When you have worked for a company over a number of years and have been lucky enough to build up one of those gold-dust like final salary pensions, the point at which you retire becomes a bit like judgement day.
You are typically presented with two or three options in your retirement pack – take the full income, take the full lump some and reduced income, or something in between.
The problem is that once you have made your choice you cannot go back. The choice will be set in stone, for life, for what could be 40 years. So it is no small decision to make. Understandably we receive a lot of enquiries from people wanting help with the decision making process. It’s a lot of pressure to take on if you’ve not thought about it much before. Plus you want to get it right and discussing it with someone else can often help.
So I thought a few basic considerations might help those who are in this position (and there will be plenty as we hit the baby boomers coming into retirement era).
1. Do you need a lump sum?
If you have a mortgage or other debts to pay off, or you have some big expenses in mind like work on the house or a new car etc. then a lump sum might be useful. If you have no cash as a reserve to make you feel comfortable in retirement then, again, the lump sum might be useful. Remember you do not need to take the maximum lump sum, you could take a smaller cash sum if you only need a portion of the maximum on offer.
2. Do you need income?
This is naturally a ‘yes’ answer I know, because everyone needs to replace the income they have previously worked for in retirement, when they no longer wish to work. But the important question is how much income do you need? If you know that you need all of the income on offer by taking no lump sum because that is going to help you cover your ongoing expenses in retirement without you having to worry about income, then maybe that’s the best option.
3. Are you thinking over your options carefully?
Again this might seem obvious but a lot of people are seduced by the fact that the lump sum is tax free where as the income will be taxed. That is a consideration, but tax should be a secondary consideration to the main event, which is your need for either income or cash in a financial planning perspective. If you need the income but like the idea of the cash lump sum then think about what you will do with the cash to generate income. Very often the lump sum on offer will need to generate guaranteed interest of more than you can earn right now in order to make up for the income you are giving up.
If you do need help with choosing the right options then please feel free to contact us today.