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  • FIRST POST
    • dbs
    • By dbs 13th Apr 18, 1:26 PM
    • 465Posts
    • 104Thanks
    dbs
    Lump sum or no lump sum that is the question?
    • #1
    • 13th Apr 18, 1:26 PM
    Lump sum or no lump sum that is the question? 13th Apr 18 at 1:26 PM
    My wife has final salary pension from Boots @ 60yrs old in May;

    1. No lump sum 7,147 per year.

    2. 34,000 lump sum 5.217 per year.

    We have no debts, 18 year old daughter living at home.

    State pension at 67yrs old 6,914 per year.

    1. No lump sum plus state pension income 14,061 may pay tax.

    2. 34k lump sum plus state pension 12,131. Lump would go in an isa to earn money spend as required. But will lose index linked increase on 1,930 per year from 60yrs old but pay no tax.

    A rough calculation means she would be worse off taking the lump sum at 78 years old by 2,000 per year after that, have I done this right have I missed anything?

    I suppose its a gamble on how long a person will live and being fit and able to enjoy it.

    Live it up while you can take lump or go for no lump sum what would you do?

    Thanks.
Page 1
    • Dazed and confused
    • By Dazed and confused 13th Apr 18, 1:38 PM
    • 2,811 Posts
    • 1,355 Thanks
    Dazed and confused
    • #2
    • 13th Apr 18, 1:38 PM
    • #2
    • 13th Apr 18, 1:38 PM
    1. No lump sum plus state pension income 14,061 may pay tax.

    2. 34k lump sum plus state pension 12,131. Lump would go in an isa to earn money spend as required. But will lose index linked increase on 1,930 per year from 60yrs old but pay no tax.


    Not sure you've got that right. Isn't the standard methodology to only use the current values, which you have presumably done for the pensions but not the Personal Allowance - option 1 and 2 will both leave her paying tax as the PA has only just become 11,850.

    So allowing for inflation on both she is likely to still be paying tax on each option when state pension kicks in.

    Are you considering the following,
    Wife opening a pension with some of the lump sum to get the 25% uplift on 2880. She can take it out before State Pension kicks in and although 75% will be taxable she has spare allowances so could be in a position where no tax is payable

    Wife paying voluntary NI to get full new state pension of 163.45/week - usually seen as a good return on the "investment" as it's an extra 4.70/week for life for about 740

    Persuading wife to apply for Marriage Allowance for each year it will benefit you and not make her pay extra tax
    Last edited by Dazed and confused; 13-04-2018 at 1:43 PM.
    • Silvertabby
    • By Silvertabby 13th Apr 18, 1:47 PM
    • 3,136 Posts
    • 4,485 Thanks
    Silvertabby
    • #3
    • 13th Apr 18, 1:47 PM
    • #3
    • 13th Apr 18, 1:47 PM
    Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.

    Your break-even point of age 78 sounds right.

    What about your own pension(s)? Have you calculated your joint pension income, using both options, and the income for the one left behind in the event of the other's death? May be worth you having a look at those numbers before deciding.
    • kidmugsy
    • By kidmugsy 13th Apr 18, 1:59 PM
    • 11,400 Posts
    • 7,931 Thanks
    kidmugsy
    • #4
    • 13th Apr 18, 1:59 PM
    • #4
    • 13th Apr 18, 1:59 PM
    Minor point: she could expect to get better interest outside ISAs than inside at the moment. After 18/19 and before her State Pension begins she will have no tax to pay on interest because of the Savings Interest Allowance and the Starting Rate Band for Savings. (That's assuming that she will have no other material taxable income).

    Major point: if you don't have much disposable capital between you at the moment it might be very comforting to have 34k salted away. If you already have a comfortable amount of capital then you might incline to the higher pension.

    http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/
    Free the dunston one next time too.
    • dbs
    • By dbs 13th Apr 18, 3:40 PM
    • 465 Posts
    • 104 Thanks
    dbs
    • #5
    • 13th Apr 18, 3:40 PM
    • #5
    • 13th Apr 18, 3:40 PM
    1. No lump sum plus state pension income 14,061 may pay tax.

    2. 34k lump sum plus state pension 12,131. Lump would go in an isa to earn money spend as required. But will lose index linked increase on 1,930 per year from 60yrs old but pay no tax.


    Not sure you've got that right. Isn't the standard methodology to only use the current values, which you have presumably done for the pensions but not the Personal Allowance - option 1 and 2 will both leave her paying tax as the PA has only just become 11,850.

    So allowing for inflation on both she is likely to still be paying tax on each option when state pension kicks in.

    Are you considering the following,
    Wife opening a pension with some of the lump sum to get the 25% uplift on 2880. She can take it out before State Pension kicks in and although 75% will be taxable she has spare allowances so could be in a position where no tax is payable

    Wife paying voluntary NI to get full new state pension of 163.45/week - usually seen as a good return on the "investment" as it's an extra 4.70/week for life for about 740

    Persuading wife to apply for Marriage Allowance for each year it will benefit you and not make her pay extra tax
    Originally posted by Dazed and confused
    Yes I was second guessing the P.A. would go up but forgot so would her pension.

