Commuted one-off lump sum

ptmjm

My husband has recently passed away and I have been awarded a forces annual pension of £627 per year. I also have the option to commute this pension into a one-off lump sum of £12,500. As I am only aged 49 this sounds like a reasonable offer. Would this lump sum be taxable (I'm a basic rate tax payer) and is this a fair offer? I'm considering writing to them to increase the offer as nothing to lose, has anyone else any experience of this?
Any advice welcome.

kidmugsy

ptmjm wrote: »

My husband has recently passed away and I have been awarded a forces annual pension of £627 per year. I also have the option to commute this pension into a one-off lump sum of £12,500. As I am only aged 49 this sounds like a reasonable offer. Would this lump sum be taxable (I'm a basic rate tax payer) and is this a fair offer?.

Is the £627 p.a. index-linked i.e. is it protected from inflation?

Inflation isn't much of a worry now, but you could easily live another forty years, so there's bound too be a spell or two when it is a big deal.

I'd say that £627 p.a., index-linked, for someone your age is a good deal. I'd take the lump sum only if you happened to be in urgent need of a lump sum (e.g. to clear expensive debt).

jamesd

The £627 a year is a fairly good deal, paying you inflation-linked 5% of the lump sum value, and it's very likely that you'll live longer than the 20 or so years it takes to break even if you're in normal good health. The pension will be index-linked so you'll be well protected there.

It isn't a fair offer. It's considerably less than the likely cost of paying the pension to a person in normal good health at your age. If you are very ill with substantially reduced life expectancy the lump sum could be the better choice.

If you don't need a lump sum your best choice would probably be to take the income and pay it into a personal pension so you get the tax relief on the pension contribution. Then from age 55 onwards you could take out 25% tax free and the rest whenever you like. Repeat as desired until you reach age 75.

Dunnit

Writing to the government and suggesting they give you a better offer is highly unlikely to succeed. Civil Servants work to government rules and have no flexibility in these matters.
The £627 pension will be linked to inflation.
You are likely to be better off taking the pension rather than the lump sum and as stated paying into another pension (they are now highly flexible tax efficient saving schemes if you have no use of the money for 10 years as the 55 age limit is likely to increase) or using it to pay for a holiday/Christmas each year.

atush

I would not take the lump sum, as you could easily live to 90 and you should break even getting the pension over the LS in less than 19 years- could be that you would break even well before you reach
SPA. I think the 12,500 is poor value for someone your age.

If you dont need the income now, contribute it to a pension for yourself?

xylophone

Start a stakeholder pension using the income? You could stop/start/increase/ decrease...

http://www.cavendishonline.co.uk/pensions/stakeholder-and-personal-pensions/

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

https://www.gov.uk/new-state-pension/overview

ptmjm

Thank you all for your comments and good advice. I don't need the lump sum and fortunately I am currently in good health so I guess it makes sense to refuse the lump sum. I will certainly look into investing into a pension for myself as I hadn't really thought of that. As always from this forum, good advice when needed, thank you!