Teachers Pension - Automatic lump Sum or Larger Lump Sum and Smaller pension?

[crimsonlake]

Hoping for some advice as I am very close to taking my teachers pension at 60.
I have the choice of taking an automatic tax free lump sum and the highest pension annually, or a larger tax free lump sum but a smaller pension.
The total annual pension amount is only in the region of 7K since once I had children I worked on supply and never paid in to my pension again.
I currently work outside of teaching and will need to continue working until state pension age.
My salary combined with my pension would obviously mean I will have to pay more tax on the total amount. This will not put me in a higher tax band.
For this reason I am pondering whether it would work out better financially if I were to take the larger lump sum which would be an extra 15K and reduce my pension by up to 2K so as to avoid paying more tax on the totally amount for the next 7 years?
Some ex colleagues have done a mixture of things. Some have given up work completely and have taken the full pension and smaller lump sum, but then again are in the position not to need to work again.
Others have taken the larger lump sum as they have used this to pay off their mortgages.
I am single, own my own home mortgage free and have some savings.

Depends really, with additional lump sum and reduced pension you'd be worse off if you lived beyond 67 (a distinct possibility as female average life expectancy is 80+y).

If you want to minimise your tax bill you could reduce your hours in your current job and top up your income using your pension.

You might be able to leave it to accrue for another few years if you don't need the cause yet (I'm not familiar with teacher pensions so could be wrong on this).

Thank you GirlsonFilm.
I never thought about decreasing my working hours, but that would not be an option in my role.
Wading through lots of information this weekend and it appears once you hit 60 and no longer teaching you need to take your pension as it does not increase any further. I would love it if someone came along and told me the opposite was true.
I have just done an income tax calculation online and it appears to be telling me that on the combined amount I will be paying over
£2,200 extra annually in tax and national insurance.
So over the next 7 years I could be looking at losing 15K which is the same amount as what the larger lump sum option is not including the automatic lump sum.
Such a dilemma.

Don’t forget that it’s not an absolute sum. The pension you receive will go up with inflation. Do you need the larger lump sum now?

Oddbutnotodd, thank you for responding.
Yes and no really, as previously said I have to mortgage, but I downsized through divorce a couple of years ago and to an area I have never really settled in. Ideally I could use the larger lump sum to purchase another house mortgage free in a nicer area.
That would be putting the larger lump sum to good investment use I think. Moving to an area where house prices since I initially moved to where I currently am have shot up in value.
I could do work on my current property, it needs a new kitchen and bathroom. However I do not see it as a long term home and in this area house prices have hardly increased since I moved here.

There’s no right or wrong answer as it all depends on your personal circumstances.

The commutation rate is £12 to £1 which means that for every £1 of annual pension given up you get £12 lump sum. This is a common rate in the public sector but is actually pretty poor. What this means is that if you live longer than about 15 years after retirement you will be losing out. The longer you live, the worse off you will be.

However it’s not always that simple because many people benefit by paying off mortgages and saving themselves the interest.

For others, they would rather have the lump sum when they’re a bit younger and able to enjoy it rather than having a higher pension when they’re older.

Personally, if I was in good health (so expected to live longer than the 15 years I mentioned) and didn’t need the lump sum to pay off a mortgage then I would take the higher pension, because I would be better off overall.

But it’s really up to you. Sounds like you have a plan for the lump sum so that may be the best option for you. Just have a think about how you will replace the income that you will be giving up - can you replace that from elsewhere?

When I say replacing the income, I mean long term - obviously you’re still working now which will make up the difference, but what happens when you stop working? How long will your savings last?

I know you say that the additional tax you will pay will probably be about the same as the additional lump sum, but you need to think long term. How much income would you like to have when you’re ninety and where will that come from?

There is a pensions talk forum on Money Saving Expert with lots of knowledgeable pension experts on. It might be worth posting in there?

I think something has gone wrong in your tax calc/reasoning. Yes, the 7k pension might mean 2.2k per year extra tax each year (although to me that looks low), but a 5k pension will still attract around £1.6k of extra tax (being 5/7ths of 2.2k) on those numbers. An extra 2k of pension simply can’t mean 2.2k of tax, it is more like 600.

