NHS pension - bigger lump sum, small monthly 'wage' or vice versa ?

[Sanguinesuzy]

NHS nurse here.
I'm seriously considering taking early retirement this year, probably on a flexi basis so working one long day a week. According to the bumf you can take a larger lump sum and a smaller monthly income or a smaller lump sum (almost half less) and bigger monthly income. Most of my colleagues who've done this have taken the bigger income because in their words 'it all works out the same in the end'
Obviously I'm going to do some research, maybe even get some professional advice but I just wondered what others have done and why ? To give some background I've paid off my mortgage and have a fair amount of savings. One of my sons will be going to uni in the next few years so will require a student grant at some point. Any advice will be really welcome !

If its early retirement you are likely to live long enough for the higher income and lower lump sum to be the best. So I would take higher income and lower lump sum.

However some people take bigger lump sum if they have a one off big purchase to make just after retirement. Depends on your circumstances.

Yes I'm thinking the higher monthly income sounds better.

Just been through same dilemma. Its hard question to resolve because we don't know our own life expectancy. We took higher income.

The only other reason I could think of taking higher lump sum is if you have a good income generating scheme to put money into instead.

I took early retirement, not NHS but a defined benefits decent scheme mine was early retirement for ill health. I worked out that taking the bigger pension and smaller lump sum would mean I would need to live for at least another 35 years.

So I took the bigger lump sum and smaller pension. But I have crappy health and to be totally brutal about it I’m unsure if I would live those 35 years for it to even out.

It doesn’t ‘all work out in the end’ in the way your colleagues mean. I’m a teacher and out pension scheme (the final salary version) is very similar to the NHS one.
I took early retirement (only by 6 months) and opted for the higher lump sum / lower annual pension scenario after carefully working out the figures.
This is a rough breakdown of how it works. (figures are approx)
Full pension = £15k, lump sum = £35K
Reduced pension = £12k lump sum + additional lump sum = £74k
Additional lump sum = 13x reduced pension amount ie 13 x £3k = £39k

Lump sums all tax free.
Full pension is taxable, the £3k I reduced by is over the tax threshold so in reality = £2400 net, so I will only lose out on my annual pension in 16.5 years ( 39000 / 2400). £2400 = £200 per month.
I used some of the additional lump sum to pay off my mortgage, saving me £4K in interest over the remaining term. The rest is sat in my bank waiting to be spent on luxury holidays 🤣.
I returned to work part time for 2 years, earning around £1800 net a month (which is all taxed as my pension takes up all my tax free allowance) but I don’t pay as much NI nor do I pay into a pension anymore.

All in all, taking the lump sum and reduced pension plus returning to work part time has been financially the right decision. I could actually live solely off my pension now if I didn’t fancy working anymore.

Oh, forgot to mention, once you die, your pension is gone (unless you have a partner who qualifies for a proportion of it), but the lump sum doesn’t disappear. I know far too many teachers who sadly died within a couple of years of retirement!

High monthly, lower lump sum

As per the poster above. You need to have a realistic expectation of your life expectancy. If you retire at 60 and it takes 30yrs to break even then surely you take the money and enjoy it.
Also it’s a balance. State support will change over time

Ours broke even at 25 years and retired early so worth it for us.

Be careful! Dh took early retirement a few years ago from the nhs and intended to work part time. He’s now had to retire completely due to ill health before he wanted or planned to.

Can anyone explain how you work out breaking even ? I'm mathematically challenged !
Bigger pension - £12500 pa/ lump sum £37547
Smaller pension - £10057 pa/ lump sum £67049

@Halliabaloo sorry to hear that. Did he take the smaller monthly pension ?

No, he took the larger monthly payment, expecting to live a long time and also to provide more for me if he died, (half pension amount.)
As it stands he’ll be lucky to live for another 5 years😢

I was told by the Pensions Adviser at the Trust where I worked that most people took a larger lump sum. This was because most people had a large enough pension income to be comfortable even when it was reduced. Some people have a mortgage to pay off. My pension is small so I did not take a bigger lump sum.
It does depend how big your pension is, if you have a partner/husband to increase your household income and how long before state pension. Many nurses return part time up to state pension age. My job would not let me do that so check first.
I was told that your payments into your pension are recouped after 12 years of pension payout, so if you live for 25 or 30 years as most will, you will gain. If you take more lump sum, this does not increase.
It really all depends on your personal circumstances.

@Sanguinesuzy

Can anyone explain how you work out breaking even ? I'm mathematically challenged ! Bigger pension - £12500 pa/ lump sum £37547 Smaller pension - £10057 pa/ lump sum £67049

Quick and dirty method - smaller pension is about £2,500 less (ignoring tax)

Difference in lump sum is around £30,000

30000/2500=12 years

Ah ok thanks !

I’ve been advised to take the larger lump sum but everyone’s circumstances are different. I’m not married and have DC so if I died shortly after retiring DC would still get the lump sum whereas the monthly pay outs just stop. Obviously I will need to make sure I can live on the monthly payments though.

@Halliabaloo that sounds awful
I've got long covid. Recovering but not 100% yet. I work in a busy stressful environment which is not conducive to good health ! I probably would have worked a few more years tbh but the way things are it's not worth the risk. One shift a week is ideal for me. My dp is self employed and his private pension is pretty rubbish. I'm lucky that I received a substantial inheritance which I've invested and is doing very well.
I'm probably moving towards taking the larger pension at the moment.

I’m sorry to hear that, Suzy. 💐
We feel dh’s condition was accelerated by having Covid. Are you investigating a compensation claim? The unions are taking expressions of interest if so.

I'd be looking at outgoings. Could you manage comfortably on the smaller income? If so then I'd take that and the lump sum.... Maybe. Do you need the bigger lump sum? What would you do with it?

My dad took the smaller lump sum and died a few months later unexpectedly. Obviously with hindsight the larger lump sum would have been better for him.

@Halliabaloo I caught off dp rather than at work. Worked the whole pandemic then caught it end of november. I was also having investigations into a condition which covid then made worse.
@CovidCorvid couldn't really manage on the smaller income to be honest. I think the decision really has been made for me !

Remember to factor your spending habits into your decision. I would have been better off to take the big lump sum because it’s tax free and it would take 18 years to break even. The thing is, I am a spender and I knew I’d go through it in a few years and then have to manage on a smaller income for the rest of my life. I went with no lump sum and bigger pension and that was right for me. It isn’t just the sums, think about factoring your personal spending habits into your decision.

I would also take into account things like any house renovations that may need doing

I have recently cashed in a private pension which would have given me a grand total of £450 a year as a pension

After tax I came out with just under £12,000. Its paid for a number of essential repairs to the house - roof, garden fencing, some plastering, electrics, new garden shed, insulating and boarding the loft, plus some badly needed pieces of furniture.
I would never have the money available to do all the works without taking out a loan.
But I’m future proofing the house, I have a civil service pension in 4 years when I’m 60. I will use the lump sum for a new bathroom and kitchen, replace white good, any other essential repairs at th time.
There will probably be enough for a blow out holiday as well.

If you can’t manage on the smaller monthly amount then for me it’s a no brainer and I’d take the smaller lump sum and the higher monthly payments.

I retired early at 55. I took the larger lump sum and smaller monthly payment. I worked out what I needed to clear my mortgage and credit card and leave me with a nice bit of rainy day fun money. Without my mortgage payments and credit card payments I was almost £800 a month better off than when I was working and commuting.
I still do one or two shifts a fortnight and that keeps me ticking over nicely. Life is so much better and I feel so much better.