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Increasing lump sum - thoughts

Discussion in 'Retirement' started by pauljoecoe, May 13, 2020.

  1. pauljoecoe

    pauljoecoe New commenter

    Just thinking of applying for my pension and then this question arises! Decisions, decisions!

    So, to outline my circumstances. We have (wife and I both retiring) a comfortable amount of cash savings which could keep us going for many years. We have no need for a lump sum, no big expenditure plans (although one possibility I will mention in a bit)

    The regular monthly payment from our pension would cover our daily expenses comfortably too. No mortgage, kids etc. So it’s all about having money to spend on enjoying life.

    My calculations suggest that increasing the lump sum to the max would be the equivalent roughly 10 years of the ‘lost’ income. That’s before tax. As the lump sum is tax free this could be a benefit.

    On the down side if the lump sum was not spent it would need to be invested somewhere to keep up with the index linked increases the pension would have each year.

    My only possible need for a larger lump sum would be to assist towards the purchase of a property for my son, which in turn would provide some monthly income as he would be expected to pay us back!

    So, thoughts? I’m not asking for advice. Everyone’s circumstances are different. Just interested in people’s opinions, views, what would you do?
    What would be most financially beneficial? Of course a lot of that depends on how long one lives for!!
  2. pauljoecoe

    pauljoecoe New commenter

    Actually, further calculations suggest 12 years 'lost income.
  3. lindenlea

    lindenlea Star commenter

    Help your son buy a property and don't expect him to pay you back. One reason to take max lump sum is to have the money as part of your estate for inheritance - while pension income stops on death. He'll get some of his inheritance early and as long as you survive 7 years he'll pay no IHT.
    tall tales, stopwatch and Prim like this.
  4. diddydave

    diddydave Established commenter

  5. pauljoecoe

    pauljoecoe New commenter

    Yes, but I'd like to think of more creative ways of doing this to benefit him without penalising me whilst I'm alive.
  6. pauljoecoe

    pauljoecoe New commenter

  7. Yoda-

    Yoda- Lead commenter

    I you have enough cash why commute for a larger lumps sum?
    More indexed linked pension in the current low interest rate environment seems more prudent to me.
    wayside34 likes this.
  8. pauljoecoe

    pauljoecoe New commenter

    Tax benefit? Use lump sum to invest/property? Monthly pension not necessarily needed so much as you get older/state pension kicks in.??

    All just thoughts.
  9. lindenlea

    lindenlea Star commenter

    Well I'm speaking from experience. We have not been penalised, our lives have been enhanced. Sometimes the simple solutions are actually the best ones - isn't that Ockham's razor?
  10. Morninglover

    Morninglover Star commenter

    I took the largest lump sum I could (even though I didn't need to) - why?

    Lump sums are tax free, whilst monthly pensions are taxed. Plus once you've got the money, no-one can change the rules/move the goalposts and increase your tax on your pension (or, perhaps, freeze/reduce your monthly pension).
    Rach05, tall tales, MrMedia and 4 others like this.
  11. baitranger

    baitranger Senior commenter

    I respectfully disagree, although I do follow your argument. I think unless you have an immediate need for the extra lump sum, you are better off in the long term by taking the index linked pension. If you have better than average life expectancy , this is an even more cogent argument for taking the pension. Of course the government could reduce your monthly pension, but they could tax or even confiscate some of your money if they really want to . Look at Greece for example. It's unlikely they'll do it, but it's still possible. If they are going to reduce your pension why not introduce a special tax on your savings?
    Another point is that with ultra low interest rates, you are effectively being taxed on your extra lump sum anyway, because you are getting much less than inflation in a safe savings account. Every year, the real value of your lump sum in the bank goes down. Your pension however, is index linked.
  12. Brianthedog

    Brianthedog Occasional commenter

    If you don't need the cash, and can live off your regular pension cmfotrably, then I can't see why you wouldn't take the extra lump sum and give it to your son. I retired last year with a smallish pension,took the additional lump sum and gave my daughter half of it as part of a deposit for her first house. I won't expect it back, ever.
    tall tales, Prim and lindenlea like this.
  13. Brianthedog

    Brianthedog Occasional commenter

    The other point is that taking the additional lump sum reduces the amount of tax you'll pay on your monthly pension. My pension is just below the tax threshold now but if I'd had the full lot instead of converting it to additional lump sum, 20% of that amount would have been taxed every month.
  14. Dorsetdreams

