Take a larger lump sum or higher annual pension?

[RosieLeaLovesTea]

I have been reviewing my pension. I am thinking I may be able to retire in 8 years at 55. My largest lump sum would be £119,000 and my annual pension would be &17,000 per year. Or largest annual amount would be £26,000 with a smalllest lump sum of £18,000. What would you do?

Do you have debts (mortgage)?

How much income do you need? I’d do your projected budget for retirement, taking into account that you might have paid off your mortgage by then, and you might have smaller outgoings if children will have moved out.

If it’s a DB pension I’d take the big lump sum. If it’s a DC I’d take the bigger pension.

Unless I needed a large lump sum of over £100k I would take more in pension every year.

I'm intending to live another 30 years I hope. (My DF was 30 when I was born, and is still alive) and so extra money each month will be of far more use to me - and a greater amount in the long term - than a lump sum.

Interesting. Could you explain why please?

You could go under a bus the day after you cash your lump sum, and not get a penny more. With a DC pension your estate will get back everything that’s in your pot.

That looks like a commutation rate of around 11 or 12 (which means that for every £1 of pension given up you get £11 or £12 extra lump sum). That’s not a great rate, particularly for retiring at 55. If you live longer than about 15 years you’ll get more from taking the higher pension. However that doesn’t take into account whether you need the lump sum to pay off the mortgage or whatever.

If you don’t need the lump sum and you’re in good health it makes sense to take the higher pension. But it depends on your priorities. Some people would rather have the higher lump sum now to spend on holidays etc and are less worried about having the higher income when older and less able to do things.

Well £17k Pa isn’t enough to get you to 67. You’d need the neat £10k pa for 12 yrs from the lump sum to eke it out. So £27k for 12 years then 29k with state pension. Very approximately.
I have the same dilemma. I think I’ll take the max lump sum because my mum died very young and I’d rather have it upfront. Bird in the hand and all that.
it’s still a great pension for 55. You must be a very high earner: so young to retire. Do you have a partner? Dependent children? Plan to work doing something?

Depends on whether you think you will live 10 years past age 55! If so, take the higher pension. If not, take the higher lump sum.

I plan on taking partial retirement at 60 (old-style nhs pension scheme), simply because there’s no benefit to me in not doing - my pension will be the same either way, so I might as well take it as not.

It depends on a lot of variables, for example how much your monthly outgoings are and what other savings and investments you have. I have minimal outgoings and a DB pension and when I retire next year I plan to take an annual salary of just below the tax threshold and the rest in lump sum. I’ll then use the lump sum and my other savings and investments to top up each month until my state pension kicks in a few years down the road. Only at that point will I start paying any tax.

You are unlikely to be able to retire at 55 in 8 years time - the minimum age changes to 57 on 06/04/2028. So it would be worth re-running your numbers based on 57 (and keeping your fingers crossed for no more meddling from the Government on the age or the 25% tax free)

then it’s a bit of basic maths - do you have a full state pension at 67? What is your current level of household expenditure? Will you still have a mortgage by then or is it/will it be paid off? Do you have a cash cushion outside of pensions for car/boiler replacement? What are your expectations for retirement- lots of travel? Purchase of a camper van?

working out the answers - including whether you see your expenditure flat over your retirement or very high spending from 57-67 (as you are replacing lost income but not entitled to state pension, dropping from 67- 75 or 80 but replaced with state pension, then continuing at a lower level after 80 or so? What about potential care costs? Do you want to leave or gift some or happy to spend the lot?

and then a bit of straight line maths £119/£8 is 14.78 years which is your break even point very simplistically (of course this is not correct because both pensions will be index linked and you will presumably save or invest the lump sum (and this income may or may not be taxable depending where you invest it) but it gives a starting point

it’s worth getting an appointment with Pensionwise (the free Govt advice service), they are very knowledgeable and helpful with regard to your options. They don’t give advice but I found them brilliant

This isn’t necessarily right for a DC pension - not once you’ve crystallised it or purchased an annuity with it. You could choose a guarantee on the annuity (e.g. lump sum or continued payments to the estate) for a certain number of years or certain amount. The longer/larger the guarantee, the more expensive it’ll be (i.e. smaller annuity payments).

Think about whether you need to do things like house maintenance, replace the car or boiler etc through retirement - cash in the bank will be handy for these if your income won’t cover them.

@Defiantlynot41 it’s worth getting an appointment with Pensionwise (the free Govt advice service), they are very knowledgeable and helpful with regard to your options. They don’t give advice but I found them brilliant.

Pension Wise don’t give guidance on DB pensions, only DC, and I assume OP has DB.

Take the lump sum which is tax free. Don't then convert any of the tax free amount into taxable income by buying an annuity with it. Instead invest it so that only the income/gains from it are then taxed.

If you have no mortgage, small house and no additional expenses £17k is certainly liveable on. You then draw down as needed from the lump sum as needed for holidays.

Hi can you tell me what DB and DC stands for as I am not sure? then I can do some research. Thanks

Is that date change applicable to all who can access a workplace pension? Damn it didn’t know about but I will research it and rerun my calculations. Thanks for pointing this out.

DB is defined benefit (what you receive is based on your pay and how long you’ve been in the scheme). DC is defined contribution (where you end up with a pot of money and can decide how to use it).

The change to age 57 does affect all schemes but some may add into their rules that those who were already in the pension scheme in November 2021 (when the regulations to make the change were announced) can keep a lower minimum pension age. You will need to check with your scheme if they’re doing anything to protect this.

Some workplace pensions have a guaranteed pension age of 55, and so even though a PP is correct in that the minimum pension age will rise to 57, then depending on your pension policy wording and when you joined the scheme, you might still be able to retire at 55 and draw your pension. But you would need to speak to your pension provider to find out.

£17k a year doesn’t really sound like enough to live comfortably on though - at least not for me, but it will depend on your circumstances.

eta: x-post with ChessieFL!

In this case @RosieLeaLovesTea Id definitely pay the money to consult a financial advisor, to ensure you make the right choice. They'd be able to explain it all thoroughly and give the pros and cons.

What does DB/DC mean?

Ignore. You've already answered.

yes and make sure it someone who understands pensions and your scheme. If gvt pension look at Pengage on Facebook group

Also does a DB pension reduce the state pension?

I'm in the same position OP, and met with our pensions advisor yesterday, as it goes.

He seemed to think it was only worth getting the lump sum if you were going to spend it - ie if you wanted a new car or home improvements.

He also mentioned that you might be able to arrange to opt for the lump sum but draw it down gradually and not necessarily take it all at once, but you might want to check the tax implications of that.

The other thing is that if Reeves does decide to make pensions liable for IHT, you will need to check that your pension pot doesn't push the value of your estate over the exempt limit.

My DH took smaller lump sum and larger pension every year. He didn't particularly need the larger lump sum for anything but felt the larger annual pension would mean he had a better lifestyle. Also he said if he died I'd get half his pension for the rest of my life. If you still have a mortgage to pay off then I'd take enough lump sum to pay it off otherwise larger pension.