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Pension, bigger lump sum

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Hi,

I have the choice of annual pension and lump sum or bigger lump sum and smaller annual pension. I have no idea which would benefit me the most, any ideas would be appreciated.

Comments

  • McKneff
    McKneff Posts: 38,857 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Im sure people with more info than me will come along and help but I can only go by my own experience.

    I was always told to take as much lump sum as you possibly could as
    A. it wasnt taxale
    B. Foregoing the lump sum and taking a larger pension it would be taxable depending of course on any other income you had.

    Its all a gamble anyway, depends on how long you think (ha ha) you are going to live to receive your pension.
    make the most of it, we are only here for the weekend.
    and we will never, ever return.
  • hugheskevi
    hugheskevi Posts: 4,508 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    edited 29 September 2011 at 4:38PM
    I have the choice of annual pension and lump sum or bigger lump sum and smaller annual pension.
    What is the deal on offer, and at what age? And what are your financial requirements, eg, do you have a particular need for extra capital now, eg, to pay off credit cards, loans, etc.

    In general, as a very rough guide if the extra lump sum is less than about 15 times the annual pension foregone it isn't a good deal. More than 20 times, then it is well worth considering in more detail. 15-20 times and it may or may not be worth it.

    There is a lot of detail to take into account to assess the value, eg, presence of a spouse, age, ill-health, financial requirements, level of indexation and any caps on uprating, etc.
    I was always told to take as much lump sum as you possibly could as
    A. it wasnt taxale
    B. Foregoing the lump sum and taking a larger pension it would be taxable depending of course on any other income you had.
    Would you prefer £100 taxed at 20%, or £70 tax-free?

    Taking the maximum lump sum is generally correct for a Defined Contribution pension, but it is far less clear for a Defined Benefit pension.

    The terms of exchange of pension for lump sum can be so poor that you would better off not taking the tax-free cash, and instead choosing taxable income instead. It all depends on the commutation rate offered.
  • I don't need it financially, it's a very small pension. Annual pension £1750.14, lump sum £3892.91 or annual pension £1333.64, lump sum £8890.91. OK healthwise (I think).
  • hugheskevi
    hugheskevi Posts: 4,508 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    I don't need it financially, it's a very small pension. Annual pension £1750.14, lump sum £3892.91 or annual pension £1333.64, lump sum £8890.91. OK healthwise (I think).

    So that is an offer of giving up £1 of income for £12 of lump sum. Sounds like a public service scheme?

    Given you don't need the money, I'd be taking the higher income every time.
  • Thanks, I think I'll go with the with the higher income.

    Much appreciated
  • BLB53
    BLB53 Posts: 1,583 Forumite
    Annual pension £1750.14, lump sum £3892.91 or annual pension £1333.64, lump sum £8890.91.
    If it was me, I would take the smaller pension (taxable income) and invest the tax free lump sum into a stocks and shares ISA. Buy 2 or 3 investment trusts (UK Inc & Growth) with the £8,890 yielding 5%. This provides a starting income (tax free forever) of £450 pa which will rise every year to keep pace with inflation. If you dont need the income yet, reinvest this to 'supercharge' the ISA pot. Just a thought.

    BLB
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