Pension lump sum v monthly pension

YorkshirePudding6

Hi

First time posting! Anyway my husband has had to take ill health retirement at the age of 52. He suffers with severe osteroarthristis of the spine but we hope he has many years left in him yet!Looking at his company pensions the decison regarding lump sum or more pension seems to be a no brainer but we thought we best get some other views, incase we have missed something.

Option A £347.37 per week with no lump sum
Option B £199.55 per week with £50,940.88 lump sum
Annual pension is reduced by £1.00 for every £9.00 of cash taken

I work and receive £12,000 per year, we have a £25,000 mortgage which is being offsetted with £23,000 savings.

Are we right thinking that it would suit us better to take the higher offer of a weekly pension?

Linton

On those figures the higher pension certainly looks far more valuable than the lump sum, spectacularly so if the pension is index linked. This is assuming that his medical condition isnt significantly life shortening.

richbeth

Hi,
on the face of it a £7.5k pa pension for a £50k investment at that age looks like a no brainer as it is a 15 % guaranteed return.

I'm not an expert but would assume the factors to be considered include your husband's life expectancy (hopefully very long!), if the pension is index linked and whether there is a spouse's pension. You may also need to factor in income tax as AFAIK the lump sum is tax free but the pension taxable should total income go above the tax free allowance.

Long life expectancy and/or spouse pension would make this a no brainer if it was me

All the best,
Richard

YorkshirePudding6

Thanks - did get my figures wrong as the lump sum is £69,178 with additional bonus lump sum, but still think the higher pension would be right for us as his condition is not life shortening.

jamesd

Congratulations! A 9:1 commutation rate is the worst I've ever seen. It makes taking the extra income an easy decision. Bad deals are normally something like 12:1 so this is a pretty spectacularly bad offer.

savageHK

jamesd wrote: »

Congratulations! A 9:1 commutation rate is the worst I've ever seen. It makes taking the extra income an easy decision. Bad deals are normally something like 12:1 so this is a pretty spectacularly bad offer.

I've seen 9:1 but it's spectacularly bad at age 52!
I'd go for extra income all the way especially given that you don't need the cash for anything.

RichandJ

savagehoutkop wrote: »

I've seen 9:1 but it's spectacularly bad at age 52!
I'd go for extra income all the way especially given that you don't need the cash for anything.

Same here, a lot of schemes used to have 9 & 10.4 (IIRC) for males and females respectively, but that was at 65.

Comm factors like this were also interpolated by 0.02 per month before 54. So in this case you might expect a factor of around 12.12 at age 52. Still bad though.

OP, I'd go back to the administrators and get them to check again. Unless I've done something stupid here, the effective commutation factor based on the £50k is 6.62. Not sure what you mean by 'bonus' lump sum, although using this higher figure does give a factor of 9.

YorkshirePudding6

sorry all sounding too complicated for me! The upshot is :
Husband ill health retirement at 52 but no life shortening disease.
Due to receive 2 mineworkers pension
1st pension
Option A £347.37 per week and no lump sum
Option B £199.55 per week and £69,178.37 lump sum
2nd pension
Option A £11,600.16 pa no lump sum
Option B £6,663.80 pa and £44,426.14 lump sum
(or any lump sum under those amounts - both pensions state that the annual pension is reduced by £1.00 for every £9.00 of cash taken)
I earn about 12,000 pa and have no pension at present.
We have 8 years left on the mortgage of £25,000 which is been offset with our £23,000 savings.We have one son aged12.

Would we be right in thinking that our best bet would be to take the higher weekly pension as opposed to the lump sum?

savageHK

YorkshirePudding6 wrote: »

Would we be right in thinking that our best bet would be to take the higher weekly pension as opposed to the lump sum?

Generally, given your husband's age (and the likelihood that some of his pension will increase when in payment) giving up £1 of pension for £9 of cash is a very poor rate. You'd hope to give up £1 of pension and get at least £15 of cash (or perhaps £20 if the pension increases in payment). One thing to watch out for though is that the cash is paid tax free, where the pension will be taxed, so that complicates matters a bit. Still - I'd likely not take the cash (for either pension, actually).

RichandJ

Ah, it is 9:1 fixed. Even their own website admits it's not a fair exchange.

http://www.mps-pension.org.uk/lump-sums.htm

jamesd

It looks as though the commutation factor is based on old and low life expectancies, not anything current or close to it. Is good to see that the scheme is honest and clearly says that it's probably a bad deal to take the lump sum.

YorkshirePudding6, if you do happen to have a reason for needing a lump sum the best deal is probably taking the money from the mortgage and using that, perhaps increasing the mortgage. The gain from the extra income is higher than the cost of mortgage interest so you'd still be ahead doing this borrowing compared to taking the lump sum from the pension. Even ignoring inflation increase in the pension the higher income is paying the equivalent of 11% interest for life, with the expected increases it's probably more like 14+%. And that's much higher than any likely mortgage or loan interest rate.