Which pension option would you choose in early retirement?

[JacCharlton]

I have taken early retirement and am 59.
80k in savings.
I have two options 60k lump sum and 9k annual pension.
24k lump sum and 12.5k pension.
I have no mortgage, and no plans to spend on my home or holidays due to caring commitments.
I will be getting a PT job which will supplement my income.
WWYD ?

The optimal decision is always going to be a gamble based on your eventual lifespan and the tax treatment of pension income in the future. If I was 59, in good health, the annual pension was index linked and I didn't need the bigger lump sum to pay off debts I'd opt for the £12.5k p.a. But it will mean paying more income tax with you expecting to have additional income from working.

This is my thoughts and what financial advice I've been given, no debts and fingers crossed in good health - and yes it's a WYPF so index linked.

If you take the lower lump sum, it will take ten years for you to come out ‘in profit’ as it were
(60k + 9k for 10 years = £150k, 24k + 12.5k for 10 years = £149.5k)

As pp says, if you are in great health, don’t need the bigger lump sum, then by the time you reach 70 years old you are £3.5k better off p.a. (before tax).

I would take the smaller lump sum since you have no immediate need for a pot of cash to spend. At some point you will want to stop working completely. That might happen before or after your state pension kicks in, but either way your annual income will not be large, I would want to have that maximised. You will end up paying income tax on it, but better that that scrimping on essential costs.
If you add your 24k to your 80k savings, that's a good amount to cover all manner of eventualities. You do say 'savings' though... Would you consider investing to combat inflation?

On the other hand, 60k now is worth a lot more than 60k in 10 years!

If you don't need the money, you could take the 60k and invest it - at 5% that could be nearly 100k in 10 years, and give you an extra 5k a year income then (14k Vs 12.5). Has some more risk though

Can you afford to support yourself on just a part time income and take your pension later so that you get an increased amount for life?

I have a mixture of investments (stocks and shares ISA which has made 15% this year - though I know that would fluctuate) and ISA and some in premium bonds so hope to get at least 7k annually (lowest option) in interest.

Presumably the cash is tax free and the income isn’t? On that basis I’d take the max cash.

That’s a very good point. Funnelled into ISAs over the next 3 years, it would then be available to you to take tax free whenever you need it and even in low risk investments should replace the guaranteed pension income lost.

This all assumes the government doesn’t bugger about with pensions and ISAs even more than they have done so far. We all need a crystal ball at this point.

There is a 3rd option.

The 3rd option is to not take a lump sum at all and the first 25% of every payment is tax free for life up to the £268,275 limit (which will likely increase with time).

“Can I take tax free cash from my pension?
You can usually take up to 25% of your pension pot tax-free. The other 75% of your pension money is taxable.
There are two ways you can take your tax-free cash:

• You can take all your tax-free cash in one go. If you do this, the remainder of your pension pot can be used to buy an annuity (an insurance policy that provides you with a guaranteed income usually for life), or to provide an income through income drawdown. With income drawdown, there is no minimum or maximum income that needs to be taken. You could take the whole fund but remember, anything you take after the tax-free cash would be taxed as income.
• You can take smaller cash sums from your pension pot, rather than taking your 25% tax-free cash as a lump sum. In that case, 25% of each payment is tax free.

As mentioned earlier, if you have more than £1,073,100 in your pension plans, your tax-free cash limit remains at £268,275, no matter how large your pension is.”

https://www.royallondon.com/guides-tools/pension-guides/pension-basics/how-your-pension-is-taxed/

I think op has a db pension and the option you quote is for dc only.

Exactly. It sounds like a public sector pension 1/80th scheme with 3/80th cash. The only way to access UFPLS is through transfer out, which whilst an option, is generally a bad move for most people, which is why you are required to take financial advice before doing it

@saveforthat
Yes, good point the 3rd option is for a dc pension only. The OP did not specify.

If this is a DB or a scheme involving an annuity, take as big a lump sum as possible. Otherwise if you die next year the money is gone.Is flexi-drawdown an option?

Yes public sector - I've always worked PT (No regrets) I just needed my instincts and advice confirming - thanks for all input so far

Is this a defined benefit local government pension? If so, there is a good Facebook Group where people pose this question all the time. It has some LGPS experts on there.

£7K draw down from your existing savings plus TFLS seems optimistic - usually people say aim for 4% drawdown from savings to supplement income.

this is my conflict - I need to live 10 more years to 'break even' give or take with investments - but having more 'regular' income is what I am stuggling with - financial advice has been to invest the 100k and enjoy the 12k plus PT earnings - and the RP in 7 years will add to my income

the 7k would be income from investments without touching the 100k - I will look into the facebook group.

If you take a bigger lump sum, check the tax needed to be paid. You could reduce your tax bill by buying an annuity.

It's tax free

It's partly a matter of how you feel. Taking the bigger lump sum and investing would give you more flexibility. Taking the smaller lump sum and larger monthly payments would give you more certainty. I chose the larger monthly payments.

@JacCharlton The Index linked pension is a valuable part of the DB pension. This April I got a 3.8% increase which on your figures translates to £9k x 3.8% = £342 vs £12.5k x 3.8% = £475.

Whilst £133pa doesn’t sound a lot, compounding will see the differential grow. At 67 based on current rates your combined works and state pension would give you an income of c£25k with both parts being index linked.

I took the smaller lump sum.
Appreciated I was missing out on tax free opportunity so it wasn't necessarily a complete financially driven decision but I am an optimist and aim to live longer so I draw it for longer. I also appreciate that it rises annually and investing the ££ and consistently beating inflation isn't isn't my responsibility. Finally I didn't have any immediate call on the cash. I'm a few years in now and the peace of mind and annual rises have been good.

If you have caring responsibilities and you qualify, pension isn’t counted as income so that might be something else that would help (about £4K per year).

If you go over 25%, be careful.