Minimum or Maximum pension lump sum?

[stroller]

I am calling my pension in at 55 in s few months time, the question is should I take the min or max lump sum?

I am not sure which is the best move, I have talked to quite a few people and the opinions have been mixed, any advice on the pros and cons for taking the minimum or maximum would be most helpful.

Look forward to your replies

Cheers

[trythat]

Personally I'd take the maximum, but I suppose the way to work it is how many years would you have to survive if you took the minimum out e.g if your max was 60k and min was 40k and your extra pension per year was 2k when taking the minimum out, then by my reckoning you'd have to live at least another 20 years+, what with interest on the 60k if you shoved it somewhere.

But I'm willing to be proved wrong.

[RobertT]

I am calling my pension in at 55 in s few months time, the question is should I take the min or max lump sum?

I am not sure which is the best move, I have talked to quite a few people and the opinions have been mixed, any advice on the pros and cons for taking the minimum or maximum would be most helpful.

Look forward to your replies

Cheers

As you’ve already found out, everyone will have a different opinion. Some will see the £ signs in their eyes and want a large lump sum and perhaps won’t be too concerned about the monthly income. While others will want as big a guaranteed income as they can get to try and make sure they have enough to live on. So it all comes down to personal choices and individual circumstances to a large extent.

But it’s not a case of just deciding whether you want a bigger lump sum, you’ve got to work out how much income you’re giving up in return and how that sits with you financially. So does a larger lump sum fit in with your plans for retirement? Or is a larger pension more important?

The larger pension is probably the more boring option, but it provides guaranteed indexed income for life and will still be coming in every month long after many peoples lump sum has been spent.

But personally I would have thought the main question is, why do you want to take your pension at 55 anyway? By doing that you’re reducing both the pension and the lump sum.

I know from some of your other posts you plan to keep working and hope to get EVR at some point and coming out of the pension will mean a larger lump sum, i.e 104 weeks pay. But that may not even happen! If it does, come out of the pension then if that’s the right thing to do for you. By taking it now you’re missing out on building up extra pension while you’re still employed and those 25% and 50% reductions in your NRA60 and NRA65 pensions will be with you for life. Plus while you’re still working, another 20% of your pension will go in income tax.

I understand the argument of taking a smaller income but for a longer period of time. But whether that is a better financial decision will ultimately depend on how long you live, which is something no one really knows. But as a general rule, the longer your life the better off you’ll be by taking your pension at the correct age.

For example:
Bobs NRA60(pre 2010) pension is worth £10,000 per year taking it at 60 and he lives until 75, so in simple terms, not including inflation, that’s a total pay out of £150,000.
If he takes it at 55 with a 25% reduction and still lives until 75, then he’ll still get £150,000.
If he lives to 80 his figures would be £200,000 and £187,500 respectively.
His lump sum numbers would obviously be less also by taking it early.

Another thing to think about is what do you plan to do with the lump sum? Are you going to spend all or most of it or are you going to invest it somewhere to provide an income? If so, how long will that money need to last and is it likely to be more or less than what you’re giving up by taking your pension early?

I don’t want to preach to anybody and it’s always down to personal circumstances, but the whole point of a pension is you save it up over your working life to ensure you have enough to live on in retirement. At some point you won’t be working anymore and presumably your only income will be from your pension/s. Will you be able to live off them then considering the early payment reductions? If the answer is no, then I would strongly suggest you think twice.

[stroller]

Thanks for your replies, RobertT your in depth reply was brilliant as all your replies are, perhaps thinking about it taking my pension while still in service may not be a good idea.

You are correct you have seen my posts about VR, I just feel after nearly 34 years in the job it's a good time to go, the job seems to be more draining and the journey into work seems to be getting harder, i seem to be tired all the time, I bet that I am not the only one!!!!!!!!

If I got VR it would open a lot of doors up for me, I have quite a bit of equity in my property but cannot touch it until I move, I could go mortgage free that would save me nearly £10k per year mortgage payments etc etc.

But at the end of the day whatever happens if I don't get VR its not the end of the world, what will be will be.

[Fatboyslim]

Throwing my hat into the ring...

'Bob'. Bob will save the payments he makes into his pension from age 55-60. He gets the chance to retire at say 55? Chances he is going to enjoy longevity beyond retiring at 60? If he retires at 55. I'd say with the way the job is going. Unless he works to 60. he might enjoy 15 years retirement. If Bob retires at 55. He might enjoy a further 5-10 years retirement, on top of the 15 he might get at retiring at 60. So, surely he could be better off retiring earlier?

Food for thought...!

[RobertT]

Throwing my hat into the ring...

'Bob'. Bob will save the payments he makes into his pension from age 55-60. He gets the chance to retire at say 55? Chances he is going to enjoy longevity beyond retiring at 60? If he retires at 55. I'd say with the way the job is going. Unless he works to 60. he might enjoy 15 years retirement. If Bob retires at 55. He might enjoy a further 5-10 years retirement, on top of the 15 he might get at retiring at 60. So, surely he could be better off retiring earlier?

Food for thought...!

In general I don’t think there is really any truth in retiring earlier means a longer life or if the opposite also applies. I think it’s a bit of an urban myth. This article on the subject is quite interesting: http://www.bbc.co.uk/news/magazine-18952037" onclick="window.open(this.href);return false; But this thread isn’t about longevity anyway is it.

Stroller is thinking of taking his pension and continuing to work for RM. In my opinion that is a mistake due to the pension he could be accruing while still in employment.

Also many people think that they can stop paying into the pension and they’ll suddenly get all their contributions as an effective pay rise. But that’s not how it works.

