Higher lump sum or annual income?

Storcko14

Given the commutation rate is distinctly average and you wouldn't consider investing the lump sum it makes sense to take the higher pension given it's CPI. You could also check whether the spouse pension is based on the higher pension even if you take the lump sum. Mine was, plus increases are capped at 3% and it had a commutation of almost 20, so it made sense for me to take the lump sum even though I didn't need the cash.

katejo

I recently took my DB pension and thought a lot about how much to take. I worked out that the commutation factor was 18 which seemed quite good. I eventually decided how much annual index linked income I wanted from the pension and used that to help me decide on a lump sum (which I want to use to treat myself to a few holidays). I have invested 2/3 of it in 1 year bonds and the rest is available to spend in the next year or so. One thing I found odd was something that my pension provider told me. I was offered 3 options: zero lump sum, mid range lump sum and large lump sum. I did the calculation and went for a figure between zero and middle. Apparently it is rare for clients to adjust it to a figure of their own choice.

IndecisiveCat

https://forums.moneysavingexpert.com/discussion/comment/82065944#Comment_82065944

Hi, thanks for highlighting this. The spouse’s pension is £500 a year higher if I take the higher pension. He already has his DB pension and state pension in payment, so even the lower of the 2 options would be ok.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82065965#Comment_82065965

You are correct, extremely rare.

The knee jerk reaction of most people is to unthinkingly take the maximum lump sum.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82065987#Comment_82065987

So looks like the higher pension is the winner?

If you don't have a use for the higher lump sum then don't take it. Of course some people may think it is better to have more money while they are young enough to spend it but when you have what looks like a relatively low commutation rate then the view on here is definitely in the higher pension camp.

IndecisiveCat

Thank you to everyone for your comments and ideas, they have been really helpful. After 3 weeks of chopping and changing my mind, I’m now confident that sticking with my original decision of taking the slightly higher annual pension with a lower lump sum is the right choice for my circumstances. I think if the difference between the 2 options had been much larger, the decision might have been easier. Now I can relax and enjoy my last 3 days of teaching!

katejo

https://forums.moneysavingexpert.com/discussion/comment/82065988#Comment_82065988

I never considered the max lump sum. I wanted a decent index linked income and I couldn't put any more into ISA this year. I just found it odd that others didn't look into varying the options beyond the fixed amounts offered.

finbaar

As someone who will be taking their DB pension soon it good to see my own decision is being vindicated again. My pension commutation rate is 11 to 1 which is poor. I'm going to take the "normal" lump sum of 3 times the pension, reducing the lump sum could be done but my scheme doesn't actually tell you what that costs. Also, by the time my SP kick in I'll have a similar income to when working.

I think not getting drawn in by the relatively large lump sums you could get by giving up extra income is difficult for some. I had a conversation with a fella at work earlier this year - he's still working - and gently probed his reasons for giving up income. Basically, he just liked the idea of a bigger lump sum, he had no real plans for it.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82066650#Comment_82066650

Your example of a work colleague blindly electing for the maximum TFC with no thought or consideration of other options is absolutely typical of the wider workforce pretty much at all levels ( including managerial).

From my perspective, this indicative of the parlously low level of financial literacy in this country.

Silvertabby

https://forums.moneysavingexpert.com/discussion/comment/82066804#Comment_82066804

Over 90% of LGPS pensioners take the maximum tax free lump sum, despite the p.poor commutation rate of 1:12. I believe that other public sector pension schemes are on a par.

Helps keep the cost of these funds down, though.