Take small lump sum or not?

littlegrebe

Friends are urging me to take the £1200 tax free lump sum from my pension rather than the £60 extra pension p/a as they say it will take 20 years to benefit.

The Pension is index linked, my family are long lived and I don't need the money so I think I would be better off taking the small extra pension. Am I missing something? Thanks

jamesd

I don't know how old you are but life expectancy for men at age 65 is around 23 years, a couple more for women. Given your family background and assuming normal good health the extra income is likely to be the better deal.

Your friends appear to be calculating incorrectly. It appears that they have just divided 1200 by 60 to get the answer 20 years to break even. It's not that simple. The money is probably taxed so it probably starts at £48 after basic rate income tax.

Then there's the effect of indexation to add, compared to whatever you would do with the lump sum. 3% inflation for 20 years would increase the value to 1.81 times the current value for the 21st year and greatly reduce the break even time, but I don't know what you would do instead.

Given your family background and assuming you're around 65 the extra income is probably the better deal.

atush

I agree. If you don't need the lump sum, 60 per annum (and rising) will be worth more and in a shorter time than 8 years.

If you needed the lump sum, it could be a different matter.

greenglide

But for amounts of £1,200 lump sum and £60 per annum it doesn't make any real difference.

If you have a genuine is for the whole amount of around £4,800 (assuming the lump sum was 25%) then taking it all together or in two or three smaller tranches may make sense for you. Equally leaving it to grow further may be worthwhile. You would never get rich on it, will never get a Lamborghini with it but you might get a nice holiday, repairs to house etc. This could still be "value".

atush

they said the pension was index linked so I assumed they meant it was a DB pension.

PensionTech

they said the pension was index linked so I assumed they meant it was a DB pension.

Yes but they could still take it as a small pot.

Also, commutation factor of 20? Not as shabby as most I've seen!

dunstonh

riends are urging me to take the £1200 tax free lump sum from my pension rather than the £60 extra pension p/a as they say it will take 20 years to benefit.

It wont be 20 years though as you said it was indexed.

kidmugsy

What sort of index-linking? if it is an unlimited connection to RPI, that's pretty wonderful. If it's a link to CPI but capped at 2.5% p.a. that's not too hot. Does it bring a widow's pension and is that relevant to you?

I incline to greenglide's position: the sums are modest so see if there is a particular niche for either the £1200 or the £60 p.a. to make your life jollier.

McKneff

Grab the £1200 and have a nice holiday....


its only just over £1 a week if you take the £60 a year, around the price of a Sunday Newspaper.

xylophone

Have you a use for the £1200? If so, why not take it and enjoy yourself?

kidmugsy

Two suggestions: (i) take the £60 p.a. and gift it to your favourite charity using Gift Aid, or (ii) take the £1200 and spend it on your garden so that it brings years of pleasure.