Author Topic: Pension Options - Advice Please  (Read 2734 times)

CMC8310

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Pension Options - Advice Please
« on: September 03, 2016, 04:26:51 AM »

Hi all - looking for some advice / input into my pension options when I hit 50 and FI! Currently the range of figures for Annual Pension & Lump Sum (Tax Free) are as follows:

- Annual Pension - 18,388
- Lump Sum (Tax Free) - 121,514

or

- Annual Pension - 22,971
- Lump Sum (Tax Free) - 11,342

Additional information:

The Annual Pension will increase at a minimum of 3% per annum. If inflation increased above that figure in the UK in the coming years, it would increase by more.

My initial plan was to take the Lump Sum and buy a flat to move into and Rent out my current 2 bed property. This would be a down size and have other Expense savings (reduced Council Tax / Factor fees). Estimated rental income would be 900 mo, Expense savings of c. 60 mo & additional costs for Insurance / Maintenance / Letting Agent Fees of 140 so Net of 820 mo. Legal and move costs etc need to be calculated and factored in as one of costs.

Whilst I would be paying a Letting Agent to deal with the day to day, I am of course running the risk of vacant periods / reduced income etc.

What would you recommend? Increased pension and guaranteed 3% increases, Rental property and down size or other?

Thanks for your input.






MDM

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Re: Pension Options - Advice Please
« Reply #1 on: September 03, 2016, 05:25:07 PM »
What would you recommend?
Some spreadsheet work using different interest rates, longevity, etc. to see if there is a "clear" answer for your situation, or "it depends...".

redbird

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Re: Pension Options - Advice Please
« Reply #2 on: September 03, 2016, 11:38:44 PM »
What would you recommend?
Some spreadsheet work using different interest rates, longevity, etc. to see if there is a "clear" answer for your situation, or "it depends...".

Agreed. When can you start taking your pension? Will you actually be able to start taking it at 50, or will it kick in later?

CMC8310

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Re: Pension Options - Advice Please
« Reply #3 on: September 04, 2016, 01:49:57 AM »
What would you recommend?
Some spreadsheet work using different interest rates, longevity, etc. to see if there is a "clear" answer for your situation, or "it depends...".

Agreed. When can you start taking your pension? Will you actually be able to start taking it at 50, or will it kick in later?

I can take the pension at 50. The early penalties etc are factored into the figures I've quoted.

Thanks for the steer - I'll have a try at the spreadsheet and report back.


SnackDog

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Re: Pension Options - Advice Please
« Reply #4 on: September 04, 2016, 03:39:12 AM »
For scenario A, the pension has an NPV of $276K (6% discount rate) without inflation. With 3% inflation adjustment each year, the pension has an NPV of $418K.  So, with our without inflation, the pension is way more valuable than the $121K lump sum you are offered. Take the pension.  Looking at it another way, over 30 years the pension would pay out nearly $1MM while 4% SWR of the lump sum would total less than a quarter of that.

Your scenario B must have a typo as the annual pension is greater than the lump sum.

former player

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Re: Pension Options - Advice Please
« Reply #5 on: September 04, 2016, 03:57:59 AM »

Hi all - looking for some advice / input into my pension options when I hit 50 and FI! Currently the range of figures for Annual Pension & Lump Sum (Tax Free) are as follows:

- Annual Pension - 18,388
- Lump Sum (Tax Free) - 121,514

or

- Annual Pension - 22,971
- Lump Sum (Tax Free) - 11,342

Additional information:

The Annual Pension will increase at a minimum of 3% per annum. If inflation increased above that figure in the UK in the coming years, it would increase by more.

My initial plan was to take the Lump Sum and buy a flat to move into and Rent out my current 2 bed property. This would be a down size and have other Expense savings (reduced Council Tax / Factor fees). Estimated rental income would be 900 mo, Expense savings of c. 60 mo & additional costs for Insurance / Maintenance / Letting Agent Fees of 140 so Net of 820 mo. Legal and move costs etc need to be calculated and factored in as one of costs.

Whilst I would be paying a Letting Agent to deal with the day to day, I am of course running the risk of vacant periods / reduced income etc.

What would you recommend? Increased pension and guaranteed 3% increases, Rental property and down size or other?

Thanks for your input.
I did a complete "reverse commute" of my lump sum and put the whole of my lump sum back into the pension: I had no need for the lump sum and got a conversion at 4.1% plus index linking, for life, safe as the Bank of England.  Pretty good bargain, I thought then, and still do.  Work out the % return on capital you are getting for the additional pension will tell you whether it is worth it for you, but an annual 3% increase plus inflation over that, added to whatever % return on capital they are giving you immediately, may look hard to beat.
« Last Edit: September 04, 2016, 04:02:43 AM by former player »

CMC8310

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Re: Pension Options - Advice Please
« Reply #6 on: September 04, 2016, 04:55:46 AM »
For scenario A, the pension has an NPV of $276K (6% discount rate) without inflation. With 3% inflation adjustment each year, the pension has an NPV of $418K.  So, with our without inflation, the pension is way more valuable than the $121K lump sum you are offered. Take the pension.  Looking at it another way, over 30 years the pension would pay out nearly $1MM while 4% SWR of the lump sum would total less than a quarter of that.

