Urgent help needed: lump sum or higher annual pension?

ennifar

Hi,

I am trying to understand what option my father should choose?

He is offered two different plans :
Option 1 :
Full pension 22 931 per year
Prospective survivor : 11 465 per year
benefit for child : 3 186 per year

Option 2 :
Reduced pension 12 167 per year
Lump sum 119 972
Prospective survivor 11 465 per year
benefit for child 3 186 per year

He is 66 years old and has to take a decision urgently, any help would be highly appreciated!!

Wilma33

What is his health like?
Does he need/want a lump sum?
What is his income tax situation?

ennifar

Hi Wilma,

Thanks for the quick reply. I don't know about tax situation, his health was fine but he has recently had some heart issues.
No he doesn't need a lump sum, but if he had it, he would consider investing it on safe options.

ennifar

Regarding tax situation : As he obtains this sum from a US company but he isn't resident there and as is foreign he isn't taxed on this income

zygurat789

So, for his lifetime he would be £10,764 (gross), at most £8,600 (net) worse off and would have £119,972 in the bank, on which he would have to earn 9% to break even.
This is obviously not on at the moment and is a high rate historically as well.
However, when he dies he will be able to leave his heirs an additional £119,972 tax free.
Only he and his heirs can decide from this point on.

Linton

ennifar wrote: »

Hi,

I am trying to understand what option my father should choose?

He is offered two different plans :
Option 1 :
Full pension 22 931 per year
Prospective survivor : 11 465 per year
benefit for child : 3 186 per year

Option 2 :
Reduced pension 12 167 per year
Lump sum 119 972
Prospective survivor 11 465 per year
benefit for child 3 186 per year

He is 66 years old and has to take a decision urgently, any help would be highly appreciated!!

He would be giving up £10800 per year for £119K lump sum.

If he spent the £119K on a commercial pension he would get a fixed (non inflation linked) pension of around £8-£8.5K or an inflation linked one of say £5-£5.5K

So I would say that if the offered pension is inflation linked it would be far more valuable than the lump sum. The only reason for going for the lump sum would be if he needed cash now much more than he needed future income. If it isnt inflation linked the decision is more difficult.

The pension is much the safer option, but if he doesnt really need the income and is happy to take some risks I can see there could be a case for taking the lump sum.

ennifar

But what if life expectancy remaining is less than 10 years? Does that change anything? How is he supposed to know if it is inflation linked? It doesn't say so on the contract, I think it is a fixed sum ...

Linton

ennifar wrote: »

But what if life expectancy remaining is less than 10 years? Does that change anything? How is he supposed to know if it is inflation linked? It doesn't say so on the contract, I think it is a fixed sum ...

If you have significant life shortening health problems, then it could be worth taking cash as the insurance companies will offer better rates dependent on the medical details of the condition. But you wont know what those enhanced rates are until you get a range of bespoke quotes probably via an IFA.

The question of whether the pension is inflation linked or not is vital to any future planning. A fixed rate pension taken 20 years ago has about halved in value since that time.

ennifar

It apparently is inflation linked. From what life expectancy age would the option 1 be profitable? More than 10 years?

Thank you again for your help!

Loughton_Monkey

For an Inflation linked pension, this equivalent annuity rate (8.97% based upon additional pension of £10,764 for £119,972) is brilliant. No other 'safe' investment could possibly bring this extra amount in under current climate.

Unless he needs the money - or would otherwise save it to draw down on - then the larger pension is by far the best.

I don't know if they would be amenable to taking a much smaller lump sum (if he wants just a bit) on a pro-rata basis?

ath007

I am no expert but have this view. Prospective survivor rate is the same. Daft question but is your mother and father still together or is there a qualifying survivor or just your dad to consider.

I would be tempted in either situation to take the lump sum. Health issues and having payed into a pension scheme for many years its time to take rewards. Lump sum cash has many homes and options for surviving spouse.