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 ?

I am retiring this year at 55 (NHS) and taking the higher lump sum (to invest) and smaller pension. We have no debt and significant savings but plan to spend freely and start drip feeding it away in sizeable chunks to DC so they benefit when they need it most and we can travel and enjoy it when fit and well enough. I don’t want to have big pots of money as I become elderly. Quite the reverse. We will be trying to run our funds down. If I get to 80 plus with little left, am happy to take my chances. Having been in and out of care homes and worked in primary care all my working life, I’ve seen the best care is not that always privately provided. I would feel bitter indeed if my monies were lost to IHT and care home fees instead of being enjoyed in my prime and passed on to family in good time.
Die with zero!

Not relevant here as it’s DB pension and not a DC one - the whole lump sum is tax free.

If it was me I would take the smaller lump sum because of the larger index linked payments (which hopefully you will be getting for decades to come). It’s a significant increase in those payments.

But I appreciate it’s a tricky balance. I’m not doing this in my case but the commutation rate (which determines how many years it takes before your lump sum value is cancelled out by annual payments) is far more generous - 30 years before the increased annual payments represents a better option.

Mil is raising equity from her home to subsidise her care - the money will last 2 years then she’s done - no money, no choices just the council option which she is desperate to avoid - I wouldn’t be running my money down - call me selfish, I want options and as always I’m prepared to pay for them.

Personally I'd take the bigger lump sum and invest it in S&S ISAs (if you have a partner and joint finances, put £20k each in your name and in hers the first year, and the second year £20k in just one)

With a 6% return after inflation you can either reinvest it to compound the growth, or take £3600 dividend income a year from it , making the gross amount similar to the second option. The first £500 is tax free according to the dividend allowance, and the remainder taxed at 10.75%, significantly less than the 20% income tax you'll be charged with option 2, so your net take home should be higher.

Of course that dividend income won't be a nice neat monthly amount, and you will need to choose your investments and manage them and income will be variable quarterly.

But the capital is yours - you could spend more upfront and use the capital. This will be useful to you now in case have any big home maintenance bills, need a new car, need to pay for extra care etc.

But then I'm a control freak with my money and I don't like it to be in someone else's hands!

I took the smaller lump sum and bigger pension 10 years ago hoping I'll live for a long time ............and if I didn't i wouldn't know about it so it wouldn't matter!😂

Different strokes.

I plan on no lump sum, take 10 years early (big hit) at 57. Run all my savings down to supplement between 57/67 and then have my 13k pension plus state to live on. Much live the above poster, plan to enjoy my savings not spend on care / sit on the bank etc

We both took the bigger lump sum, tax free of course at source and invested it in Isas .
We used the interest on 1 of the isas as a tax free income until we have our state pension. We figured the more income we get from our pensions the more tax we pay .

Watch your state pension forecast OP.
I found that through retiring at 57 I would be missing some contributing years from 57 to 66 (my qualifying retirement age). Topping these up made a big difference when my state pension kicked in.

Take the lower lump sum.

The dividends would be tax free from a S&S ISA.

DOH! Course they would, it was late when I wrote that.
So even better to take option 1

With a public sector pension I would take the larger/maximum lump sum every time.
You can invest it.
It’s tax free unlike the monthly pension.
If you die early your NOK won’t receive anything like what you would have got. At least they will be able to access the lump sum you removed.
It takes years before you break even/gain by taking the min lump max pension. I worked out I would be in my 80s by then. At that point generally people have lower expenditure and in the unlikely event I live that long I would have rather enjoyed my money while in good health.

For DH (DB public sector) he took a higher lump sum but not the maximum available.

Worked out how much he will earn on his part-time earnings and tried to minimise income tax between now and when his SP kicks in. In the meantime, the lump sum can chill out in our ISA's.

That future proofs his monthly payment for when he fully retires whilst retaining the same level of income now.

Do you claim carers allowance which is taxable ? If so the 9k combined with carers will be just about under the tax threshold. Taking the higher monthly amount could mean being taxed more. I'd personally take the higher lump sum and invest it. This is what I am planning to do when i get my NHS pension in a couple of years which are very similar options to what you have in terms of amounts. It is highly likely I will become a carer for my very elderly parent.