    I have suggested paying extra into the State Pension thanks for confirming it is a good idea.

    Need to sort my pension out before deciding what to do with her lump sum as I think this is her preferred option.
    • Audaxer
    • By Audaxer 13th Apr 18, 4:09 PM
    • 1,232 Posts
    • 739 Thanks
    Audaxer
    • #6
    • 13th Apr 18, 4:09 PM
    • #6
    • 13th Apr 18, 4:09 PM
    I'm currently in a similar situation in trying to decide whether or not to take the lump sum. Your wife's commutation rate works out at 17.6, which means for each 1 pension given-up, she gets 17.60 of lump sum. I think that is quite a good rate but if the higher income is required to live on, I would go for the full pension.
    • dbs
    • By dbs 13th Apr 18, 4:29 PM
    • 465 Posts
    • 104 Thanks
    dbs
    • #7
    • 13th Apr 18, 4:29 PM
    • #7
    • 13th Apr 18, 4:29 PM
    Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.

    Your break-even point of age 78 sounds right.

    What about your own pension(s)? Have you calculated your joint pension income, using both options, and the income for the one left behind in the event of the other's death? May be worth you having a look at those numbers before deciding.
    Originally posted by Silvertabby
    I was thinking of taking both my pensions at 60 yrs old in four years time when my wife is 64yrs old.

    St Gobain deferred pension payable at 65 take early at 60yrs old 8,431 with 43k lump sum.

    Current railway pension payable at 60 yrs old 7,000 a year with 40k lump sum but is under review again not enough in the pot and I am not age protected so they could increase the age to 65 with a 50% reduction at 60 if I am unlucky.

    So ideally at 60yrs old 15,000 plus 80k lump sum.

    Currently working 12hr shifts including night shifts and travelling 50 miles starting to feel my age so want to stop doing this job when I am 60yrs old but depends what happens with the pension review.

    Death in service wife would get 100k not sure about yearly pension on top of that, think 3,000 a year

    When I retire if I die I don't know what pension my wife would get.

    I get 3,500 per year if my wife dies when she takes her pension on both options.
    • dbs
    • By dbs 13th Apr 18, 4:52 PM
    • 465 Posts
    • 104 Thanks
    dbs
    • #8
    • 13th Apr 18, 4:52 PM
    • #8
    • 13th Apr 18, 4:52 PM
    Minor point: she could expect to get better interest outside ISAs than inside at the moment. After 18/19 and before her State Pension begins she will have no tax to pay on interest because of the Savings Interest Allowance and the Starting Rate Band for Savings. (That's assuming that she will have no other material taxable income).

    Major point: if you don't have much disposable capital between you at the moment it might be very comforting to have 34k salted away. If you already have a comfortable amount of capital then you might incline to the higher pension.

    http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/
    Originally posted by kidmugsy
    We have 35k of savings needs to spend about 25k of that on the house we bought five years ago so its maintenance free as possible, but I could finance half of that that with my wages

    My wife stopped working at Boots 24 years ago to become a full time mum so the pension quote is very good. She is currently working as a midday school supervisor 5days a week and spends quite a lot of time caring for her mum who has dementia I think she will take the lump sum to enjoy it whilst she has good health. I just want her to have all the information before she decides.
  • jamesd
    • #9
    • 13th Apr 18, 5:07 PM
    • #9
    • 13th Apr 18, 5:07 PM
    Lump sum split over ISAs in say five to ten peer to peer lending platforms could be a good move. Couldn't do it all in one year because of the one of each type rule but her starting rate for savings would cover it anyway. Around 7% after bad debt is easy enough to achieve. Unbolted is easy to use and delivers me about 9%.

    7% not inflation linked doesn't look too bad at 2,380 a year compared to 1,930 lower pension.

    If her health is good getting more state pension years could be a wonderful deal, definitely investigate.

    State pension deferral adds 5.8%per year of deferral. 1 / 0.058 = 17.24 so not great vs the commutation factor but handy if only some extra guaranteed inflation-linked income is wanted.
    • jimi_man
    • By jimi_man 14th Apr 18, 1:56 PM
    • 119 Posts
    • 117 Thanks
    jimi_man
    Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.
    Originally posted by Silvertabby
    You're not really comparing like for like though. The public sector retirement age is higher - 67 in most cases, so in the OPs case they would be giving up seven more years extra pension.

    Commutation rates on their own are pretty meaningless, you need the age that you would get it also. Consequently you can only compare commutation rates if the retirement ages are the same.

