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Did you max your lump sum? If so why?

Discussion in 'Retirement' started by Startedin82, Dec 30, 2018.

  1. Startedin82

    Startedin82 Established commenter

    A happy new year to you all (when we get there).

    I know this has been discussed before (though not for a while) but I would really appreciate some fresh thinking on this.

    I retire at Easter next year aged 59 years and 1 month. As I have been a primary Headteacher for a long time I will have an excellent pension. I am retiring slightly early because the reduction at age 59 is not worth worrying about and, frankly, I would like new challenges - including on the golf course!

    Anyway, I'm just wondering whether to take full pension and basic lump sum or max the tax free lump sum by 25%. I'm leaning towards full pension but would be interested to hear what folk did or are planning to do.

    Many thanks.
    PeterQuint likes this.
  2. mrkeys

    mrkeys Occasional commenter

    If your pension is really good it may be taxed at 40% in which case it is possibly prudent to maximize the lump sum as that is tax free. Your pension may then reduce below the 40% threshold.
    One for an accountant..
    install and Startedin82 like this.
  3. Startedin82

    Startedin82 Established commenter

    Thank you @mrkeys - my pension will not be that good though!
  4. Brianthedog

    Brianthedog Occasional commenter

    I'm similar to you in that I'm retiring 6 months early. I'm going for the max lump sum as I know I can live off the minimum pension. As has been said, the lump sum is tax free. Any pension over £12+k will be taxed. In 6 years, I will also get my state pension of £730 per month, which again will be taxed at 20% if over the threshold.
    For me, the difference between the min and max pension is £3300 a year, or £275 a month before tax, that's £2640 / £220 net. The extra tax free lump sum is £42900. That equates to 16 years, i.e. I could enhance my pension by banking my lump sum and taking out £220 in income each month to get me to the point where I would be if I were had I taken a full pension.
    I have no dependents, so when I die, my pension stops. However, whatever I have left in my lump sum will passed on to my adult children. ( although I've made it quite clear I may be living life to the full and end up spending every last penny )
    I am also intending to work part time once I get my pension, and have actually got my contract in place already!
  5. lindenlea

    lindenlea Star commenter

    My husband and I both retired on healthy pensions nine years ago and decided that we would be happy on the smaller pensions and the maximum cash so that we had control over it and it became part of our estates on death and so could be passed on to our children. Both of us have pensions that drop to 50% benefit for the surviving husband/wife and that still left either survivor with a good income. It meant that we felt comfortable giving son2 a large wodge to put as a deposit on a flat in London and that changed his life. We haven't regretted the decision yet.
  6. eljefeb90

    eljefeb90 Senior commenter

    Do you have a partner? What about dependent offspring? Several factors meant that I opted for maximum pension.Firstly, I had only a small amount left to pay off my mortgage and no debts. I also had AVCs ,so had access to funds for life's eventualities.Secondly, my wife has no professional pension, so would have to subsist on 50% of mine, if I popped my clogs before her. Less importantly, very low interest rates and rising inflation seemed to make an inflation -proof pension more appealing. In the end, there is no hard and fast answer. I like the security of that monthly payment, even though some of it is taxed. After three years, I have also surprised myself about how that lump sum has burned a hole in my pocket. I have spent a lot more of it than I thought I would, to be honest. Nothing outrageous, but the new kitchen, summer house and new (second hand) car as well as regular holidays do mount up. Having spent my life scrimping, , I felt a bit like a pools winner. You really need to be clear sighted and honest regarding your psychological attitude to saving and spending.
  7. headinthenorth

    headinthenorth New commenter

    I retired at Xmas and spend an age thinking about the lump sum question. In the end I went for a mid point, the smaller lump sum wouldn't have given me very much left after I pay the mortgage off and do a few things on the list but I wanted a reasonable amount each month to live off.
    Startedin82 likes this.
  8. Startedin82

    Startedin82 Established commenter

    Thanks all. Yes I have a partner (also a teacher who will receive a pension - though not as good as mine) and 3 adult children.

