Points to consider when deciding whether to take lump sum or not

DawlishDilbert

I have a FSS which is offering a pension, or a lump sum with reduced pension (25% lump sum). I've calculated that if I just take the pension I will have 'won' if I survive 20 years (which I hope to, I'm 57) i.e. my total income will overtake that if I took the lump sum and lower pension - didn't include growth of lump sum if I invested it).

So that makes me think I'll NOT take the lump sum. However the lump sum is tax free.... However the pensions are index-linked.... However, I don't need the cash now... I could invest/bank the lump sum....

So what other factors should I take into account in deciding whether I take the lump sum now or not?

My inclination is to take no lump sum and keep the higher pension, but am I missing anything important please?

Thanks...

DD

dunstonh

I've calculated that if I just take the pension I will have 'won' if I survive 20 years (which I hope to, I'm 57) i.e. my total income will overtake that if I took the lump sum and lower pension - didn't include growth of lump sum if I invested it).

Did you include indexation on the income?

So what other factors should I take into account in deciding whether I take the lump sum now or not?

Health
financial needs for capital in the future (car, boiler etc) vs capital you already hold
Spouse & dependants provision for income
Where you would place the capital. you say "invest/bank". Banking it will give low returns and likely suffer inflation risk and shortfall risk. Investing can counter those but brings in investment risk.

DawlishDilbert

indexing of course - thanks. Other things you mention are OK an covered. As you say I could invest the lump sum but I'm a low risk-taker. I'm just concerned I'm missing something obvious.

kidmugsy

Check whether the eventual widow's pension will be reduced if you take the lump sum.

Another thing to do is calculate the commutation rate i.e. how many pounds of lump sum you get by forgoing one pound per annum of pension income. If the answer is around twenty or greater, that could be attractive. If 12 or lower you'd probably do well to avoid it.

Ask yourself whether the scheme is, and looks likely to remain, financially sound.

Make a guess at life expectancy for your wife and yourself, based on your health records and the lifespans of your relations.

DawlishDilbert

The commutation rate works out at about 30, which sounds good by your measure, but I think looking at everything I'll stay with the higher pension.

PensionTech

The commutation rate works out at about 30

!

Are you sure? This would be a rare beast indeed. Even at age 57. I might be tempted to commute for that...

How good is the index-linking?

DawlishDilbert

Think so! Lump sum / Annual reduction in pension = 30.5.

Indexing is lower of 5% or RPI. Is that good? I've never retired before

PensionTech

Lower of 5% or RPI is pretty good but not uncommonly so. That is a decent commutation factor. Not necessarily much higher than "true" value, but most schemes have been taking the proverbial for quite some time by providing commutation factors way below true value. Any idea of the answer to kidmugsy's question about whether the widow's pension will also be reduced if you take the lump sum? Most schemes I've come across don't reduce the widow's pension for commutation, which is a tick in the lump sum's column.

etienneg

DawlishDilbert wrote: »

Think so! Lump sum / Annual reduction in pension = 30.5.

Are you sure you have used the GROSS reduction in pension (that is, before you pay tax on it), rather than what you will actually receive? 30.5 seems high to me.

Stubod

..my OH is in similar position, retiring soon with offer of lump sum....although it would be nice to have a lump of dosh we don't really need it at the mo so for me its a no brainer....higher pension. But I guess its each to their own..and it depends on what debts you have and what other funds available. Its a simple calc to work out the "pay back, but for me it would always be the higher "guaranteed" income, particularly if its index linked...

DawlishDilbert

Just checked, no reduction in widows pension. It sounds as though it's a good offer (the lump sum) but my gut feeling is to take the higher pension.