Pension advice

[Jojoanna]

Does anyone have any advice re pensions. I can take my company full pension or reduced pension with a lump sum. I don’t know which option is better ?

What would you do with the lump sum?

Would you be able to live on the reduced pension amount?

Yes I could live on the reduced pension , I don’t know be nice to have some savings

I’m about 20 years off but I intend taking the lump sum - I have an abject fear of dying soon after retirement and the investment going to waste.

I’m 63 so I’m thinking 15 years worth Is probably all I need if I’m optimistic

If you invested most of the lump sum, then you could probably get a better return on the money than the pension provider pays you. That is very generalised though, as it would be dependent on fund performance and fees.

Is it a Defined Benefit pension?

The lump sum would be tax free. I will definitely be taking it. I plan on spending it all whilst I'm in my sixties and hopefully be well enough to do so!

It also depends on of you already have saving or any debts...you don't have to take the maximum lump sum.

Generally people tend to take some as a lump sum.

The Pension Advisory Service and Pensionwise have free pension advice too.

Chatting with Pensionwise is a good idea.
About to enter retirement is a good point to get professional advice - consider seeing a financial planner.

Thanks everyone

I would take the lump sum. I think it’s a good idea to split your retirement into phases.

Early retirement phase.
From 65 (67) to say 72 I will hopefully do some travelling and get any major house repairs done or move. This is when I will need the most money.

Mid retirement
From 72-80 I would still like a certain quality of life with holidays, eating out, theatre etc. Less likely to make large purchases.

Late retirement
By 80 I imagine I might be more content to stay closer to home and would probably get by with less money.

There is so much terrifying advice on here.

1. I can appreciate why it might feel smart to have it in "savings" but in reality you have it in savings anyway. Your pension is savings - invested in an appropriate way for your age.

2. someone said take it out and invest it. Bonkers. If you want to invest it for returns - you can go into drawdown and change the investment allocation. You can have it invested however you like (identical to if you withdrew and invested) but without attracting transaction fees.

3. yes it is tax-free, but you don't lose those tax free advantages if you spread it out. Your pension income is taxed at your marginal rate so it makes FAR more sense to spread the tax-free allowance over retirement to reduce your overall tax. Rather than taking all the tax free in year one and then paying at a much higher rate thereafter.

Please go and see Pension Wise. It's free and they are very smart on the tax implications. If your pension pot is significant please see an IFA. Please don't withdraw and leave it in the bank as you will lose against inflation and please don't withdraw and invest as you can do the exact same investments within drawdown without paying hefty fees.

Current savings rates are poor, less than 1%

If you can afford

I would take the lump sum & spend it on some good times, fun & the things that you enjoy ! Hopefully while you have health & energy. Take lots of photos, so that you can look back

The poster who said 80 & less money would be needed. It could be the opposite, where more money is needed ! This is where the rainy day fund would need to be spent

None of us know how long we have or if we will make it to 80

I will get some more advice, it is a (now closed )final salary pension so not a drawdown .

If it is a final salary pension then you need to understand the “commutation factor”, ie how much lump sum you get for each £1 of pension given up. Some schemes have factors as low as 12:1 (£12 lump sum paid out per £1 of pension given up). That’s very poor value for most people, even given that it is tax free, as most can expect to live long enough to make the pension more valuable overall.

But, if you need (or want) the cash lump sum then it might be a price you feel is worth paying to pay off debt, buy a car, holiday etc.

There’s no “right” answer, but you should understand the pros and cons of each option before you decide.

The commutation is every £1.00 you receive a certain amount of cash

Op, please tell us if it is a defined benefit or defined contribution pension.

It sounds like you have a defined benefit pension (but could be wrong) and will be sacrificing yearly pension which is index linked (inflation proofed) for a lump sum, which you have no specific plan for.

Remember, inflation erodes the value of a lump sum sat in the bank. So that chunk declines in value, plus you have less per month, ossiblynfir 25-30 years to live on. Often the commutation amount is 1:12 meaning you give up £1 of pension for each £12 you take. It’s not a great rate given how long most live.

The time it can be worth taking the lump sum is particularly if there is a chunk of mortgage to pay off, so it can mean there are no housing costs to come out of pension. Or so sometimes people have a plan for retirement such as buying a camper van and travelling or doing a big building project or giving their child a big chunk of cash towards property. These specific plans for the lump sum mean it get spent before it’s eroded and achieves a particular goal. As long as it doesn’t reduce the regular pension payment so it’s hard to live, it can be very valid.

The last time when it might make sense is if a pension pays out before all pensions payout and you need to ‘bridge the gap’ for example to state pension when you will get another £9k if you qualify for full state pension. Sometimes people know they will be well off at 66/7 but the pension they get at 60 won’t be enough to live and they really want to stop work. The lump sum can be used to add to the pension already being achieved and split between the 6 or 7 years until the rest of the pensions payout, meaning stopping work at 60 is possible, rather than needing to work longer. This too is very valid.

Don’t take a lump sum just to have some savings for no specific purpose. And make sure you understand the nature of your pension and how it all works. Don’t cash in a defined benefit pension for a lump sum without getting some advice....you could lose out significantly.

It’s a defined benefit pension , I don’t have any specific plans for a lump sum only that my savings are quite low

I have 32 years defined benefit pension accumulated in a scheme now closed. It will pay nearly £15k a year from 60 but I also get a tax free lump sum on top of around 43k.

I can adjust the figures and take a larger lump sum and lower income or a part index linked income in exchange for a higher income at retirement.

Maybe the OP gets some lump sum anyway without reducing the pension?

Yes, it’s likely if she was in the pnesion before about 2007 there is some automatic lump sum. If she joined after that, there probably isn’t an automatic one but you sacrifice some monthly pension to get one. Unless there is a specific spending requirement most people,e benefit for the higher monthly pension payout.

We could give OP more useful info is she tells us about the pension, when she joined, the normal pension age within it etc.

I joined 1997 the scheme closed in 2013, there is only the option of a lump sum if I take a lower pension. Normal pension is 2023. I think I may take the higher pension .

There is also a 3td option with a transfer value,, but I haven’t considered that at all because I’m a bit wary ,

The transfer value can be a good idea for some people (especially if you don’t require any spouse’s benefit), but you’ll need to take advice to see whether it is right for you.

It usually results in a higher lump sum, though, as insurance company commutation factors are cost neutral (ie they don’t profit from you taking a lump sum).

@wombatchocolate that's a very helpful post. It answers questions I had