Tag Archives | pension

Pension or Lump Sum?

pension-or-lump-sumPension or Lump Sum?

Many retirees are in a position where they need to decide between taking a pension or a lump sum on retirement. Workplace pension schemes may offer options of a lifetime pension, a lump sum or a combination of the two. A part lump sum option also applies to members of the old Government Superannuation Fund Scheme and to people who have transferred a UK pension (under certain conditions). In addition, you can now use a lump sum to purchase your own annuity providing a regular monthly payment for life. In all these situations, the key question is “Should I take a pension or a lump sum?”

The answer will depend on your personal situation. The advantage of a pension is that it provides a known amount of income for the remainder of your life. This helps take away the uncertainty of how long you are going to live and what investment returns will be. If you live longer than the average person, the total value of the payments you receive will be more than the value of the lump sum invested (plus returns). The key disadvantages with a pension are that you cannot access the capital sum invested, and if you die before the average life expectancy, any funds not already paid out to you will be forfeited. To avoid these situations, you can invest a lump sum in a variable annuity which allows partial access to capital and has a residual value at the end of life.

The key factors for considering your options are your life expectancy – based on your health and family history of longevity – and your ability to access large lump sums if required. If you have a decent lump sum in addition to a pension or an annuity you may have the best of both worlds.

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Don’t Just Retire: Reformat!

Dont’ Retire: Reformat!

The word ‘retirement’ conjures up a range of confusing or even contradictory feelings for people these days. Once upon a time, retirement was a defined day, usually marked by a birthday, after which any form of paid employment ceased immediately. A combination of factors, including the end of compulsory retirement and increased longevity, mean that people are now working well past the age of eligibility for their pension. For some, this means just continuing on with their career as it was, either full time or part time, but an increasing number are seeing retirement as an opportunity to do something completely different in life. What better time in life to experiment, with a modest standard of living guaranteed by pension income, no mortgage payments and no dependent children to worry about?

There are many famous examples of people who have started businesses late in life, including Ray Croc, founder of McDonalds and Colonel Sanders, founder of KFC who had both celebrated their 65th birthdays before they created their global empires. For some, the motivation to try something new is driven by the desire to have a higher income in retirement, while for others, it is all about the excitement of trying new things; perhaps things they have always secretly wanted to do.

There is a great little book called ‘Don’t Just Retire: Reformat’ written for such people by Dr Lynda Falkenstein (Niche Press, 2005), full of ideas for how to reinvent yourself in retirement. Lynda suggests three important questions to ask yourself: If you could, with a wave of a wand, be doing anything you want, what would it be? What is it that gives you the greatest personal joy and fulfillment? What are you doing to ensure ‘it’ is an enduring feature of the rest of your life?

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