    The reasons that I am inclining towards max pension are;

    • The commutation rate of 12:1 is quite poor when taking max LS
    • I hope to live a long life
    • My LS will be a good chunk of money in any case
    • The LS will be eroded by inflation whereas the pension will be uprated with inflation
    • Whereas the LS is tax free any investments made with the LS may be taxable
    • We do have some mortgage outstanding but rates are currently so low I wonder whether it is worth paying off?
    All that said - a very large chunk of tax free cash is tempting!
    Dorsetdreams and eljefeb90 like this.
  9. lindenlea

    lindenlea Star commenter

    It is all a gamble and I think that's the strongest reason for going for max pension.
  10. Sundaytrekker

    Sundaytrekker Star commenter

    I wanted the security of the maximum pension and I’m happy to pay some tax on it every month. Perhaps one sum worth doing is finding out whether pension plus state pension would put you in the higher tax bracket. Unlikely, I would have thought.
  11. PeterQuint

    PeterQuint Lead commenter

    What do you intend to do with the LS?

    Just a quick note. Don’t forget, you get your SP at 67. Look at your pension. Work out what it’ll be if you take max LS. Add your state pneumonia to that. Is that enough to live on + get holidays, etc?

    If it is, then how far short would your pension be from 59-67? Would your LS cover the shortfall with anything to spare?
    Startedin82 likes this.
  12. eljefeb90

    eljefeb90 Senior commenter

    PQ...it'll be at 66 for the SP.
    PeterQuint and Startedin82 like this.
  13. Guest

    Guest Guest

    I took maximum lump sum from both my phases of retirement. It enabled me to be completely debt free, including mortgage, and have back up in the bank. Fortunately I had 36 years service and although I took AAB the minimum pension is still fairly decent as I was paid well.
    Now paying into new career average pension as I returned to teaching nearly full time. However, without having to worry about career aspirations and knowing its not permanent, I like it even more, just enjoying the teaching.
    I also have the knowledge that I will always have a liveable minimum income(the pension) whatever happens. I am also ensuring I qualify for maximum SP at 66 in 2024.
    My earnings now will help me achieve some financial and aspirational life goals. Each to his own. I am not a risk taker and my financial plans give me peace of mind!
  14. FrankWolley

    FrankWolley Star commenter

    We only have my pension, but we decided when I retired (at 56 years, 10 months) to maximise the lump sum because:

    • It is tax free (or was when I retired), and the pension isn't;
    • If a future government decides they will cut our pensions due to the economic situation (or Brexit!), too bad, I've got my lump sum!
    • Who knows how long I'll live, but if I make it to 66 I get a state pension as well;
    • Having the lump sum gave us the freedom to use it how we like - pay off mortgage, buy new car, help child get on property ladder etc;
    However we are all different...I can only say, 5+ years down the line, we have no regrets!
  15. Bedlam3

    Bedlam3 Star commenter

    What would you do with an increased LS? I'd only take a bigger LS if I needed it for something otherwise it could just sit in a savings account earning a poor rate of interest.
    Startedin82 and eljefeb90 like this.
  16. FrankWolley

    FrankWolley Star commenter

    As I said above, we helped our eldest child buy a house, bought a new car, enjoyed various long haul holidays (& more to come!) and bought a large number of premium bonds. If I were more adventurous financially, I'd have bought another property to rent out. But I'm financially risk adverse.
    Startedin82 and eljefeb90 like this.
  17. PeterQuint

    PeterQuint Lead commenter

    Right gang, before we go any further, let's just do a few basic sums as a guide. A Mr/s Average.

    Let's say you're retiring in September at the age of 60, and (to ease the sums) your birthday is on 1st September. You're on UPS3. You were born on 1st September 1959, and started teaching age 23, so 1st September 1982. I've used the TPS calculator to work out what you'd get.

    Taking just the standard LS you'll have:

    Pension £18,225 (after tax £16,950 or £1,412 pcm)
    State Pension pcm £547 - IT = £109 = £438 pcm
    Total Pensions post-67 = £1,850 pcm
    Lump Sum £54,675

    Taking the full 25% you'll have

    Pension £14,645 (after tax £14,086 or £1,174 pcm - that's £238 pcm less, or £2,856 less a year than if you'd taken the minimum lump sum)
    State Pension pcm £547 - IT = £109 = £438 pcm
    Total Pensions post-67 = £1,612 pcm
    Lump Sum £97,634 (an extra £42,959)

    First sums first, it'll take you 15 years to 'earn' the lump sum back from your pension, so until you're 75. Average life expectancy is 81, so that's an extra 6 years at £3,500, meaning you'll finish up dead, being £17,136 better off overall

    If you're on UPS3, after tax, pension & national insurance you currently draw

    UPS3 £39,406 salary, pension @ 9.6% = £3,783. Add this to your tax allowance of £11,850 = £15,633 and you're only taxed on £23,773 @ 20% = £4,755. National insurance allowance is effectively £8,424 a year, so you pay NI @ 12% on £30,982 = £3,718.

