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.

Not sure how helpful it is, but we were advised by an accountant we knew that, generally you should always go for the maximum tax free lump sum, which we did

That makes absolutely no sense. If you have a life limiting condition and you get a good commutation rate, yes, it might be a good idea. Your accountant is obviously not very competent.

Max lump sum for me. And DH. And everyone else we know.

Wasn’t our accountant, a friend who was and worked for an extremely large accountancy firm in a senior position, so I imagine he had some understanding of what was saying . I don’t doubt that it obviously depends how long you live after taking your pension as to which is the best option, but personally, I know far too many people who have died within just a few years of retirement

Yes, it’s a gamble. None of us know how long we’ve got.

That’s why it’s so hard. Still undecided but thinking about commuting a bit now, not all.

I retired 2 1/2 years ago and took a middle amount tax free and still have a generous TP. My pension is more than some of my TAs were taking home working full time.
My mortgage was paid off but I wanted to do quite a bit to the house. I had a new kitchen and bathroom, the house was decorated throughout and new carpets/flooring in every room. It was long overdue and looks wonderful. I also had some work done on the garden. I have had no regrets and would say it depends what you want/need to do with the lump sum.
I feel like investing it in my house was the right thing to do, but it did hurt to see my very large bank balance going down after paying each tradesperson!
I did seek some advice from a financial advisor, it didn’t cost more than about £250 for a chat and a report with figures in.
I would say try and make an informed decision and then live with your decision and don’t spend any time regretting it!

This is the kind of thing I will also obsessed over, but as an impartial advisor I'd say take a lump sum big enough to pay off your mortgage when it ends (assuming fixed). Then whatever your mortgage is becomes free cash to save, or splurge on cruises and boozy lunches.

There are too many significant unknown & uncontrolled factors to make a perfect decision.

So make one based in the here & now, knowing that you will still get a monthly pension, irrespective of what the next 25 years holds & then stop worrying & enjoy your retirement.

I’m in the nhs pension scheme. Same commutation rate of 1:12.
I'm going for max lump sum.
Taking the lower pension puts me just over the tax personal allowance so I pay minimal tax on the small amount over £12570. If I took the larger pension I would be paying tax on anything over the personal allowance. I worked out that taking this into account I would need to live 15.5 years rather than 12 years to be better off with the lower lump sum. This is factoring in the yearly index linked rises in pension.

I will siphon as much as I can into ISAs.
Keeping my non ISA income from pension as near the personal allowance minimises the tax. It also means I’m eligible for the starter rate of tax allowance on interest ( Martin Lewis explains this much better than I can). I can then have up to £5,000 from non ISA savings accounts before paying tax on the interest.

Looking at interest rate predictions I'm going to be putting my lump sum into high interest long term accounts and ISAs as soon as it hits my bank account.
All the predictions suggest interest rates are going to fall so I want to lock in soon at a guaranteed rate.
For me it’s about the best and most tax efficient way to bridge the gap between retirement at 60 and state pension kicking in at 67. As others have said my 60’s are the decade when hopefully I have the health and energy to enjoy the pension I’ve earned over the last 40 years. No point in sitting on loads of cash at 85, not fit enough to fully enjoy it and worrying about 40% of it being swallowed up by inheritance tax.

If you take the lump sum and invest you have to be prepared to accept a market crash. My DF retired in 2007 and took £150k tax free lump sum from his DB pension. He invested it all in the stock market about two months before the market crashed and it dropped 60%. He did the sensible thing, didn’t touch it, and the value did return in the end. But would you spend a lot of time regretting your decision?
TPS is guaranteed income forever.
ref the poster suggesting 7% returns above inflation, I asked ChatGPT for the 25 year results and it is significantly lower.

Putting FTSE 100 vs inflation together (approximate)
Using those long‑run averages:
• FTSE 100 total return: about 6–7% a year.[fool +1]
• UK inflation: about 3–4% a year.[statista +1]
That implies an equity “real” return (after inflation) of roughly 2–3% a year over 25 years in the FTSE 100, assuming dividends are reinvested.

@Tearsofthemushroom but that is still real growth year on year while a savings account will do well do keep pace with inflation so 0%growth. But attitude to risk matters when you decide

I am not suggesting putting it in a savings account, you are right as that could be an even worse option. But if the OP has never invested her appetite for risk may be very low as she will never have experienced stock market fluctuations.

if you are using the lump sum to pay off mortgage buy a new car renovations etc etc it is best to take what you need as no point having any form of debt in retirement but if it is just going to be in a standard savings account rather than invested you would probably be better taking a smaller lump sum and the bigger pension, the average woman aged 67 has about 20 years of life left on average,
life expectancy at birth is not the same as life expectancy when you have already reached 65 it is higher
if you are 65 now when you were born in 1960 life expectancy for a woman was 70 now at birth it is 80+ but once you have already reached 65 life expectancy is 85+

I’ve 13 years yet but my initial thoughts on mine ( NHS) would be 1995 section i can get at 60 and i’d take the higher lump sum and invest/save it. I come from a family who die young : mum 61. or have elder ill health. I’m trying hard to avoid that but i guess things can change. You get taxed on pension so it would also depend where that was at come then. But i’d also still be working ( maybe not nhs).

Its difficult.

Suggest you get a better financial adviser!
Ultimately it is " up to you" as they said but a good financial adviser should be able to generate several clash flow models to show you how each choice might work in terms of income and spreading your liabilities.
They also have access to a wide range of different products.
Worth noting that my financial adviser looked at the TP scheme in detail and said it was one of the best he had seen for a guaranteed income with yearly increases.
IMO Definitely worth paying for some proper tailored advice.

Yes, I think I do need to pay for proper, tailored financial advice with scenarios mapped out.