Lump sum vs pension

missile

Hi,

I am 67 basic rate tax payer.

I have a small pension with Rothesay Life £273.92 / year. It is fixed rate i.e. no escalation or spouse benefit if I die before my wife. They have offered me £4,023.02 as a lump sum to cash it in.

I estimate that is circa 11 years pension payment after tax. I have checked and have been advised this would not qualify as a tax free 'trivial lump sum', as I am already in receipt of this pension.

I feel it is not particularly generous offer. What would you do?

Many Thanks :A

Linton

Unless £4023 is much more useful to you now than £274/year until you die or you are in unsually poor health I agree with your feelings and suggest that you turn down their kind offer. Perhaps they will come up with something better.

Albermarle

Probably something between £5000 and £6000 would be a fairer offer .

Marcon

You're misleading yourself (in terms of assessing the 'generosity' of the offer) by taking tax into consideration. The offer is nearly 15 times the pension you are receiving. National statistics indicate someone currently aged 67 could expect to live another 18.6 years. If you are being offered the money up front, that makes it a perfectly reasonable offer.

Whether it is worth accepting is where the tax take, coupled with your health/family history of longevity comes in. Assuming I had enough income for my future needs, I'd take the cash and you and your wife could have a great holiday!

xylophone

If you take this pension in payment as a lump sum it will be taxable as income in the year of receipt.

https://www.pensionsadvisoryservice.org.uk/content/publications-files/uploads/Taking_small_pensions_Quick_SPOT012_V1.7.pdf

Unless you are giving up a pension in payment in which case the whole lump sum is taxed.

MarkCarnage

It doesn't sound like a particularly generous offer, never take the first one from Goldman Sachs....

missile

xylophone wrote: »

Unless you are giving up a pension in payment in which case the whole lump sum is taxed.[/I]

That is what is being offered. :T

missile

Marcon wrote: »

You're misleading yourself (in terms of assessing the 'generosity' of the offer) by taking tax into consideration. The offer is nearly 15 times the pension you are receiving. National statistics indicate someone currently aged 67 could expect to live another 18.6 years. If you are being offered the money up front, that makes it a perfectly reasonable offer.

Whether it is worth accepting is where the tax take, coupled with your health/family history of longevity comes in. Assuming I had enough income for my future needs, I'd take the cash and you and your wife could have a great holiday!

I should have said not a very "attractive" offer.

bowlhead99

As the sum is not escalating, the receipt of £273 in a couple of decades' time is not as useful as £273 in your hand today.

If we assume inflation at 3%, the receipt of £273 a year for twenty years is worth £4075 in today's money, and they are offering you close to that.

Your view may be that (a) your personal inflation rate is going to be lower than 3% over the period, so the £5.5k cash receipts over the next 20 years will be worth significantly more to you than £4k in your hand right now; or (b) you are going to live substantially longer than twenty years, and therefore the total amount received will be significantly higher than £5.5k in nominal terms which would translate to significantly more than £4k in real terms today.

If you don't want to exchange the defined income stream for only £4k of cash right now, fair enough, by refusing the buy-out you will have 'bought' some insurance against living a long life.

Is the reason for your apparent 'tax problem' which makes you think the payout would only be 11x net income, caused by your being close to the basic or higher rate tax bracket ... and so you are thinking that each of the £273 annual payments would sneak under the tax threshold and only attract 0% or 20% tax, while if you took £4k all at once it would attract 20% or 40% instead?

If so, you have a valid reason to legitimately prefer the annual small amounts instead, because of adverse tax consequences. While another person faced with the exact same choice would be indifferent between paying 20% tax on the total cash now and paying 20% tax on the individual chunks as they come in.

If closeness-to-tax-threshold is an issue now, perhaps it will not be an issue in a couple of years time if they offer it to you again if/when the thresholds or tax rates have changed.

missile

Many thanks for your thorough assessment. I only received the offer this afternoon and my post was a knee jerk reaction.

On further consideration, it would seem I would need to live until circa age 85 before I would receive an equivalent amount as a pension in real terms.

It must be expensive for Rothsay Life to manage very small pensions. I feel they could have been a little more generous, as they stand to make a (significant?) cost saving.

Marcon

missile wrote: »

Many thanks for your thorough assessment. I only received the offer this afternoon and my post was a knee jerk reaction.

On further consideration, it would seem I would need to live until circa age 85 before I would receive an equivalent amount as a pension in real terms.

It must be expensive for Rothsay Life to manage very small pensions. I feel they could have been a little more generous, as they stand to make a (significant?) cost saving.

Go back to them with a counter proposal. At worst they say no, at best you get a better offer.