    Dorsetdreams Occasional commenter

    During both world wars UK inflation out-run interest rates, sometimes by 10 or even 15%.
    If the current situation has a similar effect taking a larger lump sum looks like a very poor idea.
    (I am no economist and I have no real idea how the forced expenditure on imported arms compares to expenditure on domestic support - yet to me it seems that the latter is even more inflationary.)
  15. heldon

    heldon Occasional commenter

    Jam today or jam tomorrow
    I am taking the larger pension at 60
    catmother likes this.
  16. Morninglover

    Morninglover Star commenter

    I suspect a Government is more likely to remove the index linking (or change it to pay out less) than they are to top slice bank accounts; indeed (despite whatever they might so abroad) any government that did this here would be committing political suicide. Of course if you fear that, invest in gold etc instead of using bank accounts.

    However I do agree the ultra low savings rates are a concern - I commented to Mrs M the other day that maybe I'll buy a really nice car (I'm guessing there are a few good bargains likely to be going later this year!) rather then keep some savings earning 1% or less - unfortunately Mrs M pointed out we have a perfectly good car, and if there is any money going spare we should give it to our children.
    Prim, eljefeb90 and brook123lyn like this.
  17. mustntgrumble

    mustntgrumble New commenter

    I'm in the maximise pension camp. The argument has been gone though many times but basically If you are healthy, have a long lived family, it is wisest.

    If you have a life expectancy less than 7 years.. Any of your lump sum you give to the kids will be taxed if you die. They will have to declare it as part of their inheritance.

    A really bad /morbid thought. Everyone is assuming a quick, cheap death. All my grandparents lived to 90 About half of my family needed significant social care and would have needed to be put in a home if close family hadn't stepped in. If you have any money in a house or lump sum then the government will acquire it to cover costs. My pension is based on a worst case scenario of needing a care home. As the state pension and TPS is indexed lived and should approximately cover that then my kids should not be inconvenienced and still get house etc.

    Don't underestimate the effect of inflation. If inflation stays at 2% average for ten years then your lump sum is decreased in value by 30%. Every decade or so like clockwork we get a peak of inflation around 10%. That can really knock any value off a lump sum.

    Look at diddys excellent work advising people to leave pension scheme if their salary levelled 10 years ago. That effect was brought about by a 7% peak inflation following the late 2000 banks crash. Clearly there is going to be a"correction" because of covid.
  18. diddydave

    diddydave Established commenter

    Thank you for that comment but I hope I have been slightly more nuanced than that...certainly I believe everyone who has been on the same scale for 10 years should take a 'break' of 1 month but leaving the pension scheme entirely has to be considered very carefully. There are some, mostly those who are close to retirement, for whom that makes sense but many who are 5 or more years from finishing would probably be better off going back in after a month's break. As ever it is definitely worth doing some maths, or asking someone to help you with that, so you can put it into real cash terms.

    Your point about care homes was one that I had considered but forgotten, as I have no children it is something that is quite probably out there in my future. So although I don't have to worry about inheritance I do have to consider what kind of care/home I could afford in the future. Having an extra few thousand a year through my pension could make a difference then....and having just helped my father-in-law through the last few years of his life we found that the care costs starting at £700 a week would very quickly burn through the lump sum and other assets. He was absolutely desperate not to go into a home and fortunately our circumstances meant we could help him stay in his own until he died...at the age of 94 - which, if my wife has inherited his longevity, means we are still planning for the long term :)
    adultsocialcare likes this.
  19. lindenlea

    lindenlea Star commenter

    You cant build a plan round predictions of care needs. There is a real likelihood that a new universal NI scheme to contribute towards costs will be introduced and the chance of local authorities contributing to the care of any but the most poor seems unlikely to me. So, be prudent; invest in your kids lives as much as you can afford too, live moderately and enjoy life but don't try and beat the system. You'd need a crystal ball to be certain of winning that game.
    eljefeb90 and Morninglover like this.
  20. diddydave

    diddydave Established commenter

    Agree, there's no one choice that is guaranteed better than another - unless you have 20/20 hindsight as you say! ;)

    I tend to stick to the maths side of the equation and just lay out what the financial consequences may be so that anyone can take them and make their own, hopefully more, informed choices.
    border_walker likes this.

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