Is it worth taking this lump sum ?

shilts

On one of my pension statements the below figures are quoted regarding a lump sum . Does this seem a good deal or not please . 

£8576 a year with no lump sum
£6264 a year with a lump sum of £42884

I’m not looking to retire yet but just curious as to what is or isn’t a good rate . This is at age 65 and basic rate tax payer if this helps .

Thanks 

Cobbler_tone

Not the best, not the worst. Depends on other pension provisions and whether you have plans for the lump sum. There is no right/wrong answer.

Yorkie1

It's a commutation rate of 18.5, which is not too bad (Civil service is about the worst at 12). 

El_Torro

As mentioned it's not a bad rate. You're giving up £2,312 a year to get £42,884. In other words you're getting £18.55 for every £1 you're giving up in regular income. I'm no DB pension expert but I have seen anything between £12 and £25 mentioned so this offer seems to be somewhere in the middle.

Does your yearly pension increase in line with inflation? If so you need to take that into account, it will take less than 18 years to get your money back if you don't take the lump sum. 

Generally speaking if you don't need the lump sum (for example to pay off a mortgage) then you're better off not taking it. 

RipleyG

Tax matters. If you will be a basic rate tax payer when taking your pension, the £2312 annual amount you are giving up would be £1850 after tax (assuming the whole amount is taxed).

The lump sum is tax free, so you get the full £42884. You would need to live for just over 23 years for the annual payment to be a better option on those numbers. (A higher rate tax payer would have to live for 31 years - it's why so many of them take the maximum amount tax free lump sum). 

As El_Torro says those sums will be different if your pension increases with inflation - though if you are able to put the cash lump sum aside you could get interest/growth from it too which could offset the increased pension. 

It's a good question to ask before you are ready to start drawing your pension, and really helpful to give yourself time to think through the different options before there is time pressure to make a decision. 

shilts

Thanks everyone for the replies . By the time I would need to make a decision I would definitely be a lower rate tax payer . I was just curious as to what ‘good’ and ‘bad’ looked like . It would seem this is somewhere in the middle , thanks .