If you're approaching retirement, think twice before exercising your right to take 25% of your pension fund savings as a tax-free cash lump sum.
If you're a member of a final-salary scheme, the tax-free lump sum available to you on retirement depends on a "commutation factor". This is the formula that determines how much cash you qualify for and, just as critically, how much annual pension income you'll forgo by taking the money. The higher the commutation factor your scheme offers, the more generous it is.
But the factor also gives you a rough idea of how long you have to live to miss out overall by taking the cash. A commutation factor of 12 broadly means that 12 years into your retirement you'll have given up more in regular pension income than you received as your lump sum.
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Men and women aged 65 today can expect to live for another 19 and 21 years respectively. So for many people, a higher annual pension with no lump sum paid upfront will be a better bet.
In defined-contribution schemes, the calculation is more difficult. You can take a straight 25% of the fund upfront, but this will mean less annual annuity income or a smaller fund to invest if you're opting to draw cash down directly from your pension scheme. If the former, you can do some quick calculations by getting annuity quotes with and without taking the lump sum; if the latter, you'll have to make a judgement about the investment returns you're missing out on.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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