Help needed - TP pension decision

[Lilyargin]

I have to make a choice and cannot reach a conclusion. Have asked for IFA help but not got anywhere as they all say ‘it’s up to you’ - which I know it is but I want some kind of Martin Lewis to tell me what to do. These are my options:
£27 ish tax free lump sum + annual pension of £9,167 (so £763 pcm).
This monthly sum is liable to tax.
OR
£49,324 tax free lump sum + annual pension of £7,367 (so £613 pcm). Or anything in between - these are the two extremes.
The commutation rate (exchanging annual pension for lump sum) is 1:12 ie £12 of tax free lump sum for every £1 of annual pension you give up. I do not understand this at all but everyone says this is not good commutation rate. Obviously all this depends on how long you live. I know if I live for more than 12 years I will get more but maybe if I had a bigger lump sum I could invest it and make more in the long run. Also no-one knows how long they’ve got.
Also, how often do you get tax-free money?
Really need help!
Thanks for reading if you’ve got this far.

OP - you say you wish there were no choice as you're so scared of getting it "wrong". Would it help if you think of it as no wrong choice, just two good options?

Either you take £27k lump sum and a pension of £9k pa (which I assume will increase by inflation every year). Hurrah! That's a good place to be in.

Or alternatively you take a bigger lump sum and a smaller annual pension. Hurrah! That's also a good place to be in.

The reason why I'm not planning to take a 1:12 lump sum from a scheme I'm in is because I don't need the bigger lump sum and I'm hoping to live longer than 12 years. If my health was poor or I needed the lump sum to pay off a mortgage etc, I'd obviously make a different decision.

I'd suggest you go for whichever option makes you feel most comfortable.

please note that only a lump sum of 25% of TPS pot value can be taken tax free if you can a larger amount it is treated as taxable you need to check this out
generally there is an age at which it tips to being better to take larger pension
reasons for taking larger lump sum, paying off a mortgage or other kind of debt, if you die earlier than average more for your family but if applicable widowers pension also lower,

reasons not to if anyone is likely to spend it too quickly or see it as cash rather than a savings pot to last the rest of your life,
if you are in good health at 61 the average life expectancy as a woman is over 23-25 more years look at your family medical history etc of course tomorrow isn't promised to anyone
also another factor is are you single or with a partner and how much is their pension likely to be do you have other savings
There is no point in taking a bigger lump sum for it to go in a standard savings account as it will only just keep up with inflation
if you are not comfortable investing in a stocks and share ISA you can do a whole market tracker so it follows FTSE 100 rather than picking funds
om average stock market makes 8 % a year over decades so if you plan leaving the money invested that's great if you might suddenly need to wihdraw 10K you might be at mercy of the markets

one way would be to find out exactly what mortgage balance is; what penalties there are for paying it off in one go if any and taking exactly that sum as a lump sum

do you have separate savings for things like a new car house maintenance etc

an extra 27K would need to be at around 7% to give you the missing £150 a month however if you wiithdraw that each month it will stay at around that as the lump sum is not compounding to beat inflation

There is no right or wrong answer it depends on your attitude to risk and whether you are at heart a spender or a saver and what other funds are available to fund retirement have you had a inheirtance are you likely to get one etc

Thank you for this OP - I'm 15 years off retirement yet but at the point where I check my pension forecast regularly! I feel woefully ignorant about the choices, so this has been really helpful.

If you take the higher lump sum you will have £22k more. To make up the lost £150 on your monthly pension you'd need to invest it at over 8%. This is very simplified and doesn't take into account the pension rising annually or that you will still have the £22k.
I'd take the £27k and the higher pension but cannot advise you as I am not a financial advisor.

I would take the smallest lump sum, that commutation factor stinks especially at age 61.

But as others have said, if you have a desperate financial need for the extra cash (high interest debt etc) then that might make it worth taking a higher lump sum.

Thanks again everyone. I don’t have any debt apart from the mortgage and I’m not a big spender. I’m quite careful with money but I just like the idea of having a more generous pay-off after the blood, sweat and tears of teaching and investing it and getting a good return - making the money work for me.
I have watched the Martin Lewis programme on investing and have spoken to an IFA about it (who wants £1K a year to manage the investments)
That’s what I want to do but when I read people saying ‘that commutation factor stinks’ I get scared, @SlipperyLizard
I’m hopeless at decision-making.

It’s just the pull of tax-free money too.

A £1k per year to manage £49k sounds ludicrous to me.

But @Lilyargin it isn’t a “more generous payoff” if you live more than 12 years, for the majority of people it is very poor value (some schemes offer more like 20 to 1, sometimes higher).

That’s why unless you really need the cash you should think carefully before taking it.

I would not pay an ifa £1000 to look after £50k.
I’d go for £27k option unless you have immediate plans for the money.

I am in a similar position and have opted for the larger lump sum. Mainly because we don't have longevity in our family and also, I am single so if I die quite young the whole thing is lost. I might feel differently if I had a spouse who would benefit from an ongoing, albeit reduced, pension. As a pp noted, I have also seen many people as they advance through their 70s happy to live a simpler (and cheaper) life. But it's basically a gamble!

Ok, I've plugged your numbers into a compound growth calculator and an excel spreadsheet. If you don't spend any of your lump sum, you are likely to be £30k better off in 12 years if you take the bigger lump sum than if you take the smaller lump sum. I've copied the amounts at the bottom of the post. My calculations assume 7% growth on the investment after inflation.

Option 1 lower lump sum after 12 years you will have had £170,814 net of inflation from investing the lump sum and taking the higher annual income.

Option 2 higher lump sum after 12 years you will have had £199,500 net of inflation from taking the higher lump sum and lower annual income.