Your scenario B must have a typo as the annual pension is greater than the lump sum.

Hi SnackDog - to clarify, at 50 the pension projections I can take from my current employer is either of the Options (both Monthly Pension / Cash Lump Sum). This is the Min / Max Range of Lump Sum 25% Tax free. By reducing the 25%, this increases the Monthly Pension for life.

As it is Inflation protected and in the current situation in the UK very attractive, the Annual Pension would increase at a minimum of 3% per annum. If Inflation did go above 3%, the increase would match the Actual %.

My question was around, take the higher lump sum & lower pension or the lowest lump sum & higher pension.

Thanks for your input.

CMC8310

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Re: Pension Options - Advice Please
« Reply #7 on: September 04, 2016, 05:26:10 AM »

I did a complete "reverse commute" of my lump sum and put the whole of my lump sum back into the pension: I had no need for the lump sum and got a conversion at 4.1% plus index linking, for life, safe as the Bank of England.  Pretty good bargain, I thought then, and still do.  Work out the % return on capital you are getting for the additional pension will tell you whether it is worth it for you, but an annual 3% increase plus inflation over that, added to whatever % return on capital they are giving you immediately, may look hard to beat.
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Hi Former Player - this forum is fantastic - so glad I've found it. Thanks for your reply.

It is such an important decision, can I just make sure I've explained the position correctly. This is the Min / Max range for the Lump Sum amount and impact on the Annual Pension I've shown.

If I calculate the % return correctly, the Lump Sum difference is 110,172 (121,514 - 11,342) & Pension Diff. per annum is 4583 (22,971 - 18,388) so a 'conversion' of 4.16% and as you have said the Index linked 3% min. of greater if UK inflation did increase significantly.

I could do with the cash but if this is a low risk long term solution, I will adjust my plans for the next 5 years and build up a share / cash fund separately.

Am I also getting a bargain here?

former player

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Re: Pension Options - Advice Please
« Reply #8 on: September 04, 2016, 06:12:07 AM »
I agree that on the figures you give you get a pension worth 4.16% of the commuted lump sum, index linked.

USA posters on this forum work on two assumptions: a return on stock market investments which has a safe withdrawal rate of 4% per annum (increasing with inflation).   I have seen a table (can't now find it) which suggests that the safe withdrawal rate on UK investments is slightly lower, at 3%.  So essentially what your pension deal does is lock in a level of returns that this forum agrees is obtainable and satisfactory, but without any of the concomitant risks of stock market investment and the work of managing an investment portfolio.  The annual 3% minimum increase potentially makes it an even better deal, given that the Bank of England inflation targets are below this level, so your pension looks at though it will increase over time by more than inflation.  That is good, because it helps to keep the pension in line with general increases in wealth rather than just compensating for decreases in monetary value.

You do of course need to consider how secure your pension scheme is, given that a number of private sector schemes are currently underfunded.  If it is a central government or local government scheme, it is as secure as the Bank of England.  If it is a private sector scheme, you need to check out the Pension Protection Fund rules, which protect to 90% before you take the pension and 100% after you take it but not with the same inflation protection.

One relevant question on taking the pension rather than the lump sum is inheritance: your pension income dies when you do but an invested lump sum can be passed on to your heirs.  That wasn't a consideration for me, but might be for you.  You could also consider the tax position: you will pay income tax on pension income but there are various allowances (on dividend income, for instance, or moving the lump sum over to an ISA) which might make investing the lump sum and taking income from those investments more tax advantaged (although tax rules can change, of course, so what is the case now might not be in the future).

Faced with a very similar question to yours I opted for the pension payments, and don't regret that - I think I got a decent deal, and it bumped my pension up to a level that feels very comfortable rather than possibly a bit marginal, for absolutely no work and no worry.

CMC8310

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Re: Pension Options - Advice Please
« Reply #9 on: September 04, 2016, 06:51:53 AM »
Hi thanks again for the comprehensive response and sound advice. I think Im airing on the side of increased pension / reduced Lump Sum. The Pension is with a global insurer so comfortable with the risk.
Regarding inheritance, thanks for flagging one for me to think through but the guaranteed increased income for absolutely no work and no worry along with my existing Rental income will get me to my projected spending at 50 with luxuries (Holidays / Gym / Social Beers & Restaurants) all covered. I will also have a Share / Bond fund as a safety net by then and can continue to reinvest the Dividends / avoid draw down after 50 if required. These luxury areas could be reduced significantly as an additional safety net.

Starting to shape the plan and focus areas for the next 5 years and build in confidence that FI is very much doable really appreciate your assistance and guidance.