Anyone good at maths who can help me please?

[pensionsums]

Hi everyone. I'm hoping that someone who is good at maths can help me here please. I have just turned 55, and can now take my private pension should I wish. I no longer work at the company it's with (I am now self employed).

I've seen all the figures, and as you would expect, the later you take it, the larger the sums become. But I've been using a compound interest calculator, and it looks to me, like I can get the best return on the money, if I take the lump sum now and invest it, and add the monthly payments to the same account. But I'm not the best at maths and would love some second opinions please!

The figures are as follows :

Pension pot = £308,646

Age 55 : I can take £67,866 lump sum & £848 pm

Age 60 : I can take £95,089 lump sum & £1037 pm

Age 65 : I can take £119,547 lump sum & £1371 pm (after tax)

I realise that once the pot is empty, that my monthly payments will stop. By my calculations, that would make me between 75 & 78 years old.

Running these figures through a compound interest calculator, it seems to me, that I am better off taking it now and investing, because if I opened an account now and invested £67,866, and added £848 to it every month, then by the time the pot runs out, I would have £472,516.

Whereas, if I waited until 65, and invested the lump sum of £119,547 and then added £1371 to that account monthly, then by the time the pension pot runs out, I would have £353,375 in the account.

I have used 3% as the interest rate, which seems quite conservative.

I realise that this is perhaps simplistic.

Can anyone tell me if I am talking sense, or point out anything I am not getting?

Thank you!!

You say your monthly payments will stop when the pot runs out. Are you sure that's how it works? It's not a monthly pension for life? What will you live on then? And what will you live on between now and then, if you are going to be saving all your pension as your OP suggests?

I would suggest talking to a financial advisor to get the best advice not random people on Mumsnet. Sorry to be harsh but you need to do the right thing for you and not worry about that a hundred other people would do. No one else knows your situation but if you get a good registered financial advisor they will be able to advise you based on your exact situation and help advise you re investment for the tax free lump sum you are planning to take.

You'll need to be spending that money to live though so how does that work unless you've had a massive windfall.

I agree with both previous posters.

1. surely the payments are for life, not until the money runs out
2. get proper financial advice

You really need to speak to a financial advisor. There are all sorts of tax implications and tax efficient ways of reinvesting your money. It also depends on your personal circumstances and requirements. We never know how long we are going to live either!

The money in your pension pot isn't simply sitting as cash. It will also accrue interest. There's no particular reason to assume that investing the money outside the pension pot will generate a higher return than the money being invested inside the pension pot, but that's the only way you can get the result you've shared.

Often the illustrative scenarios on these things are presented in inflation-adjusted pounds, so I think the key thing you've done is to neglect the likely rate of inflation when calculating how much money you would have after investing your pension payouts.

This means you're comparing inflation-adjusted figures with nominal figures and the nominal figures will naturally look higher.

If you run your calculations again, with a 1% return after inflation, then you likely will see a different outcome.

I agree with the previous comments, and also think that as a single investor you might be able to get a higher return, but overall you are less able to manage risk and are more vulnerable to loss than a pension fund would be.

Sorry but you have completely missed the way pensions work. And the figures at 60 and 65 are estimated. Your pension pot does not run out.

What do you mean until the pot runs out? Are you sure that's how it works.

The monthly payment after your lump sum is until you die isn't it?

😖😖😖 as someone who works in financial advice but not currently as an adviser please visit www.unbiased.co.uk and find a suitable independent financial adviser. You don't appear to be taking any tax implications into account either which is worrying.

Of course a pension pot can run out unless it's an annuity or final salary.

You are also ignoring any increases to your pension and any spouse benefits etc.

Is it a defined benefit pension? It sounds like it. If so there is no pot.

The figures quoted appear to be an annuity on retirement. They don't run out. Payable for life and possible have a spouse benefit after death.

Yes but she hasn't taken an annuity yet.

Of course a pension pot can run out! If you take everything out of it, there's nothing left. If you buy an annuity then that's different, but as OP talks about running out, I assume she's not planning on doing that.

The money in the pension pot will continue to grow (interest) as you are taking stuff out. So the pot will last longer than your calculations suggest.

echo the others who say you need to see a financial adviser

also, why would you be taking money out of your pension pot and then investing rather than spending it? what would you live on?

How is the pension currently invested? How do those returns compare to investing outside of the pension?
If you are investing out of a pension will you be liable for tax?
What annuity could you buy with your pot?
Is an annuity right for you?
What income do you need to maintain your lifestyle?
When and what state pension will you get and how will that impact what you need to take from your pension?
What are the tax implications of the monthly payments from your pension?
How is your health, are there any factors that would indicate you won't live into your 80s & 90s?

These plus more would be questions I would be asking an financial advisor.

There's no one right answer. It a decision that needs talking through with someone that knows the ins and outs of your pension and situation.

Thanks all. To answer some questions.....

I have consulted with a financial advisor. She is away to look at everything and then we will meet again. This is just me thinking in the meantime.

I am still working, and will most likely do this job until I'm 70 (it's very easy and I can take the winters off, if I want to). Income from this job is circa £3k per month, which is why I wouldn't need to touch the monthly amount that came from the pension.

I am married. DH will be retiring in 3 years, and will get about £900pm from his pension. Very stressful job, so he is adamant he's getting out at 55.

Obviously once we are 67, we will get £1700pm from our 2 state pensions.

Things you also need to think about are;

Will your monthly pension rise with inflation? Do you have any debts (because it might be better to pay them off, but not necessarily).

Your OP suggests you have a defined contribution private pension, not a public sector one. I assume this because you say your pension will stop at some point. So you need to know about the pros and cons of buying an annuity or not.

Taking cash and investing it yourself is only a good idea if you think you can make a better return than your pension scheme or annuity provider. It can be a burden managing large investments.

So tasks for you are: get clear what type of pension it is and what ALL your options are. Think about debts. Speak to a financial advisor. And don't be naive when dealing with a financial advisor.

Apart from everything else that's already been said, keep in mind that the lump sum is tax free but the monthly amount is taxable. So you won't save the whole £800-odd. If you retire later, the tax free amount will be larger and you may pay less in tax if you wind down your self-employed work. You will also pay tax on your investment returns if not in an Isa. You really need someone to do the numbers properly.

This. There’s no reason to think your money will grow more outside the pension than inside it (if it looks like it will, that’s because you’re using a calculator with different assumptions or that doesn't take account of inflation) and by taking money out before you need it you reduce what you can take tax free.

Wait and talk to your financial advisor. I think you are misunderstanding the monthly figures. These will either be based on you buying an annuity or taking a drawdown and not planned on "running out". Your 3% assumption is not taking inflation into account.

You might be able to take a lump sum tax free but any income you then earn from it will be taxed at your marginal rate - presumably 40% if you continue working. The monthly payments would also be taxable.

You'd be better off leaving it invested inside the pension wrapper if you can live off your self-employment income and are going to continue working.

Some other scenarios to mull over

Just because you are entitled to take at 25% doesn't mean you have to and doesn't mean you have to in one lump sum.
My parents are taking their 25% out over a couple of years so they can move it straight into ISAs maxing out their entitlement each year.
One option they have looked is only withdrawing the interest the pension pot is making to live off. For their outgoings this should be sufficient and means they still have the pot should their needs change and their outgoings increase - for example one of them needs care.

Be careful with retiring at 55 it can impact your state pension. My mum retired and had to buy years to get close to a full state pension. She had some contributions as part of carers allowance. Check the calculator online and whether your state pension is predicted based on continued employment between 55 and 67 or whenever it can be drawn or not