Ask a planner answers: taking a small or large lump sum at retirement

Tuesday, June 7, 2016

The question, from Neil Coy, 60 from Lincolnshire

I want to retire at 61 my company pensions gives an option of a large lump sum + pension using 31% of my lifetime allowance for tax or a larger pension + small lump sum using 36% of my lifetime allowance. How do I work out the best option for me?

The answer, from Alan Dick CFPTM, Forty Two Financial Planning Ltd

There are really two separate issues here; the Lifetime Allowance and the need for income versus a lump sum.

If this is your only pension the Lifetime Allowance is likely to have little or no impact on your decision as both options are well within the Lifetime Allowance limits. However, if you have other pension benefits that might take your overall pension entitlement to close to the Lifetime Allowance of £1.25m (unless you have a protected higher amount) managing the impact on the allowance used could save you incurring a tax charge of up to 55% on the excess over the Lifetime Allowance.

The decision whether to take a full pension or reduced pension plus a tax free lump sum will depend on your own personal circumstances; there is no one size fits all answer. Some of the factors which you will need to consider are:

  • other assets and liabilities
  • projected income during retirement
  • your own personal lifestyle goals which will dictate the level of income and/or capital you need throughout retirement
  • the value of your company pension compared to the income that could be secured by investing the lump sum or using the lump sum to buy an annuity yourself (this may be particularly relevant if you have any serious health issues which could allow you to benefit from enhanced annuity rates)
  • personal tax position
  • the need or desire to protect dependents or pass on assets to the next generation

A good financial planner will gather the required information and create a lifetime cashflow forecast that shows the impact of each option and provides a framework for making informed decisions. The cashflow forecast will take account of important factors such as inflation, investment assumptions and life expectancy to ensure that you do not underestimate the level of income required for your own personal lifestyle requirements.

Alan Dick CFPTM
Forty Two Financial Planning Ltd