Should I take the larger lump sum?

themarmitekids1962

Hello, I am shortly to receive my public sector pension and I have 2 options.  Either I can take a smaller lump sum and a larger monthly pension or a larger lump sum (nearly double), and a smaller monthly pension.  Not sure what to do, obviously seeking financial advisor advice but thought I would get more unbiased opinions from this group.  It's index linked to CPI so with inflation at the moment it may make sense to take the smaller lump sum?  I'm a small rate tax payer.

Dazed_and_C0nfused

One of the crucial things here is the factor involved i.e. what the pension you give up for the rest of your life buys in additional TFLS.

A rate of 12:1 i.e. you give up £1,000 of inflation linked pension in return for a one off payment of £12,000, is low and unless you have a (very) good reason for taking the extra lump sum it's a poor choice from a financial perspective.

MX5huggy

Take a Small lump sum and large pension.

Inflation running at 10% plus will grow your pension but destroy your lump sum. 

Albermarle

obviously seeking financial advisor advice but thought I would get more unbiased opinions from this group.

Financial advisor is not really needed, for what is a very simple issue.

As D&C says the 'commutation factor' is important- divide the lump sum, by the amount of pension you will lose. If it is less than 20 then not a great deal, especially as it is linked to CPI with no limit/cap (presume this is the case and it is a very valuable benefit). Probably the factor would have to be over 25 to even think about taking a larger lump sum due to this uncapped CPI link. If it was a capped CPI link ( many private DB schemes are capped at 3% or 5%) then a commutation factor around 22/23 would make it a 50:50 decision. 

Three caveats 

If you were desperate for the lump sum .

You have a life limiting health condition.

If your overall financial situation ( investments, other pensions etc) meant that you were thinking of employing a financial advisor anyway, then obviously you could also discuss it with them as well. 

Secret2ndAccount

I feel the same way as all the above posts. Except... I'm going to disagree with myself.
First thing: your commutation rate is likely 12:1. Important to find this out. 12:1 is a terrible offer, and you'd get a lot more money out, long term, if you opted for more pension and less lump sum.
But. We don't know your position. Example: a couple, happy to live on 26k. From age 67 they will have two State Pensions, so they only need a little bit more to be comfortable. Public Sector Pension is 16k, plus 48k lump sum, from age 60.
That 48k lump sum enables the couple to retire at 65, or at 66 with a holiday, a change of car, and a new kitchen. Commute that pension to 9k per year. You give up 7k per year, and get an extra 84k lump sum, Now you can retire at 62 or 63.
Those extra years, while you are still both healthy, might be worth way more to you than having more than you need at age 80.
So, for people with modest pensions, and modest needs, I can understand why there might be reasons to take the lump sum. If you have bigger numbers in mind, have another pension, or substantial savings, then it makes much more sense to leave the money in this pension. Think of it as a form of insurance against living to a ripe old age.

CorseyEdge

I'm contemplating a similar choice in the future. I know that 12:1 is a pretty poor commutation and especially today with CPI running so high. However would there be a case to go for more/larger lump sum if you were single? As I understand it most Public Sector pensions have poor or no inheritance value if you have no partner/spouse. Taking a lump sum could possibly allow for mitigating that.

JGB1955

I took the 'larger' lump sum at age 60, because I didn't see myself living long enough to benefit from the smaller lump sum.  Still here (almost) 8 years later and happy with the outcome!

Nebulous2

This decision is an individual one. There isn't a right or wrong, it depends on your own circumstances and attitude.

Do you need the lump sum?

Any plans to spend a chunk of money? A mortgage to pay off? Plans to travel? 

Despite paying into a public sector pension for most of my life, by a strange quirk in transferring from one scheme to another, I didn't have a lump sum at all. I could have given up some of my pension for almost £100k lump sum, or something in between. I didn't take any. 

I retired early, wanted guaranteed income, having been a wage slave for 40years I didn't want to deal with not having a monthly payment. I am pretty happy at the thought of a 10% rise to my pension next year, while cash falls in value, but we relocated which freed up enough cash to see us through to state pension age without the lump sum. 

Work it out for yourself, it's to some extent a bet on how long you will live, but also what works for you. That includes whether you have other resources to bridge a gap to other pensions. 

Albermarle

This decision is an individual one. There isn't a right or wrong, it depends on your own circumstances and attitude.

Correct but I would also think it would be affected by current events. When inflation was very low and investments/economy  were doing well, then it would maybe more tempting to take out the lump sum. However with high inflation and less rosy prospects generally, hanging on to that inflation protected guaranteed income would look more attractive.

EdSwippet

Albermarle said:

This decision is an individual one. There isn't a right or wrong, it depends on your own circumstances and attitude.

Correct but I would also think it would be affected by current events. When inflation was very low and investments/economy  were doing well, then it would maybe more tempting to take out the lump sum. However with high inflation and less rosy prospects generally, hanging on to that inflation protected guaranteed income would look more attractive.

What you describe above is known as "recency bias" (aka "availability bias").

Avoiding it is unfortunately not easy. It requires first acknowledging it, and then consciously trying to take a longer term view rather than focusing closely on "current events". For the OP, the consequences of this decision will last a lifetime. Literally.

Albermarle

Yes, you see a lot of recency bias in other threads asking should I invest now, with all the things going on in the world?, when there is always things going on.
I think though that you would have to be quite strong minded to give up an uncapped inflation pension at the moment, on the basis that it maybe would not be the best thing to do in the long run.