Urgent help needed: lump sum or higher annual pension?

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
13 replies 2.1K views


  • LintonLinton Forumite
    14.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    ennifar wrote: »
    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!

    This is highly dependent on interest rates and inflation rates.

    If we assume:
    - inflation at 3%
    - interest at 5%
    - both the whole of the lump sum and the part of the pension lost by taking the lump sum are saved with interest,

    then the pension option becomes profitable at about 12 years. By 20 years the pension option is worth 50% more than the lump sum option.

    BUT it is even more dependent on what he does with the money....

    Lets also assume that he spends £5000 (inflation linked) of his lump sum or extra pension per year and saves the rest.

    Then the break even point is still around 12 years, but by 20 years the total remaining for the pension option is 3 times that for the lump sum option.

    The reason for this great difference is that taking an increasing amount from an lump sum increasing at a fixed rate will at some stage completely deplete the lump sum.

    So if he spent £10K a year (which is less than the pension) his lump sum would be completely gone by 14 years whereas his savings would steadily increase for the pension option.
  • ennifarennifar Forumite
    6 Posts
    Thank you again for your thorough reply. Not sure I understood everything but , correct me if I'm wrong, it would be advantageous for him to take the lump sum if he thinks his life expectancy is for more than 12 years, if not the higher pension is more profitable, right?
    If he were to take the lump sum he wouldn't be using it , it would only be to save it in a savings account or a low risk investment.
  • kidmugsykidmugsy Forumite
    12.7K Posts
    Tenth Anniversary 10,000 Posts Name Dropper Combo Breaker
    other way round: the longer the life, the more lucrative the pension.
    Free the dunston one next time too.
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