15% lump sum and pension or 25% and reduced pension.

h5djr

Later this year I will be due my Local Government pension based on 30 years service. I can either take a 15% lump sum (£27,600) and a pension of around £10,000 a year or 25% lump sum (£46,0000 and a reduced pension of around £8,000 (£1 reduction in pension for every £12 extra lump sum). The pension payments will be linked to the RPI.

Am I better to take the 15% lump sum and the £10,000 a year or the 25% lump sum and a reduced pension.

Any advice or views would be most welcome.

Eck

Hi there,

It really all depends on your personal circumstances, you may have outstanding debt etc etc, or you may wish to invest the lump sum, if it were my choice i would take the higher lump sum and invest it in cash ISAS, and some decent paying savings accounts.

Andy_L

You'd need about an 8% + rpi return on the lump sum to match the pension you give up.
So, as Eck says, it depends how important that lump sum is to you to eg clear debts, obtain tax free income via ISAs or buy a sports car/world tour

Ian_W

Neither poster above has mentioned tax. I'm no expert but from the figures you've posted it seems fairly clear that that if you take the money as income you'll be paying tax on it at 22% [assuming LR tax when retired] whereas if you take the lump sum it will be tax free.
If it's relevant also check whether the enhanced lump sum affects survivor pension benefits - if it doesn't then for me it would be the lump sum.

Setting aside round the world cruises, sports cars and having cleared any debt I'd try to get the money into ISAs ASAP. If you only use cash ones you can get £3k in before end of tax year and another £3k in April [double if a couple]. If you also use a S&S you could get £14K [each] in very quickly. S&S depends on your attitude to risk but you can get lower risk funds though never no risk.
However if you only use cash you'll also pay a price in that you can't get as much in as quick so the interest much of your money earns will be taxed and over time S&S type investments have always outperformed deposit accounts.

Baz_2

If you can invest the £18400 and beat a return of the £2000 per year sacrificed then go for the lump sum.

With annuity rates about 6% (I think) your 18400 would only buy you an income of around £1104. So it may be best to take the extra income. However that assumes your going to live long enough to take advantage.

If you die quickly then you would lose out whereas if you live for another 20 years you would be quids in. So as mentioned, it depends on many things, such as health, savings etc.

Ian_W

Baz wrote:

If you die quickly then you would lose out whereas if you live for another 20 years you would be quids in.

The lump sum is double win/win if you die quickly, as the cash can be left in your will whereas your pension can't. :beer:

You might not think so though.

Baz_2

Ian_W wrote:

The lump sum is double win/win if you die quickly, as the cash can be left in your will whereas your pension can't. :beer:

You might not think so though.

Exactly.

Im not sure if annuity rates are that low to be honest, and you wouldn't need to take an annuity with it either. Also tax is an issue as that £2000 in reality will only be £1560. So you looking to beat an inflation proofed return of 8.4%. As your pension is RPI driven but your lump sum investment wouldn't be. Which with inflation at say 3% would mean a return of around 11%. ISA rates are 5.25% and annuities at between 6% and 8 % would mean you would be better off with the extra money.

I'm sure someone in the industry will be along to prove me wrong though.

wotsthat

Am I better to take the 15% lump sum and the £10,000 a year or the 25% lump sum and a reduced pension.

Looking at the above postings it's clear that based on the numbers you could do either and wouldn't go far wrong.

You don't say how old you are but, say, you're 60 do you really want to wait until you're 80 to have the satisfaction of breaking even if you don't take the cash?

The great unknown is life expectancy - you might not make it to 80.

Is a bird in the hand worth two in the bush?

Curious_Moose

The question is whether a lump sum of (46000-27600)=£18400 is better than a pension of (10000-8000)=£2000. You haven't mentioned your age (or your sex which is also a factor), but if you are 60 to 65, then the pension of £2000 is almost certainly more valuable than a lump sum of £18400. Yes, you could get hit by a bus tomorrow and lose the pension, but if you are asking which is the more valuable, then the £2000 pension is.

Especially an index linked pension.

The younger you are, the more valuable the pension as you will be receiving it for longer.

Presumably, there is a contingent spouse's pension attached?

Check out http://www.williamburrows.com/rates/quotes.aspx which gives you an indication of the value of a pension.

E.g. a male age 65 with an index linked pension allowing for 50% widow's pension would provide £392 p.a. based on a purchase price of £10000. Put another way, £1 p.a. pension would cost £25.51. So £2,000 pension would cost over £50,000. You are being offered £18400.

Like I said, we don't know your age, sex or immediate financial needs, but from an Actuarial viewpoint, the extra lumpsum is not worth the pension you are giving up (based on the example above).

wotsthat

Like I said, we don't know your age, sex or immediate financial needs, but from an Actuarial viewpoint, the extra lumpsum is not worth the pension you are giving up (based on the example above).

Unless the OP does get hit by the proverbial bus.

I'd take the money (the RPI indexing does make it a more choice difficult though). However, we don't really know about the OP's situation - if this the only pension provision then the increased pension is attractive. If it's only a small part of total pension provision then the lump sum may as well be taken - why bet against the bus?

h5djr

Thanks very much for all the replies. To give a little more information I am male, in reasonably good health apart from type 2 Diabetes and will be 60 when I take the pension. I have a reasonable amount of other savings (around £150,000) and my wife (who is also 60) has also just retired with a company final salary pension and some private pension annuities from a previous job. My pension will be the standard final salary based Local Government pension with 50% spouse pension. I also have a small annuity based pension from the 8 years employment since I was made redundant from the Local Authority.

I am assuming from the replies so far that I would be better off taking the 15% standard lump sump and the higher pension.