The 12:1 rate is really poor, and from a purely financial angle it would be foolish to take it, even tax free.

I took my pension 6 months before my 60th birthday - you need to be careful because of you take it at your NPA you will be limited as to how much you can earn as a teacher. You are limited to earning no more than your pension plus your income combined than the salary of reference you will get on your pension statement. Taking it earlier stops this happening, so for 1 year i got my pension plus my full time salary. Yes, I ended up paying tax on all my income as my pension was almost equal to my tax free allowance.
I took my lower pension and extra lump sum - about £39k extra. Paid off my mortgage, did some jobs on my house and saved the rest. I now work part time as a teacher.Don’t pay pension, very little NI, but pay 20% tax on all my earnings. If I remember, the actual calculation was something like 17 years before the balance tips from being better off with a higher pension / lower lump sum to better off with a lower pension / higher lump sum. By then I’ll probably need less money to live on (I’ll be 77), and have my State Pension to supplement my teacher pension.
Pension reduced by = £3k PA, which would have been taxed £600 pa so net = reduction would be £2400 - ie £200 pcm.
Mortgage paid off 5 years early = saving payments of £500 pcm x 60 months - £30K but due to saving interest only cost me £23k
I’ve not actually touched my regular lump sum, its in 5yr fixed bonds, and live very well off my smaller pension plus part time earnings.

How secure is your job? If there's a risk you might lose it (and obviously you don't know if you'll remain healthy enough to work until 67 either), then would the lump sum plus monthly pension and other savings be enough to live on until then?
The £7k per annum alone wouldn't be enough.

I would have said, two years ago, take the smaller lump sum and keep the pension pot. Then DH died, a year after taking the minimum lump sum himself, and not having had the time or good health to enjoy it after working all his life. The pension scheme wouldn't pay me a lump sum benefit as his widow and I pay 40% tax on the pitiful monthly sum I get as his beneficiary. Take the higher lump sum, enjoy yourself, you're a long time dead.

Thank you all for taking the time to comment :)
ChessieFL
In my mind I have a vague plan about moving, preferably detached :) where I could throw all my savings including pension lum sum at it.
I could then with my salary and pension combined spend the next several years building back up my savings.
Once I stop working I will still have my small annual teachers pension combined with my state pension. Living alone I imagine I will get by.
I have always lived carefully, but of course not having a crystal ball who knows what the future holds job wise? I think my job is quite secure, but you never know.To be honest working in the same role for the next several years does not appeal either.

Lightsabre, I have registered to do exactly that on Money Saving Expert, but am waiting for my account to be authorised before being allowed to post.

Slipperylizzard, I entered the calculations in to the Money Saving Expert tax calculation? I was basing it on a combined income of £24K

Soontobe60, I understand it is a personal choice depending on your situation. I should have started looking in to this a lot earlier rather than leave it until the last minute.
I suppose realistically I am thinking why not take the extra lump sum tax free now rather than receive it over the next several years and lose the equivilant of it in tax over that time.
Sorry to all if I am not articulating myself well but I find pensions so confusing.

Teenytrees, something which I have considered if I lost my job or could not continue to work through ill health....The 7K full pension would cover my bills and yes I could eek out my savings, but I would be living very carefully. If I took the reduced amount it would be even harder.
I do have a SIPP pension, which I can take 25% of tax free, I have not recently checked it's value but last year I think it would have yielded me another 7K . The rest I would need to take as an annuity and it would probably cover the gas and electricity bill.
I also pay in to a pension at my current workplace which if I last several more years wont amount to much more than a few thousand lump sum.

AndNoneForGretchenWieners, I am sorry for your loss, such a shame that your husband did not live to enjoy his retirement. My son;s are my nominated beneficieries and I can see it is not a great amount.

