Cash or income?
From age 55 a member has the option of taking some of their pension savings as cash and many members think this is the best option as the lump sum is tax free.
Members should be made aware that they do not have to take the full amount of PCLS offered, a smaller amount can be taken if preferred.
There are many financial considerations to making this decision.
In this module we are concerned with lifestyle factors.The main ones that have an impact on this decision are:
Life expectancy
What is the average life expectancy?
According to the Office of National Statistics a new born baby boy could expect to live 79.1 years and a new born baby girl 82.8 years if mortality rates remain the same as they were in the UK in 2013–2015 throughout their lives.
Life expectancy at birth has increased by 13.1 weeks per year on average since 1980–1982 for males and 9.5 weeks per year on average for females in the UK.
In 2013–2015 a man in the UK aged 65 had an average further 18.5 years of life remaining and a woman 20.9 years.
The most common age at death in the UK for men was 85 and for women was 89.
There was an increase in deaths in 2015 and this has had a very slight impact on life expectancies, resulting in life expectancy at birth in 2013–2015 remaining virtually unchanged from the 2012–2014 life expectancy estimates.
If the member is in good health, doesn’t need a cash lump sum and expects a long and happy retirement then it may be more important to have the higher pension coming in on a regular basis that is guaranteed.
If the member is not in good health then the option of taking some cash may be more attractive if they do not expect to live for many years.
The longer a member survives after retirement, the financially better off they will be by taking income even though it is subject to income tax.
DB schemes
A member’s pension will (unless the PCLS is provided separately) be reduced as a result of their taking a PCLS. The more a member takes as a PCLS, the greater the reduction in their pension will be.
DC schemes
The PCLS option will materially affect the amount of both the pension paid to the member and any spouse’s pension. The PCLS is deducted from the fund value, the amount left is then used to purchase the pension.
Flexible benefits
A member could access their funds as either a one-off lump sum or multiple lump sums. These are known as Uncrystallised Funds Pension Lump Sums (UFPLS).
The member needs to consider carefully what future income requirements they may have.
