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!!

Hi again. Okay, so I found out that my pension is a Defined Benefit Pension. So PP are correct, it doesn't run out.

If I compare the sums :

A) Age 55 - take £70k and £880pm - invest the lump sum and the monthly payments for 10 years and don't touch.

Using a compound interest calculator, and an interest rate of 3%, at the end of 10 years, there would be £217,427 in the account.

B) Whereas, if I waited until age 65 to take anything, the projection is £122k lump sum.

Can anyone give me a good reason not to proceed with Plan A?

Are you competent with spreadsheets?
If so then make one and look at info graphically.

How do you mean?

One which shows on basic figures when the crossover point is between earlier but smaller payments and later but larger ones.

Check you can still pay into a pension while withdrawing from another.
Have you factored in that your pension pot will increase in value over the next 10 years and so the 25% tax free amount will also be bigger than currently predicted. So e.g. if you apply the 3% annual growth to your total pension pot how big will it be in 10 years?

Ah, two good posts with very good points - no I haven't done that. Back to the drawing board!

@pensionsums I think you have two threads running.

If you are still working you will pay tax on your monthly pension. It maybe 20% or 40%, that reduces the net pension to save.

I agree you need to do a spreadsheet with all the variables.

If it’s a DB pensions tend there is no pot.

I’m being thick here, but how can I work out how 3% inflation on the pension changes the projected figures?

It’s saying £122k lump sum in 10 years time. Do I add on ten lots of 3% and assume that in ten years that’ll be the new figure? Argh!

Is this a dB (defined benefit) pension or dc (defined contribution) ? I suggest you listen to the meaningful money podcast he's got really clear explanations on pensions and investing. He gives out loads of information and says mist people can manage their own money, but he says if anyone should take advice, at retirement (or when planning retirement) is the best time. A good financial planner could really help

It’s a defined benefit pension

I think your 3% return is over generous. Currently the highest rate is 3.8% in the highest paying account. The calculations for inflation significantly reduces this. Interest rates are on a high at the moment but are likely to fluctuate greatly over the next decades.

What you're proposing is not tax efficient. Your monthly payments will be treated as income and taxed. If you put the payments in savings or an investment fund than that will also be taxed.

The idea behind defined-benefit schemes is that you retire and then live off it. That's why the pot never runs out as it's guaranteed income for life.

If you take it when you retire then you don't have any other income so most or all of the pension falls in your tax free allowance.

You should also understand if the dB pension has guaranteed inflation increases, this could protect the income as opposed to you investing and hoping to get a return.

Another factor, do you need the cash to use for holidays, pay off mortgage, gift to children?

No I don’t need the cash right now. I’m trying to extract the most from it that’s all.