Should I take a lump sum from my final salary pension sheme.?
Conventional wisdom says it is always right to commute part of you pension for tax free lump sum. However looking at my quote I am not so sure. I have been offered £11K per £1K of pension given up. This does not seem that high to me, especially as I am taking my full pension without penalty at 60. Any advice?
For 11k to produce an income of 1k you will need to invest it at 1/11 = 9% == this is effectively impossible ….. and if the 1k is Index Linked, it’s even more impossible for £11,000 ‘now’ to produce more than £1,000 per year ‘for ever’ ..
Of course this ignores ‘Mortality’ (since you won’t live ‘for ever’) and Tax (since the ‘25% Lump Sum’ is Tax Free whilst the £1,000 a year is Income and (depending on your other income) may be Taxed at 20% or 40% ..)
If your life expectancy is very short (say, only another 5 years) then, when the £11,000 is ’spread’ over your remaining life it can be better deal than £1000 a year (eg. for 5 years, this is £2,200 a year) …
However if you are a non-smoker in average health at 60 you should plan to live until well past 80 ..
I leave you to use Excel to calculate what rate of interest needs to be achieved starting with £11,000 invested today, and paying out £1,000 a year, ending with zero after 20 years.
Allocated Pension’s new label: “Account-Based Pensions”
