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Discussion in 'Retirement' started by sueclarke65, Aug 31, 2020.
Standard lump sum or opt for larger lump sum and smaller pension?
I'd say up to you. What are your plans? Do you need the extra lump sum? How old are you retiring? Will you pay lots of tax if you don't take the lare lump sum? Details please.
Hopefully will go next September and I’ll be 56. Worked for 32 years but will only have 24 years in pension cos I was part time for some of it. Think pension is about £15000 or £11700 With £33000 more lump sum. No mortgage but I will struggle on smaller pension
Depends very much on what you will do with the lump sum.
My wife is very risk averse and you cannot really get any 'safer' income than the annual pension. Unless you are a very savvy investor I'd say that the normal lump sum is safer.
This is a post I put up earlier on the other thread:
Larger Lump Sum
You get £12 as a lump sum for every £1 of annual pension you give up. (I believe it's the same amount whichever scheme)
Using the lump sum to boost the pension means spending it. So over 7 years, £12 divided by 7 is about £2. As you've given up £1 a year to get that it means that the 'boost' is around £1 more.
The figures multiply up of course, very few would give up just £1.
Suppose your pension was £16,000. Giving up £3500 would get you £42,000 as a lump sum and your pension drops to £12,500.
Over 7 years you could use the £42,000 which would be about £6,000 a year.
So for those 7 years you would have £18,500 to live on instead of £16,000.
After the £42k is gone you would then have £12,500 a year. Year 8 onwards.
Timing this so that year 8 is the year your state pension starts would add about £7,000 (the basic state pension) which means that you would then have £19,500 a year. So if you have worked out that you can live on £18,500 but not £16,000 it is a way to go when your pension is below £18,500.
However, you want to go at 56. That leaves 11 years before you can get the state pension boost. Spreading the £42,000 out over those 11 years gives you about £4,000 a year (rounded up for simpler maths). That 'improves' your reduced pension from £12,500 to £16,500...only £500 a year more than you'd have without taking the extra lump sum. (And inflation would be the enemy of your lump sum...the pension would be going up by inflation whereas your lump sum would only increase if invested)
You don't say whether your £15,000 pension is the 'full' amount you'd get at 60 or the early-age-reduced amount (at 56 you get 84.5% of the NPA60 pension and around 60% of the CA NPA67 one).
Choosing Which Pension
One other thing to consider is that you are going to be able to choose how your service from 2015 to 2022 is to be treated. It can be as it is shown on your benefit statement, the mix of FS and CA, or it could all be treated as Final Salary - the latter brings a bigger lump sum. But do the calculations to see what the exact effects might be.
As you've been part-time there is a good chance you may have had some breaks in service. These could get you a higher pension.
I've said this before, but I'll put it out there again - I went for a larger pension as it is not taxed (unlike the pension) and I reckoned our pensions could be altered in future due to (say) a financial crisis...but once you've got the lump sum, it's yours. So even though we had no mortgage, we took the lump sum. Since ten we have enjoyed (pre-2020) a lot of travelling, and also helped put one of our children on the property ladder.
For what it's worth, my pension (our only income) is around 16K per year (net); on top I have two small AVAs (totalling <1K per year) and we've never found it difficult to live on this. In fact we feel better off than ever before.
Diddydave has given you the facts and the maths. For me, the larger pension which increases annually by inflation for life was the best choice. Only if I’d have needed the lump sum to clear the mortgage or other debt would I have considered the smaller pension and larger lump sum.
Remember the income goes further than when you're working - no NI and no superann.
Spend much less on commuting too. (And holidays in term time are cheaper!)
