Lump Sum or Regular Payments

PennyDD

I'm hoping to take my works Pension soon.  Should I take a lump sum and small monthly payments or just take a larger monthly payment as if I was getting paid every month?  Is it as simple as that?  

dunstonh

Which option best fits your objectives and requirements?

tacpot12

Unless you have a specific need for a lump sum (e.g. you have debts such as a mortgage that you want to pay off), or you want get money out the pension to have more flexibility over it in future, e.g. about how you leave it to others after you die, it is generally better to have the extra money to spend each month. You can save it or give it away (free of Inheritance Tax) if it is more than you need to live on, assuming you have provided for all your reasonable expenses.  

Mr.Generous

Take the max tax free lump sum you can, anything else is a really bad decision. 

af1963

Depends.  

As well as dunstonh's question about what your needs are, it also depends on how much pension you need to give up to get the lump sum.

Suppose you receive the pension for 20 years ( fairly typical, and it could be longer). If they are giving you £12k lump sum for every £1k of annual pension given up, you will give up £20k of income (£16k after tax) to get a £12k lump sum.  If they are paying 25x the annual amount given up, you'd give up the same £20k (16k after tax) but receive £25k. You might make different choices in these two situations.

QrizB

Mr.Generous said:

Take the max tax free lump sum you can, anything else is a really bad decision. 

For most people in DB pension schemes, this is a terrible suggestion.

Joskat

PennyDD said:

I'm hoping to take my works Pension soon.  Should I take a lump sum and small monthly payments or just take a larger monthly payment as if I was getting paid every month?  Is it as simple as that?  

It depends on your situation and if you are okay with a lower monthly payment. I took the lump sum as it gave me flexibility in how it was used. Spent some, saved some, and gave our children / grandchildren some.  

Cobbler_tone

QrizB said:

Mr.Generous said:

Take the max tax free lump sum you can, anything else is a really bad decision. 

For most people and many pension schemes, this is a terrible suggestion.

That's as broad as saying it's a great suggestion to take it, although I suspect it was a reaction to exactly that.
Not the worst decision for those with ample provision, what scheme you are in, or the many, many people who pop their clogs within a few years. 

We don't know how old Penny is, what her financial situation is, what her personal situation is and whether she wants to fund the sports car she's always wanted.

I get the general vibe on here to not take lump sums and index link the maximum pension possible but there is most certainly a time to take a lump sum.
Not everyone wants/needs (e.g.) £35k a year, when £25k a year, a state pension to come and money to burn (whilst you can really enjoy it) may be more attractive.

If it is few critical grand a year which will assure your lifetime income to live without worry, it could well be a different outcome.

i.e. context is everything.

Moonwolf

Do you have a budget for spending in retirement, if not start there.

Will your lower pension plus the state pension be enough to cover your spending, if not then you need the larger regular income.

Do you have any conditions that make you think you will die early, if not you have a 50% chance of living until your mid 80s and a good chance of going to your 90s. Can you make the lump sum last, if you are taking the lump sum in case you die tomorrow, probably a bad idea.

What will you do with the lump sum, if you expect to have more holidays before you are 75 and this will pay for them, that is probably a good idea. If it will just sit in the bank until you die, why not have the extra income.

Is it for your kids, under the current IHT regime it might be better to take the higher income and give the difference to them each month, that take the lump sum, keep it and leave it in your will.

What would the lump sum buy in annuity terms, how long would you live before an indexed payment gives you more money, in the NHS for example it is 12 years or so ( depending how you account for inflation versus investment performance on the lump sum), that is poor.

All these need to be thought through.  Most important for me though is what will you do with the money and does it leave you enough to live on.

Secret2ndAccount

Eight replies and only one has mentioned the commutation rate 
If you are 65, you might expect to live perhaps for 20 years. Therefore if they are trading cash-for-pension at 20:1 you might call that fair. In fact it's tax-free cash for taxable pension, so maybe 16:1 is a fair rate. So if they're offering 25:1, most likely take the cash. If they're offering 12:1 most likely don't touch it.
Of course, we don't know your circumstances. If you have credit card debt at 36%, maybe you want some cash to clear it. Or perhaps you have life limiting conditions which make 20 years an unlikely stretch. But don't just take the cash because you might die tomorrow, or because it's the biggest pile of cash you've ever seen. At least consider playing the long game. Like everything in life, the lump sum has to be paid for. If you understand that you will be paying for it every day for the rest of your life, even if you live to be 100, then you are ready to make an informed decision.
OP, what is your commutation rate, and how old are you?

Albermarle

Also what are the conditions for the monthly payments? For example do they increase with inflation each year ?