Selling the Golden Goose? (DB scheme pension swap for lump sum)

CheekyMikey · 31 May 2022 at 10:13AM

Malthusian said:

QrizB said:

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

It's unlikely, though. For a 23x commutation factor, your investment would have to be uncommonly wise and return 4.35% above inflation for 24 years.

Are we ignoring the inconvenient fact of death?
After 24 years of 2.18% growth above inflation - half your figure - a lump sum of £100,000 would have grown to £164,031 in today's money. If you took the pension of £4,348pa you would have received a total of £104,348 in income, again in today's money.
If you drew £4,348 per year (increasing with inflation) from the lump sum you would have received the same income and would still have £33,249 of your lump sum left, rather than nothing.
You do not need 4.35% above inflation growth to match a 4.35%-inflation linked income that expires on death. Not when you can deplete the capital, where anything less than 100% depletion means the lump sum wins.

Thank you, this is what I was thinking but you’ve expressed it better…I don’t think the old lags who were being dimissed for suggesting the lump sum option are necessarily wrong. Of course taking the full pension means guaranteed, no risk income but personally I’d still take the risk that the lump sump over 24 years would generate at least equal income while providing a financial cushion should the op need it during those years and may leave something in his estate. But I don’t know the op’s circumstances or attitude to risk…

QrizB · 31 May 2022 at 10:26AM

Malthusian said:

QrizB said:

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

It's unlikely, though. For a 23x commutation factor, your investment would have to be uncommonly wise and return 4.35% above inflation for 24 years.

Are we ignoring the inconvenient fact of death?

No, not at all.

Malthusian said:

After 24 years of 2.18% growth above inflation - half your figure - a lump sum of £100,000 would have grown to £164,031 in today's money.

Yes.

Malthusian said:

If you drew £4,348 per year (increasing with inflation) from the lump sum you would have received the same income and would still have £33,249 of your lump sum left, rather than nothing.

But that's not the scenario that CheekyMikey was suggesting. His post was:

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

(My bold). I took that to mean he was suggesting you could generate an annual return better than the commmuted pension without having to draw upon the capital.

Albermarle · 31 May 2022 at 1:48PM

CheekyMikey said:

Malthusian said:

QrizB said:

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

It's unlikely, though. For a 23x commutation factor, your investment would have to be uncommonly wise and return 4.35% above inflation for 24 years.

Are we ignoring the inconvenient fact of death?
After 24 years of 2.18% growth above inflation - half your figure - a lump sum of £100,000 would have grown to £164,031 in today's money. If you took the pension of £4,348pa you would have received a total of £104,348 in income, again in today's money.
If you drew £4,348 per year (increasing with inflation) from the lump sum you would have received the same income and would still have £33,249 of your lump sum left, rather than nothing.
You do not need 4.35% above inflation growth to match a 4.35%-inflation linked income that expires on death. Not when you can deplete the capital, where anything less than 100% depletion means the lump sum wins.

Malthusian said:

QrizB said:

CheekyMikey said:

The lump sum could also of course generate an annual return over 24 years that is better than the difference in pension if invested wisely, with the benefit of having the lump sum amount too….

It's unlikely, though. For a 23x commutation factor, your investment would have to be uncommonly wise and return 4.35% above inflation for 24 years.

Are we ignoring the inconvenient fact of death?
After 24 years of 2.18% growth above inflation - half your figure - a lump sum of £100,000 would have grown to £164,031 in today's money. If you took the pension of £4,348pa you would have received a total of £104,348 in income, again in today's money.
If you drew £4,348 per year (increasing with inflation) from the lump sum you would have received the same income and would still have £33,249 of your lump sum left, rather than nothing.
You do not need 4.35% above inflation growth to match a 4.35%-inflation linked income that expires on death. Not when you can deplete the capital, where anything less than 100% depletion means the lump sum wins.

Thank you, this is what I was thinking but you’ve expressed it better…I don’t think the old lags who were being dimissed for suggesting the lump sum option are necessarily wrong. Of course taking the full pension means guaranteed, no risk income but personally I’d still take the risk that the lump sump over 24 years would generate at least equal income while providing a financial cushion should the op need it during those years and may leave something in his estate. But I don’t know the op’s circumstances or attitude to risk…

Can not comment on the OP personally either, but I would be pretty sure that in reality, not many people take the lump sum and invest it for the long term. More likely to get spent quite quickly ( new car, holidays, house improvement, family gifts etc) or sit in a bank account.