    Total deductions Pension £3,783, Income Tax £4,755, NI £3,718 = £12,256.

    £39,406 - £12,256 = £27,150 net, or £2,263 pcm.

    Average UK monthly mortgage payment is £669, so after mortgage you take home £1,594.

    Let's presume you use the standard lump sum to pay off your mortgage, or have it earmarked for other things already, and that you'll be mortgage free in retirement.

    Net pay now (after mortgage) £1,594
    Net teacher pension (minimum lump sum) £1,412 (£182 pcm down on now)
    Net teacher + state pension post-67 (minimum lump sum) £1,850 (£256 up on now)

    Net teacher pension (maximum lump sum) £1,174 (£420 down on now)
    Net teacher + state pension post-67 £1,612 (£18 up on now)

    If you take the extra lump sum and use it to top up your pension between 60 & 67 that's £420 a month x12 = £5,040 a year x7 years = £35,280. Your total extra lump sum was £42,959, so £7,679 left to play with. However, you'd need to dip into your lump sum even if you were to take the minimum amount for 7 years to the tune of £182 pcm x12 = £2,184 x7 = £15,288. So you have around £23,000 extra spare cash by taking the maximum lump sum, presuming you wanted to live on the same as you have now.

    So those are the key figures. Either £23,000-ish in spendable cash now, or £238 a month pension between 67 and death.

    What strikes me is that, upon reaching 67, whether you take the minimum or maximum lump sum, if you've paid your mortgage off you'll actually have a higher net income than when you were at work.

    Please feel free to correct any errors - my brain hurts.
    richest1, install, tall tales and 2 others like this.
  18. lindenlea

    lindenlea Star commenter

    PeterQuint and Startedin82 like this.
  19. Sundaytrekker

    Sundaytrekker Star commenter

    Wow Peter , that’s amazing. Are you a maths teacher? :D

    I’d still rather have the extra income every month. But I had paid off the mortgage a few months before retiring.
    Startedin82 likes this.
  20. PeterQuint

    PeterQuint Lead commenter

    Okay, those are the sums, here are a few thought.

    1 - I'm guessing you want to do stuff when you retire (stop me when I get too complicated). Some of that stuff will cost money - extra to your regular monthly budget - and that much of that you can foresee. I'm thinking holidays, but it could be something else. At the moment, if you go on holiday, I'm guessing you save a bit every month, and spread the cost over the year. In the case of your pension, this is an extra expense, saved for after your regular outgoings. Or, put another way, from the taxable bit. So if you save £3,000, you'll have to use £3,750 in pension and give £750 of that to the taxman. If you take a larger lump sum, you use £3,000f it and pay nothing to the taxman. In short, it looks like you're better off taking a larger lump sum if you know for sure you're going to be spending it on something large and specific, like a holiday.

    2 - Okay, looked at another way. I've calculated (previous post) that, living to 81, you're £17,136 better off at the end of your life, by taking the minimum lump sum. Over the 21 years of your retirement that's £816 a year, or £68 a month averaged out. Hopefully that puts a real-world figure on it. Will/would that £68 a month benefit outweigh the benefits on the other side?

    3 - My own opinion. I live a comfortable life. More is nice, but on a monthly basis I earn enough to enjoy myself. So that's my target, rather than 'as much as I can get'. As long as I can continue living a good life, enjoying my current creature comforts, Sky, Netflix, walking, holidays, car, going out, etc., then I'm happy. I only really need my pension to give me that much; in other words, my pension needs to be larger than my current net income minus mortgage payments (presuming the mortgage is paid off). I'll take as large a lump sum as I can which allows me to do that. From my sums, if I take my maximum lump sum, then my pension + SWMBO's pension will be greater than our current joint income minus mortgage/debt payments.

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