Pension or lump sum?

[Fanacapan]

I retire in 2 years time, on an NHS pension. I was advised by a colleague to take the largest lump sum possible and the reduced annual pension. This is in case of not lasting long post retirement! Then the money is safely put away somewhere. Has anyone received this advice.

Yes, it’s what I will do.

Presumably you are in the 1995 pension pot and can take it without any reduction. Everyone says take the full lump sum in those circumstances

No I’m in the 2008 and 2015 schemes, the plan was to take the maximum from the ‘08 scheme and then the pension from the ‘15 scheme.

Have you worked out how many years of reduced pension it will take for you take make up the lump sum?
I calculated mine at 20 years which means I'll be 80 by the time I break even. By that point I expect that my outgoings might be fairly minimal. Better to have it in your account now. Depending on the amount of monthly pension you'll get and assuming you'll get full state pension, taking the lower monthly pension will reduce the amount of tax you pay.

I got some paperwork from the NHS pensions people the other day but haven't read it properly.

I opted out of the 2008 one so only have '95 and '15. I have 21 and a bit years in the '95 and can still take it at 60.

The letter the other day I think said you could flexi retire on one scheme and still add to the '15 until 67. If you wish obvs!

As a general rule the advice is to take the max lump sum and it is certainly what I am doing in a few months time when I reach 57 and take early retirement.
We ran through the modeller and as you say, the break-even point is some 20-years down the line when expenditure is likely to be less (and of course I will be in receipt of a full SP).

I am in the TPS not NHS. Joined 2005. Retiring October. I will take the max possible lump sum and reduction in any payment. It is what the majority of teacher colleagues have /are doing.

I do worry about the schemes in the future and potential future changes that may be made impacting younger colleagues.

I’m planning to take the full lump sum (retirement is quite a way off yet).

TPS here, will be taking max lump sump, it’s tax free and will pay off the mortgage

Placemarking

Take the biggest lump sum you can (25%) which will be tax free, you'll be paying tax on your monthly private pension if it is above the threshold and especially once your state pension kicks in.

Some trusts have a retirement study day which I found really helpful
The advice was if in 1995 take the max lump sum
Enjoy your retirement

I did the opposite and took max annual pension (not public sector).

My logic was that I didn’t need the cash right now so I would have had to have invested the extra cash myself to try to provide future funds & I would rather have that money in a guaranteed index linked pension instead.

In my scheme, it works out pretty much quits whichever option you choose (assuming you live to an average age which no one ever think they will!).

The right answer will be different for every person. From a numbers point of view it probably depends on three or four things:
(a) for every £100 in extra lump sum, how much annual pension income would you give up? Ideally you would work out the amount of after tax pension income you are giving up because if you will be in a higher income tax bracket so that the lump um is tax free while the pension income is heavily taxed, that could favour the lump sum
(b) what is your state of health and how long do you expect to live? If you live for a long time, then the annual income is that much more valuable
(c) do you expect to have immediate needs (or wants) that you could only fund with the lump sum, and are those things more important to you than the amount of long-term secure income that you would be foregoing?
(d) how do you prioritise security of your own income versus leaving something to your heirs? If you are more worried about living a long time and running out of money, then the annual pension income is more valuable, and if you die unexpectedly young then you will not need the money anyway. On the other hand, if you care a lot about leaving something for your heirs should you die young, then the lump sum may be advantageous.

Dave Fountain /Diddydave whose an ex teacher and a bit of an expert on teachers pensions/retirement disagrees with taking the maximum lump sum. He has a video on YouTube about it called Swap Pension for lump sum (Selling the Golden Goose).

He does agree it's a good idea to get rid of debt but says it's obviously a decision based on personal circumstances.

I found these two videos arguing both sides, from the same guy, that are more comprehensive and better informed than my own comments. I got some of the key points but missed others. The bottom line is "it depends", but these videos do a good job on explaining what it depends on, and for many individuals, after thinking it through there will be a clear answer.

Arguments against taking a lump sum

Arguments for taking a lump sum

Do you have the PIE option?
This one had me wringing my hands for quite some time.

I fully intend to take my full lump sum. You don't know how long your retirement will be, at least you'll have the cash in the bank

It is right that if you take your lump sum your remaining pension never goes up?
No annual increases?

This is for a Defined Benefit pension.

No!

Well, not usually. The increase does depend on the scheme rules so I guess yours might be a very unusual scheme with that term. Public servants schemes go up with inflation. Mine (an old bank scheme) goes up with CPI but it’s capped at a max of 3%.

Teachers pensions are index linked and for life. I'll be taking my maximum pension and lump sum.

I am taking my DB pension later this year with the max lump-sum and an annual pension that increases annually by RPI/CPI (can't remember which). Ours isn't capped and this year the increase is 10%.

Like I said earlier there is sometimes the PIES option.
This allows you to take an even larger lump-sum and annual pension (initially at least) but part of your annual pension then NEVER increases.

Many decisions to be made.

I’ve got a call booked with a pension advisor next week, we’ll see what he says! Thanks for all your comments so far!

It’s very individual whether to take the maximum lump sum or the maximum pension, but one thing to bear in mind is that in the NHS scheme the commutation factor is 12:1 and this doesn’t change with age. This means that for every £1 pension you give up, you get £12 lump sum. At a very simple level, this would mean that you would need to be receiving your pension for at least 12 years after retirement to get more from that than if you took the max lump sum. Once you factor in tax and the annual increase on the pension, it’s probably somewhere between 15-20 years to hit the break even point.

Therefore, if you’re retiring at 75, taking the max lump sum is a good deal as there’s less likelihood of you receiving your pension for long enough to break even. If you’re retiring at 55, it’s a much less favourable deal, especially if you’re in good health, because you would hope to be receiving your pension for more than 20 years so would therefore get more from having the higher pension.

Again though it’s not as clear cut as that because it depends on your personal circumstances - being able to pay off the mortgage with the lump sum might be more beneficial, or you might be able to invest the lump sum to earn enough interest/investment income to outstrip what you might gain from the higher pension.

It’s a very individual decision and there’s no overall right or wrong answer about what the best option is.