Let’s say our mate Bob pays £20 per week into his pension(RMPP). Because he gets tax relief at source, for every £1 he pays he has £0.20 taken off his income tax bill. So that £20 only actually costs him £16. Normally pension contributions are taken off gross pay before tax and NIC’s are deducted, but because there are now no pension contributions, the £16 will get taxed aswell, leaving around £12 to take home. So if he saves that for 5 years he’ll have £3120 plus any interest, etc. Compare that to what he’ll be giving up by not paying into the RMPP for those 5 years – based on my Section C statements, that's probably around £1,500 per year for life.

If Bob is actually in the RMDCP and his £20 per week contribution equates to the maximum 6% employee payment which in turn attracts the maximum 9% RM contribution, that’s a total of £13,000 over 5 years, plus growth. Taking tax relief into account he’ll be paying in just 32% of that total.
Considering new rules which potentially allow you to take all of that out tax free, that in my book makes a pension one of the best savings schemes around.

Also, I’m not saying anyone shouldn’t retire early, I’m planning on retiring at around 55 myself, although I have no intention of taking my RMPP before the correct ages. All I’m saying is taking your pension early while staying in the job isn’t necessarily the best plan.

[Fatboyslim]

Point taken - but I think the way the job is going in deliveries. I remember starting and deliveries were 0700-0930. And a little second delivery. Now, with proposed six hour delivery spans in the pipeline. I'd rather be retired and thinking about a stroll around the golf course. Than a six hour delivery slog...!!

And no matter what you read. This will take its toll later on in life.

I'm also targeting a 55 retirement by the way.

[pj2001]

All these calculations made on NRA 60 and NRA 65 pension payouts, don't forget your state pension kicks in at 66

[RobertT]

Point taken - but I think the way the job is going in deliveries. I remember starting and deliveries were 0700-0930. And a little second delivery. Now, with proposed six hour delivery spans in the pipeline. I'd rather be retired and thinking about a stroll around the golf course. Than a six hour delivery slog...!!

And no matter what you read. This will take its toll later on in life.

I'm also targeting a 55 retirement by the way.

Life expectancy can come down to lots of things and the job you do is one of them. But so is diet, lifestyle, family history,etc. Ultimately nobody really knows how long they're likely to live.

[RobertT]

All these calculations made on NRA 60 and NRA 65 pension payouts, don't forget your state pension kicks in at 66

Mine will be 67.

[srfkdr]

[quote="RobertT"]

Also, I’m not saying anyone shouldn’t retire early, I’m planning on retiring at around 55 myself, although I have no intention of taking my RMPP before the correct ages.

Hi Robert

Perhaps I am missing something, but why would you want to miss out on 5 years of pension income for the sake of only 5 years of RPI additions to the pension pot?

[RobertT]

Hi Robert

Perhaps I am missing something, but why would you want to miss out on 5 years of pension income for the sake of only 5 years of RPI additions to the pension pot?

Your RMPP gets reduced by 5% for each year you take it early. So taking all your pension at 55 would see a 25% reduction on your NRA60 and a 50% hit on your NRA65.
The argument for taking it early is you get less but for longer, while taking it at the correct ages is more likely to provide enough income to live on, which in my opinion is what it's all about. Whichever choice gives turns out to be the correct financial decision overall will depend on how long you live.

[slider]

Last year myself and 2 others from my office were offered and took VR and being as we were aged 55 plus we received our full pension I'e lump sum and monthly payments with immediate affect which was quite surprising as I fully expected the pension to be reduced accordingly as at the time I was 56 years old with 40 years service but fortunately this was not the case.
Royal Mail is paying me my pension as if I were 65 with no loss incurred.
Regarding the actual VR payment we were payed 6 months salary I think had I been under 55 the offer would have been 2 years Salery with my pension frozen till 65 so a kind of trade of I guess ? On the pension side there were 3 offers on the table the first one being max lump sum with less annual pension which I took as it would have taken 20 years plus to make up the difference over the second option which was the lesser lump sum / higher annual pension also ther was a third option which was an even higher annual pension but zero lump sum.
I don't know if Royal Mail is legally obliged to do this for employees who are offered VR and are over 55 or this sort of offer is unusual? But for you guys over 55 which seems to be the golden age and would like VR hopefully you will get these sort of offers it's certainly worth looking into.

[RobertT]

Last year myself and 2 others from my office were offered and took VR and being as we were aged 55 plus we received our full pension I'e lump sum and monthly payments with immediate affect which was quite surprising as I fully expected the pension to be reduced accordingly as at the time I was 56 years old with 40 years service but fortunately this was not the case.
Royal Mail is paying me my pension as if I were 65 with no loss incurred.
Regarding the actual VR payment we were payed 6 months salary I think had I been under 55 the offer would have been 2 years Salery with my pension frozen till 65 so a kind of trade of I guess ? On the pension side there were 3 offers on the table the first one being max lump sum with less annual pension which I took as it would have taken 20 years plus to make up the difference over the second option which was the lesser lump sum / higher annual pension also ther was a third option which was an even higher annual pension but zero lump sum.
I don't know if Royal Mail is legally obliged to do this for employees who are offered VR and are over 55 or this sort of offer is unusual? But for you guys over 55 which seems to be the golden age and would like VR hopefully you will get these sort of offers it's certainly worth looking into.

It sounds to me as if you actually got EVR(Early Voluntary Retirement) with enhanced pension, which is only open to the over 55’s.
But unfortunately that option was made less attractive when the MTSF was renegotiated late last year.

[slider]

Yes it was early volantary retirement / volantary redundancy which was first offered February 2015 and I left in the May.
Have they moved the goalposts now on that kind of offer?