There's a good article in the February edition of Good Housekeeping where a financial planner says think of your pension in 3 stages - the first for travel and fun, possibly grandchildren next and then maybe ill health where you can't do much .
I'm facing a similar decision and timeframe OP but with a bigger pension and lump sum and it's such a big decision about how to slice that cake.
One thing I do know is that I want to enjoy the next 10 years (God willing) to the full and while I will need to budget, I don't want to scrimp on the fun stuff either.
Once you've made that decision, then forget about, don't have any regrets and enjoy yourself!

Teenytrees, thanks I will take a look at that article.

Get someone to look at the figures for you. It is unlikely that you would be paying an extra £2,000 in tax if you are only receiving an extra £2,000 in income.

Do a few scenarios and see how it makes you feel.

You talk about investing in property for its possibility of increase in value. If it were the place you wish to live in for tye rest of the life, this increase in value would not benefit you financially, it would however benefit your quality of life so for that reason, might be worth doing.

Good luck with your decision making.

ChateauMargaux, thanks.
It would be an additional £7,000 on top of my income.
Good point about the quality of life rather than an investment.

So you would receive pension of £7k, no lump sum or £5k with a £15k lump sum.

The relevant calculation is that you pay tax on an additional £2k at 20% so you will receive £1,600 per year (you don't pay national insurance on pension income) having forgone the £15k

If you live for 9 years (15,000 /1600)after you start receiving your pension, you will break even, after that, you will gain.

ChateauMargaux thank you.
£7k pension and an automatic lump sum of £19k.
Or the automatic lump sum of £19k plus an additional lump sum of £15k with a smaller pension of £5.5K.

With this, I’d personally go for the bigger pension unless there is a debt to be paid off with the lump sum, or something you’ve longed to do in retirement such as buy a camper van.

Lump sums are quickly eroded by inflation, whereas your monthly pension will be index linked. You already have an automatic lump sum which you can save/gift/ use for a bigger expenditure. Having a bit more money on a mo they basis, especially until your state pension kicks in, strikes me as useful, even if it won’t add a huge amount each month.

However, some people use the lump sum to bridge the gap to another pension paying out. So, for example, if you have a 5 year gap between getting your teacher pension (which won’t be enough to live on) and a private pension or the state pension paying out, you could use the £15k extra lump sum to give you £3k more per year....so you use it for short term income. That makes sense for some people, alas though your automatic lump sum could be used for this purpose, but if not enough, you might want the extra too. Given the state pension could give you £9k extra per year, it can be that you won’t ne3d the extra £1.5k that the teacher pension generates per year.

You need to know your ‘number’ of how much you need to live on. Look at the various phases of retirement up to state retirement age and how much you will have at each point. You might run down a lump sum on living costs up to state retirement and then the state pension added to the teacher pension is more than you need and some of the state pension is saved to replenish a pot of savings. It’s a case of jiggling about income and lump sums to fund your lifestyle and give you the buffer you feel you need for security. Planning ahead gives you more options and often means you find you can retire sooner than you might think.

WombatChocolate , thank you.
I did indeed just take the automatic lump sum but still no decision made regading investing it in some way as it is still sitting in my bank account.
As for using some of it to move home or make home improvements on my current home I am still torn.

Crimson, glad you decided.

It’s hard to get a good return on the lump sum at the moment and inflation will be exceeding that return in all likelihood. So it’s good you didn’t take more in that form, if you don’t need it right now. The monthly pension will be index linked and rising over time, rather than than having its real value eroded like your lump sum.

I’m not sure if you’re retired yet, it using some of that lump sum for your living expenses rather than drawing on other income which might be taxed, could be a good idea. Totally depends on your financial circumstances.

WombatChocolate, thank you again.
I am still working outside of teaching and expect to do so for another several years, but am in receipt of my TP as soon as I reached 60.
I need to do something with my monthly TP as I can live quite comfortably on my salary, currently living on my own and mortgage free.

You could try ringing Pensionwise which is a government run pension advisory service. They are very helpful.

Viviennemary , thank you , i have spoken to them previously when I was trying to decide between the TP sums and I agree they are very good.