I haven't taken tax into account, as that is dependent on your other income streams - eg if you are at stage pension age, you will get your state pension, if you have other private pensions you could have an income from those, or if this is for early retirement and you will continue working full or part time, then all these affect tax

But, it's not just the benefit of the £30k you need to think about.

If you have that money in your ISA, it's yours, none of it will be taxed and you get the control of that money, instead of the government. Personally, I really dislike the gvt trying to control money that's mine! You can spend it, support your kids at uni, or contributing to a house deposit, or the holiday of a lifetime, or several holidays of a lifetime! In 12 years time you could be too old or too ill to spend that much money, or you might die. Having the money up front gives you options.

You'll need to put £20k in by 5th April then £20k on 6th April, and any extra will either be taxed on the dividends or you can use your husband's ISA allowance for a year then move it into your own name in 2027. Or hold it in a non-isa high interest savings account for a year at 4% and you won't pay tax on the interest at all as you'll be below the tax on on savings threshold.

If you are taxed on the dividends, then the tax is 8.5% vs 20% income tax you'll pay on the annual income. If you haven't reached state pension age, then there will also be NI of another 8% to pay on top, that you don't pay on dividends.

(Assuming you have other income to take you above the £12500 basic rate tax threshold, and if you are taking your state pension, then that will be tax free but your TP will be taxed)

Regarding and IFA, please don't use one. If £30-50k is all you have in S&S then their costs, plus the cost of the ISA platform, plus the fund charges will make a huge dent in your capital. You really need to have over £100k-£200k to make and IFA worthwhile. If you use an IFA you will lose £12k over the 12 years which is HUGE and any decent IFA should tell you it's not worth your while. And if they don't tell you that, then you shouldn't use them anyway!

To be honest, it's not a major deal either way, as £30k over 12 years is not set in stone, it's only £2500 pa, and it depends what you do with it. You might blow it all in the first year or two! But at least you'll have had the choice to do that.

Option 1
Lump sum
£27,000
7% after inflation, compounded
£33,810
Total after 12 years
£60,810
Annual income
£9,167 per year for 12 years = £110,004

Value over 12 years net of inflation
£170,814

Option 2
Lump sum
£49,320
7% after inflation, compounded
£61,760
Total after 12 years
£111,090
Annual income
£7,367 per year for 12 years = £88,404

Value over 12 years net of inflation
£199494

Hope that helps

Jopo

Jopo - I know it's simplified but you have gotta adjust the TP for inflation over those 12 years as well as the lump sum.

(It's a really helpful little summary otherwise, nice job!).

No you don't because if you add 4% inflation to both sides of the argument, you get the same results.

I’m in TP and retired. I took the smaller lump sum. So, glad I did as my monthly pension is higher and has gone up each year. Don’t be over swayed by the larger lump sum - it goes quickly!

Jojo - is it realistic to expect a return of 7% above inflation every year for the next 25+ years? Especially for someone who says they have no experience of stock market investing so are likely to go for lower risk options?

What do the figures look like on 4 or 5% above inflation?

The stock market has delivered 11-15% returns year in year for 25 years.
Except for 2025 when it was higher.

So it's not unrealistic. I am getting that sort of level with unsophisticated funds, just index trackers across the globe.

a FTSE 100 tracker fund has averaged 8% per year over past 70 years recently it has been more 2025 was a very good year at nearer 20%
you do not need to pick single stocks etc you can chose a managed fund or just a stock market tracker vanguard, trading 212 and others operate very low or no fee schemes

Ah, sorry, I didn't realise you meant 7% above inflation, I thought you had inflated one scenario and not the other.

Personally, I wouldn't want the 'responsibility' or the risk of 'needing' to consistently achieve 7% above inflation. 11-15% has been perfectly achievable for the last two years but not the few before then and it's not a standard medium/long term average growth assumption for a reasonably safe investment. And of course, it could always go down too!

I'm very far from having a "desperate financial need", but I'll still probably take the maximum lump sum, even with a poor 1:12 commutation rate. It depends a lot on the mindset of the individual.

Those pp who've made the thread look like an mse pensions advice thread (🤯😆) are obviously very comfortable running numbers and looking after their investments, but that stuff's anathema to me - I get stressed simply trying to change bank accounts and I'm completely risk-averse with regards investing.

It might be financially better in the long run to take the smaller lump sum, but I'd rather have more cash now to spend on the things I enjoy now (holidays, hobbies, etc), and to help bridge a couple of years to state pension.

If i retire at 65 (one more year) I'll be at least 77 before I get to "the long run", by which time I'm not too arsed about having a bit (or eventually even a lot) less than I otherwise might have - I don't want to be sitting on loads of cash at 90.

I can't imagine anything worse than taking the bigger lump sum just to invest it to beat inflation - I want to use it to live a little, hopefully before I die.

Incidentally, my figures are modest... DB pension approximately same as state pension, state pension in a few more years (if i get there, tomorrow isn't promised, and all that), and circa £250k savings.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise?source=pw

Pension Wise is a government service set up to help people understand the pension options available to them. It offers guidance to help empower people to make informed decisions about their pension which are best for their individual circumstances.

Wow thanks again everyone, especially @Jopo12! Still hesitating and don’t know what to do, will read all posts again and try to decide. @MsGreying, thanks for the link but Pension Wise only advise on defined benefit schemes or something, can’t remember - whatever it is I have, they don’t advise on it, annoyingly.

You have a defined benefit pension, thats why they won't advise.

All public sector DB schemes offer 1:12 and I have not seen a scheme that offers more.

Considering that the full State Pension will use up all personal allowance from this April, you will only receive 80% of any other pensions (or 60% if it puts you into higher tax).

So that would give you an effective commutation factor of 1:15.

Many private sector schemes offer better commutation factors, and where schemes have been bought out with insurers even more so.