big lump small annual or smaller lump bigger annual

NoBShere

In a couple of weeks I have to decide if I should take an additional lump sum of 40k but it would mean taking 11k annual instead of 14.5k. I'm 55 and don't know which to take?

dunstonh

Why do you have to decide?

There may be other options, such as defer until later (if you dont need it).

Do you need the pension now? How much pension income do you need? Do you have any capital expenditure requirements,? How is your health? What dependants do you have?

Annie1960

Do you have a need for the lump sum? If you want to pay off remaining mortgage, buy a new car, go on the holiday of a lifetime etc, then think about taking a bigger lump sum.

Otherwise consider taking a higher annual pension payment (especially if your payment is index-linked).

When I retired, I did an inverse commutation to swap all of my lump sum for more monthly income, as I already had savings, did not want to do anything specific with the lump sum, and my annual pension payments are index linked, so it made more sense for me.

jem16

NoBShere wrote: »

In a couple of weeks I have to decide if I should take an additional lump sum of 40k but it would mean taking 11k annual instead of 14.5k. I'm 55 and don't know which to take?

So a commutation rate of less than 12:1 which is really dire and not a good choice unless you really need the capital.

You say an additional lump sum - sounds like you get an automatic lump sum? Will that be enough for your requirements?

atush

Basically we can't tell from what you said.

but I am inclined to say take no extra LS, and the highest pension.

NoBShere

Yes I will get an automatic lump sum which is enough for what I need. I take it a commutation rate means how quick I would make the 40k anyway?

jem16

NoBShere wrote: »

Yes I will get an automatic lump sum which is enough for what I need. I take it a commutation rate means how quick I would make the 40k anyway?

It basically gives you an idea how much you would need to make in interest/investment income to make up for the lost income.

So a commutation rate of 12:1 would need around 8.33%pa to make up for what you would be giving up.

Mr_Prudent

jem16 wrote: »

It basically gives you an idea how much you would need to make in interest/investment income to make up for the lost income.

So a commutation rate of 12:1 would need around 8.33%pa to make up for what you would be giving up.

When working out the commutation factor is the fact that the extra 40K is tax free taken into account as opposed to a larger pension and having to pay tax on the extra income, or am looking at this wrongly (wouldn’t be the first time!)

AlanP_2

Mr_Prudent wrote: »

When working out the commutation factor is the fact that the extra 40K is tax free taken into account as opposed to a larger pension and having to pay tax on the extra income, or am looking at this wrongly (wouldn’t be the first time!)

Not in the calculation normally, so in the OPs case they are getting 40,000/3,500 = 11.43 commutation rate.

Each individual's tax situation will be personal to them so it makes sense to ignore it when doing the calculation but then take a personal view on the tax implications of the options.

kidmugsy

NoBShere wrote: »

In a couple of weeks I have to decide if I should take an additional lump sum of 40k but it would mean taking 11k annual instead of 14.5k. I'm 55 and don't know which to take?

If you're single and in rotten health take the additional lump sum. Otherwise treat the offer with suspicion. In particular if you are married check whether the smaller pension would imply a smaller widow's pension too.