lump sum or small annual pension option?

[OzHopes]

If anyone could advise/give opinion that would be appreciated. My husband is 61 and he has a pension option from a short job many years ago which has given 3 options:

1. £350 per Year with £1000 lump sum
2. @£310 per year with £1900 lump sum
3. @£7000 lump sum with no annual pension

Which is best to do ? The annual pension gives just £25-29 per month or by putting the larger lump sum in a savings account would probably have @£350 in interest per year.
we’re pretty clueless about pensions and investments so not sure what is best. We’re mortgage free and working full time, our joint pensions are fairly modest (@£9900 per year each if we retire @63) due to various jobs and part time hours over the years.

Take the lump sum and get the best interest you can on it, you then also have access to the £7,000 if you ever need it.

Yes I would take the £7k. The annual pension is too small otherwise to make any meaningful difference.

The other option is if you don't need it now leave it where it is - you can still take a lump sum any year and if it is 25% of the total will be tax free (any more than that you pay tax so don't take it all out in a year where you are earning over the tax threshold - wait till you have a lower income year)

Fundamentally you need someone who knows what they are doing to review things for you

Thanks all for your quick responses! My feeling is putting it in a savings account to earn interest but @RB68 mentions tax issues and then I don’t know what is best, we’re higher tax payers just now as each earning @£50k. My husband is reluctant to pay for advice as he thinks it would be very expensive - we’ve taken a long time to get to this financial position so never had spare money and just building up savings now so every penny has been a prisoner over the years !
Not from backgrounds where anyone had savings /investments etc so feels a bit overwhelming and while I try to read about savings etc, I don’t understand much of it beyond high interest savings accounts. So tax implications feels beyond me right now, will have to explore getting some advice I guess.

You can earn a thousand interest before you pay tax.

He would need to live for at least 17 years to make it to 7k, plus factor in inflation.

Take the 7k and chuck it in an ISA, all tax free, current rates can be as good as 5%.

I had a choice of pension payout plus pension and choice the bigger lump sum.

I was in this exact position a year ago at age 60, a pension of 450 ish a year, or a one off payment of approx 8k, with first 25% paid as a tax free lump sum.

I took the latter option, but I do have 2 other final salary pensions which will pay around £12+ between them, some DC pensions and decent savings/investments.

I also have already stopped work, so was able to adjust my personal pension drawdown payments for the year so that I didn’t pay any tax at all on the one off pension.

@RB68 is correct in that he will pay tax on 75% of the payment, but depending on how much over 50k he earns, could he pay more into existing pensions to reduce his tax liability?

It may not be possible to defer payment, mine didn’t give me the option.

Also, what would happen if he took the ongoing pension and then passed away soon afterwards. Is there a widows pension, and if so, how much?

Thanks Vicky, that’s helpful. We’re in scotland and on the higher tax bracket, he earns @£48k, I’m a little over the £50k. What would be the tax % on the remaining 75%? Would it be our usual tax codes which I think is 46% or would it be the 20% (?) as it’s a lower amount? Forgive my embarrassing ignorance !

I think you would pay the higher tax rate, the one off payment would just be added to his normal income, so he would be taxed on 48k (less deductions) plus the lump sum.

I don’t know anything about Scottish tax bands, but in England if you earn just above the 40% tax threshold, you can pay extra into a pension and bring it down below the threshold.

The moneysavingexpert site has some very knowledgeable people, maybe start a thread in the pension section, but also include his salary and that you are in Scotland, ask for advice from someone with Scottish tax knowledge.

Thanks @mynameisVicky that makes sense about the tax, i guess it lowers the lump sum amount quite a bit. We have an old ISA with only £1400 in it so may add it to that or look for a better performing one. Thanks, I will look on moneysupermarket - used it a lot over the years but not looked at the pension or investment sections.
You’ve all been really helpful, thanks :)

Just one observation - Option 2 looks very good value compared to Option 1: almost double the lump sum for very little loss in pension!

Which is best is a personal decision to you, really, but all I would say is that if it were me I'd be choosing between options 2 and 3 and disregarding 1.

Sorry, I missed the point that tax would be payable on £5,250K of the £7000 - I was thinking that 7K in an ISA could easily get more than £300 per annum interest at current rates which would be tax free.

While that sum on its own doesn't sound like it merits financial advice, if you're looking at both retiring at 63 and he's already 61, it does seem worth either seeing an IFA or reviewing your current pension savings and others, and making more use of ISAs/other tax free savings as well.

Seconding the recommendation for Money Saving Expert pension forum.

Is the annual pension indexed to increase with inflation? This makes it potentially more attractive as the lump sum will lose value in real terms over time, whereas a rising pension will keep its buying power.

High rate tax payers are limited to £500 interest not £1000