, cant be all down to tax?

    So that to me shows more than 12 years to = the difference in the lump sum of £28,000

    I have tried same check on https://www.thesalarycalculator.co.uk/salary.php and it comes up with similar figures

    I do understand the 1:12 ratio now, and that works out just over 1:11 on the £28,000 difference on the £2460 difference between the 2 amounts, however based on the tax checks I have done the actual difference in receipt is more like £1668 approx. Which obviously will take longer to equal the £28,000 lump sum difference.

    So it will take around 17 years for that monthly pension difference to equal the higher lump sum.

    The net amount also appears to increase when he reaches state pension age in 2025.

    Or am I talking nonsense?
    Last edited by sharpj; 10-01-2018 at 8:11 AM.
    • saintalban
    • By saintalban 10th Jan 18, 8:23 AM
    • 15 Posts
    • 7 Thanks
    saintalban
    Have you factored in annual index linking eg CPI or RPI increases into your calculations for the pension? That might help introduce an earlier break even element in taking the larger pension instead of the lump sum.
    • sharpj
    • By sharpj 10th Jan 18, 8:25 AM
    • 27 Posts
    • 6 Thanks
    sharpj
    Have you factored in annual index linking eg CPI or RPI increases into your calculations for the pension? That might help introduce an earlier break even element in taking the larger pension instead of the lump sum.
    Originally posted by saintalban
    I haven't a clue what those are and how to check them to be honest.

    I would assume the pension difference each month would be the same for each amount?
    • Reluctantpensioner
    • By Reluctantpensioner 10th Jan 18, 8:39 AM
    • 32 Posts
    • 5 Thanks
    Reluctantpensioner
    One quick test you can make: take the value of additional lump sum, then look to see what annuity that would buy. How does it compare with the reduction in pension?
    • Linton
    • By Linton 10th Jan 18, 9:24 AM
    • 9,394 Posts
    • 9,527 Thanks
    Linton
    ....
    Off gov.uk tax using 'estimated take home pay' for tax and ni figures are approx. £1422 against £1283 monthly
    Only shows a difference of £139 per month
    ....
    Originally posted by sharpj
    You dont pay NI on pensions.
    • sharpj
    • By sharpj 10th Jan 18, 9:48 AM
    • 27 Posts
    • 6 Thanks
    sharpj
    You dont pay NI on pensions.
    Originally posted by Linton
    okay so assuming I am right with my earlier 17 year bit then taking the lower pension higher lump sum doesn't seem so bad?
    • Linton
    • By Linton 10th Jan 18, 10:08 AM
    • 9,394 Posts
    • 9,527 Thanks
    Linton
    okay so assuming I am right with my earlier 17 year bit then taking the lower pension higher lump sum doesn't seem so bad?
    Originally posted by sharpj
    err no - if your calculations assumed that NI was paid then they are too pessimistic as regards the total net income. As a crude calculation the number should be 12/0.8 which is 15 years to payback rather than 17. If you assume inflation of 2%/year the breakeven point falls to around 13 years.

    13 years is a lot less than life expectancy.
    • sharpj
    • By sharpj 10th Jan 18, 10:17 AM
    • 27 Posts
    • 6 Thanks
    sharpj
    err no - if your calculations assumed that NI was paid then they are too pessimistic as regards the total net income. As a crude calculation the number should be 12/0.8 which is 15 years to payback rather than 17. If you assume inflation of 2%/year the breakeven point falls to around 13 years.

    13 years is a lot less than life expectancy.
    Originally posted by Linton
    I thought you stopped paying NI when you reached state pension age?
    All the calculation checkers I have used show no NI AFTER you indicate you in receipt of state pension.

    Just he gets an income supplement anyway in 2025 when his state pension starts, plus has another lump sum due in 18 months of around 26k.

    Hence either way financially I think he will be secure, it's just that extra tax free 36k available now against the pension drop.
    Last edited by sharpj; 10-01-2018 at 10:21 AM.
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