Pension lump sum to take or not

damon21 · 2 February 2012 at 7:35PM

Due to retire later in the year on a final salary pension, what are the benifts and againsts on taking a lump sum, getting conflicting advice on what to do.

atush · 2 February 2012 at 8:29PM

It will really all doeend ont he level of your pension and your other savings and investments. You'd have to post details of the commutation rate too- they are all different.

Basically you will get more pension (and even more in future years) as the pension is index linked. So, you could be better off taking it all as pension, esp if you have penty of other savings and investments and your house is paid off.

But everyones pension, and situation is different so we can't really give you our opinions with the info provided

Linton · 2 February 2012 at 9:00PM

Benefits of taking lump sum
1) Cash in hand if you need it eg for paying expensive debts
2) Lower tax

Disadvantages
1) Lower pension
2) Other people asking the same question on this forum have generally found that their pension lost is more valuable than their lump sum. They would have difficulty getting sufficient return from investing the lump sum to get the same income and inflation matching.

So as atush says it all depends on your circumstances and on the generosity of your scheme.

Tony1952 · 2 February 2012 at 10:12PM

I am due to receive a final salary pension in March. I worked out that if I didn't take the cash lump sum, it would take 16.59 years to make this sum up by way of the increased pension, which is, of course, taxable.

OK, I have no way of calculating how the annual increases on the increased pension figure, as opposed to the increases on the lower figure, would reduce this 'payback term', but I felt that it would still take ages.

So I have opted for the cash lump sum. I hope this helps.

atush · 2 February 2012 at 10:43PM

And it also pehaps mainly falls on your personal health and family health (ie gene pool).

Most people these days last a lot longer than 16.5 years in retirement. So taking a lump sum in that circumstance would make a lot of sense if your health is impared or your famiuly has a history of early mortality. It would not make a lot of sense if you are in excellent health and your parents lived to 85-95.

Again, this is personal circumstance so unless we have some facts on that, we cna't have an opinion.

Linton · 2 February 2012 at 10:58PM

Tony1952 wrote: »

I am due to receive a final salary pension in March. I worked out that if I didn't take the cash lump sum, it would take 16.59 years to make this sum up by way of the increased pension, which is, of course, taxable.

OK, I have no way of calculating how the annual increases on the increased pension figure, as opposed to the increases on the lower figure, would reduce this 'payback term', but I felt that it would still take ages.

So I have opted for the cash lump sum. I hope this helps.

Your decision may well be appropriate for your situation, but I would question its general applicability.

1) The calculated payback time will depend significantly on your assumptions for inflation, which may or may not match reality.

2) 16.59 years is rather less than your life expectancy at 65, assuming you are currently in good health. So, you are more likely than not to exceed this.

3) I suggest it is sensible in retirement planning to assume that you will live to an unusually high age. Running short of money in my 90's isnt something that I find an inviting prospect if it can be avoided by some prudence earlier on.

pineapple · 2 February 2012 at 11:09PM

I decided to take my lump sum last year for the following reasons:

Going by the longevity in my family and also the health problems which my parents had and which afflicted them from their 70s I don't expect more than 15 fit(tish) years ahead.

The global financial situation is precarious - who knows what is going to happen. I would rather have my jam today - before it turns into marg.

I paid off the few grand remaining on the mortgage. As it was a low interest rate I might have been better putting the money into a good ISA. But I would have been tempted to fritter it away. Also given the current financial situation, it seemed the more secure option. I did some much needed work on the house and have a bit left over for renewals/repairs/emergencies.

Someone who is as fit as a lop and whose family have consistently lived to a ripe old age might think differently of course!

atush · 2 February 2012 at 11:17PM

You are quite right. No pockets in a shroud, but not a good life to be living on state pension only when you have out lived your cash.

xylophone · 2 February 2012 at 11:26PM

atush wrote: »

You are quite right. No pockets in a shroud, but not a good life to be living on state pension only when you have out lived your cash.

Unlikely that someone on a DB pension (plus state pension) would wholly outlive their resources, even if lump sum taken?

pineapple · 2 February 2012 at 11:29PM

atush wrote: »

You are quite right. No pockets in a shroud, but not a good life to be living on state pension only when you have out lived your cash.

Agreed. Fortunately I also have superannuation. So enough income even to save a bit. Can't imagine how people manage on the state pension alone.

jamesd · 3 February 2012 at 12:17AM

These decisions depend on:

1. the amount of ongoing pension income you give up to get the lump sum. The lump sum varies between 12 times the ongoing pension loss (almost always a bad deal) and 20 or more times (can be a good deal).
2. your health and whether you expect to live to a normal age. That's around 23 more years for half of 65 year old men, a few more for women, assuming normal health.
3. whether you have some more profitable use for the money. Paying off a mortgage is popular but makes you worse off financially.

Since we don't know any of those three things it's impossible to give you any guidance that allows much for your own situation, leaving the general guidance: it's usually something that will leave people in normal health worse off long term but can be good if you want to use it when you're more fit in the early years or if you're a skilled investor who will invest it to make more money.

Pension lump sum to take or not

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