    Based on that they are both probably broadly similar rates.
    • Silvertabby
    • By Silvertabby 14th Apr 18, 2:08 PM
    • 3,136 Posts
    • 4,485 Thanks
    Silvertabby
    Based on the figures you have given, it looks like the commutation rate is 1:18. This isn't brilliant, but it's not bad - it's certainly better than the public sector's 1:12.

    Originally posted by Silvertabby
    You're not really comparing like for like though. The public sector retirement age is higher - 67 in most cases, so in the OPs case they would be giving up seven more years extra pension.

    Commutation rates on their own are pretty meaningless, you need the age that you would get it also. Consequently you can only compare commutation rates if the retirement ages are the same.

    Based on that they are both probably broadly similar rates.
    Originally posted by jimi_man
    No, the commutation rate is nothing to do with any actuarial reduction for early payment. Sounds like OP's wife's NRA is 60 - but NRA for a long term deferred LGPS pensioner could also still be 60.
    Last edited by Silvertabby; 14-04-2018 at 2:23 PM.
    • kidmugsy
    • By kidmugsy 14th Apr 18, 6:22 PM
    • 11,400 Posts
    • 7,931 Thanks
    kidmugsy
    ... spends quite a lot of time caring for her mum who has dementia. I think she will take the lump sum to enjoy it whilst she has good health.
    Originally posted by dbs
    An entirely reasonable argument: good luck with your decision. I would not, however, leave this point dangling: "When I retire if I die I don't know what pension my wife would get."
    Free the dunston one next time too.
    • andy001
    • By andy001 18th Apr 18, 7:33 AM
    • 42 Posts
    • 18 Thanks
    andy001
    Great discussion
    Silvertabby: Is there a break even calculator to decide when to retire and if its cost effective to retire at certain age?
    Thanks
    • Silvertabby
    • By Silvertabby 18th Apr 18, 9:07 AM
    • 3,136 Posts
    • 4,485 Thanks
    Silvertabby
    Great discussion
    Silvertabby: Is there a break even calculator to decide when to retire and if its cost effective to retire at certain age?
    Thanks
    Originally posted by andy001
    Not that I'm aware of. It depends on the commutation rate of the scheme. If you want to try your own number crunching, have a look at the difference between:

    Pension only X number of years you expect/hope to live in retirement =

    Lump sum X 1 plus reduced pension X number of years you expect/hope to live in retirement =

    Rule of thumb for the LGPS (1:12 commutation rate) is 12 or 14 years, depending on tax status in retirement (lump sum is tax free, annual pension is taxable income). You may also wish to factor in the future cost of living increases that would have been paid with the higher pension....

    HTH
    • swindiff
    • By swindiff 18th Apr 18, 10:10 AM
    • 342 Posts
    • 139 Thanks
    swindiff
    Current railway pension payable at 60 yrs old 7,000 a year with 40k lump sum but is under review again not enough in the pot and I am not age protected so they could increase the age to 65 with a 50% reduction at 60 if I am unlucky.
    Originally posted by dbs
    If changes are brought in this would only affect future contribution. Existing contributions are protected by law. So the actuarial reduction would only affect the portion of your pension that you contributed to after the changes to the scheme were made.
    • andy001
    • By andy001 18th Apr 18, 7:10 PM
    • 42 Posts
    • 18 Thanks
    andy001
    Thank you
    Not that I'm aware of. It depends on the commutation rate of the scheme. If you want to try your own number crunching, have a look at the difference between:

    Pension only X number of years you expect/hope to live in retirement =

    Lump sum X 1 plus reduced pension X number of years you expect/hope to live in retirement =

    Rule of thumb for the LGPS (1:12 commutation rate) is 12 or 14 years, depending on tax status in retirement (lump sum is tax free, annual pension is taxable income). You may also wish to factor in the future cost of living increases that would have been paid with the higher pension....

    HTH
    Originally posted by Silvertabby
    Thank you!
    So generally speaking for these schemes including NHS pension- it would make sense to retire at 55yrs if one can afford to than retiring at SPA (67yrs)? (May get extra 12yrs by retiring early)
    • Silvertabby
    • By Silvertabby 18th Apr 18, 9:49 PM
    • 3,136 Posts
    • 4,485 Thanks
    Silvertabby
    Thank you!
    So generally speaking for these schemes including NHS pension- it would make sense to retire at 55yrs if one can afford to than retiring at SPA (67yrs)? (May get extra 12yrs by retiring early)
    Originally posted by andy001
    It depends on how much your pension would be reduced for taking it early. Assuming the NHS operates in a similar way to the LGPS, the early retirement reduction would be calculated first and then the commutation.

    This is the commutation gizmo for the LGPS - but it will work for the NHS and all other pension schemes which use a commutation rate of 1:12

    How much lump sum would you like to take?
  • jamesd
    Is there a break even calculator to decide when to retire and if its cost effective to retire at certain age?
    Originally posted by andy001
    Try cfiresim, discussed with some worked examples at Drawdown: safe withdrawal rates.
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