Pension-deciding on whether to take lump sum.

[Wings]

Wife has just reached retirement age, with one of her Personal Pensions, offering her the chance of taking a 25% lump sum payment of 20k, plus 4870.00 per annum pension, or no lump sum but 6500.00 per annum.

This is just one of many pension policies, and together with investment income from BTLs, she will not only always be a higher rate tax payer, she will possibly never have need for the pension income.

Deciding on whether to take the lump sum, I have calculated the differences of the annual pension payments, net of the present higher rate of tax is 1200.00 per annum. So dividing the same into 20k, means she has to live for 17 years or mean to break even, by not taking the lump sum payment now.

Taking into account both inflation, present buying power, increase in tax rates, bank interest rates, possibility she might not either have the good health to enjoy the monies or survive for 17 years.

Whilst investment rates are presently low, it still appears to me to be better “a bird in the hand, is better….”, to take the lump sum now and a reduce pension, have I missed considering any other factor in the equation.

[fandango_c]

6,500 - 4,870 = 1,630

I thought that higher rate tax is 40%? If so, net difference is £978pa

The annuity payments may increase with inflation and this would increase the payment each year. There may be a spouses pension on death as well.

Have a look at annuity rates from insurance companies to see if it seems to be good value.


Personally, if I was in the same position with other plenty of income from other pensions, I would take the 20k and spend it on holidays/cars etc.

[Wings]

Thanks for that reply, I was just doing a rough calculation, the other pensions have been put into a SIPP, which we hope will go to the children free hopefully of IHT, well that is our thoughts. This pension however was offering such an attractive lump sum and reduce annual pension, that it made us deliberate a bit longer over, any way thanks again for the reply.

[sidicks]

Typically the terms on which an annuity can be converted into a lump sum are slightly disadvantageous (as most people want the cash up front, even if it is calculated at less than 'fair value'.

Sidicks

[jeff m2]

This as much a question as an answer

But isn't the lump sum tax free? (in UK)
If so taking the lump would be a no brainer, 'cos otherwise it becomes income that is taxable at an unpleasnant rate.

[Wings]

jeff m2 said:

This as much a question as an answer

But isn't the lump sum tax free? (in UK)
If so taking the lump would be a no brainer, 'cos otherwise it becomes income that is taxable at an unpleasnant rate.

The pension example i gave was not just offering 8% return, where other policies were offering 3 1/2%, so one reason why i was considering taking up the pension now. Also in the example i showed the lump sum void of tax, with the difference in annual pension taxed at the higher rate.

I believe we are heading towards a "means tested" society, for benefits etc., this together with the fact one should be more fitter at 60, than at 75, one is more able at 60 to enjoy the benefits of a lump sum tax payment.