Additional Lump sum vs pension

Pat38493

Question is, should my wife consider taking an additional lump sum amount of £77k for a £6.4K reduction in annual pension if retiring at age 56.

Seems to me that the answer is absolutely no way this would be a terrible deal unless she is expecting to die long before average age span?

WYSPECIAL

Do you need the £77k?

What rate of tax would she be paying if she took the extra annual amount?

Dazed_and_C0nfused

How much tax will be payable on the £6.4k?

What inflation proofing does the £6.4k attract?

If it's 20% tax then she's giving up £5,120 (before inflation additions) which is 15 years to get the £77k.

If she has no desperate need for the lump sum I would tend to agree with you, keeping the £6.4k pension is the sensible long term option.

Pat38493

WYSPECIAL said:

Do you need the £77k?

What rate of tax would she be paying if she took the extra annual amount?

No we don't really need it right now and I asssume it would be tax free as it's part of the lump sum offer from the NHS pension scheme.

To clarify, in this scheme you are obliged to take a lump sum but you can take a higher one in exchange for less pension.

However this doesn't look like an attractive commutation to me.

Exotoxin1

12:1 commutation is really rubbish isn't it? I just took the standard lump sum.
Unless you need the money or life expectancy is significantly impaired I'd not take it, especially with high inflation.

Secret2ndAccount

Agreed. Take the pension, not the lump sum.

12:1 is one step away from a scam in my opinion. The problem is that, for many people, it’s a once in a lifetime opportunity to get their hands on a large lump sum to pay off the mortgage / buy a boat / travel the world. Therefore many people take it, so why should they offer a better deal?

In a private sector scheme there is a need for every offer, be it a CETV, a lump sum, or an early or late retirement, to be fair both to the recipient, and to the rest of the people who get their pension from the same large pot of money. With a public sector scheme I guess that requirement is meaningless since the large pot can’t run dry.

Private schemes typically offer closer to 20:1