Lots of things get cheaper. You've got time to cook so no buying relatively expensive quick and easy food - you eat far better as well as you've time to buy the right stuff, avoid the sh3t that gets added to a lot of food. You have time to look for the best deals with utilities, banking and insurances. No need to replace suits, shirts etc. Time to tackle jobs like painting etc if you can be so inclined, rather than pay a workman. Far more flexible so cheaper trains / buses / tickets for theatres, museums etc. Holidays and travel is (was) by far the biggest saving I made. Spent the weekend in Venice a few years ago, for under a hundred quid for flights and 2 nights in a nice hotel. Many quick jaunts to European capitals for under £15 each way. Able to visit world class ballet and opera all over Eastern Europe (and Austria surprisingly) very cheaply. Running my trusty 7 year old car costs £20 a year tax, £150 a year insurance and a few hundred for a service. Like many I guess, I fretted over retiring and did supply for a few years before finishing completely. As it turned out, I rarely spend more than a grand a month on absolutely everything and have only a few times gone over £12K in a year - you just can't spend it if you don't live a consumer-led friviolous life. The New Year's resolution was too spend more - but Corona meant far less has been spent. You can't win .
It depends how long you intend to live and whether you have any other source of income when you retire eg from properties
That is interesting. I’m intending to go at 55 which will be almost all but 3 years in the old scheme. (Alas like others, I’ve not been a teacher since 22 so it won’t be that much). Taking @diddydave's advice on taking the pension early I’m taking it at 55. We won’t need the lump sum so can afford to keep that down and push the pension back up. I don’t know what I will do with 3 years of the new pension. I have to take it at the same time. It won’t be worth much.
Lastly, I was wondering if it is worth putting some AVCs away for the next 5 years. I have never done AVCs, but can afford to put away quite a bit now. I wouldn’t want to buy more annuity. I think I’d rather draw them down to top up the pension. Is that a credible idea?
But remember that (in the UK, at least) you will get a state pension when you reach stet retirement age (66 for me, maybe 67 for younger retirees). That will add a fair bit to the teachers' pension.
Won’t you opt to stay in the old final salary scheme ? Then you can take it all at once and for me this works out a lot more
They are only extending it to 2022 and then we are all paying in to the new scheme. I’ll not be going until 2025.
Ah you’re obviously very young... not an oldie like me!!!
I've spent the entire summer grappling with this one and I have concluded that there are only wrong answers. Whatever I do, there's a situation where I could have done better by doing something else.
The new pension will be worth a fair amount. It also is a slightly better return if you take it at 55 compared to the old scheme - with the old scheme you are ahead until your late 70s, with the new scheme you are ahead until your early 80s.
Yes, that's a very credible idea and increases your flexibility. In the last few years we put between 60% and 80% of my wife's salary into them with the plan that we would take them out to cover the years from 55 to 60 if she didn't take her pension early. The biggest incentive for that is the tax relief. The Prudential allows the full range of flexible options. Under the current legislation, if you don't have any other income planned for your tax year when you reach 55 you can take out much more than the personal allowance of £12,500 because you get 25% tax-free. If you took out £16,666.66 in this way you pay no income tax.
Putting in £16,666.66 actually costs you £13,333.33 (so long as you would have been taxed on it). Getting a £3000 return on an investment of £13,000 is pretty good!
Agree, only hindsight will provide the best answer. All you can do is consider the options and decide what the pros and cons of each are. I always try to steer clear of actually offering any advice, I prefer to help with the maths and pose questions - as everyone's answers will be different that's as much as I think we can do.
For instance when I posed the question about opting out to trigger a hypothetical calculation I lay out how much you will lose from your pension against what the possible benefits may be.
@Newidentity There's nothing for it hen, you'll just have to keep working ;-)
Did that help?
That's true. So you have to do something that you feel gives the chance to do what you want, and accept that (and not look later at what you cold have done differently...)
I too had lots of options when I reached 55 (I chose to retires almost 2 years later). Maybe I could have earned more money/got a bigger pension by retiring earlier/later, but I don't know, and don't want to know. I left teaching when I was still enjoying it, and have loved my retirement thus far. So 'decide what you want from the rest of your life, and go for it with no regrets' is my advice.