Should I take the pension or redundancy payout?

Question

I am a 53-year-old civil servant facing redundancy in November. My financial adviser told me to go for early retirement, as opposed to the redundancy payout of £41,000. This means I will get around a £59,000 lump sum and a pension of £8,500 a year.

However, another financial adviser believes I went for the wrong option, based on the fact that I have paid my mortgage and have no debts. He feels I should take the redundancy and hold off for as long as possible before taking the pension.

I intend looking for another job when I finish in November.

I would appreciate your views on my situation.

Neil Thomas, Wales

Answer

The other two financial advisers have much more information about this than I have, so you should ask them why they recommended those options and dismissed others. The questions I would be asking are: which route offers best value for money generally, which is most tax-efficient and, based on a thorough understanding of your financial position, circumstances and needs, which is the best option?

Regarding tax-efficiency, if you plan to continue to work, the £8,500 annual pension income could push you into higher-rate tax, depending on what your new salary is. If all of the £8,500 was taxed at 40%, but by delaying the pension you would get a higher pension than 20%, deferring the pension might make sense. In respect of the redundancy payment, some of this will be taxable but the lump sum from the pension should be tax-free.

As for value for money, it's not clear whether you had a choice over the £59,000 lump-sum level. Can you opt for a lower lump sum in exchange for a higher pension income?

If you are in good health and have a dependant who would receive, perhaps, 50% of your pension if they survive you, the higher index-linked income might be more valuable than the extra lump sum. If you are single and have concerns about your life expectancy, then the lump sum might offer better value. Sacrificing pension income for a higher lump sum often represents poor value for money but that doesn't mean that people should always decide to choose the low lump sum, high-income option.

What is not clear is if you opted for the redundancy payment route, what pension would you eventually get and when? Does the £8,500 income represent the full pension you would have expected at retirement or has it been discounted to reflect the fact that it is being paid early? With this knowledge, you can make a calculation up to, say, age 90, of what the total receipts across pension and redundancy would have been if you took redundancy and delayed the pension, versus if you just received the pension early.