Take The Money, Open The Box?

[Jennykenny]

Deceased husband's pension provider has written to say I am entitled to £590.00 per month for life or £8,400 lump sum, subject to tax at basic rate.I am 64 years old.
Any advice as to which way to go, and how much would I lose in tax approximately.
Many thanks.

[Old_Geezer]

£590.00 per month is £7,080 every year
Compared to a one off £8,400 ?

Are you sure that is correct ?

[bhg481]

The tax you will pay depends on what other income/savings you've got.

The company is assuming that you already pay tax and will pay you the pension less 20% ie, £472 per month or a lump sum of £6720. If you don't pay tax currently you will be able to claim some of this back. If you pay tax at more than the basic rate you will have to declare it to HMRC and pay the extra tax.

Is the monthly payment going to increase as time goes by eg, index linked or will it remain constant? If it remains constant it will effectively reduce over the years as inflation increses the price of things. Are you in good health? Do you expect to live more than 14 years (14 x monthly sum = approx the lump sum).

Bearing in mind that your expenditure will probably drop as time goes by (you will get about less with increasing age etc) you might feel that the lowering of the value of the monthly payment isn't important to you. You might also feel that a guaranteed income for life, however long you live, is very comforting. On the other hand, if your health isn't very good, you might feel that taking the lump sum now and investing it to get some interest is the best plan for you.
An interesting figure - with inflation at only 4% (not usually classed as high inflation) money halves in value over 20 years. With current inflation rates your £590 per month will be worth about £400 per month (in today's value) in 14 years' time.

[BlackadderV]

At 94 I would take the lumper, otherwise, no.

[Jennykenny]

Sorry huge mistake, £580.00 per annum.

[Jennykenny]

Thank you bhg. Very interesting. You have given me a lot to think about.

[Old_Geezer]

Ah that makes more sense :-)

Doing some very rough calculations, now it looks to me that the lump sum might be best over the whole period if you think you won't reach 88, but the income kicks in as best after that.

Assumed an investment return of 4%. Not considered tax nor inflation, nor the fact that money now might seem more useful than money at 88 an onwards.

My inexpert gut feeling at this point is that the lump sum might be the better bet, but I don't think there is probably much in it.

[bhg481]

Thinking about it a bit more I think OG is right. £40 a month after tax, decreasing (in real value) with time does not compare well with taking £8400 now and investing it. If inflation does go up, for any reason, if you have the cash-in-hand and invest it, it will go some way to retaining its value.

[bert_h]

The £590 ought to be increased annually by 3% - that's pretty standard in pension arrangements, so find out if it applies. If it does, it makes all the difference, and you should take the income, not the lump sum.

[boxtops]

I'd take the income - you've got years of life ahead of you yet.

[Jennykenny]

Bert, yes, didn't mention that an increase of 3% was put in the letter.
Haven't given you folks a clear picture at all.
Should have thought through the question properly.
Will do better next time.
But keep wavering as to which is best.

Will sleep on it.

[Old_Geezer]

There again the increase probably covers most of the fall in value from inflation, which is why I chose to assume they cancelled out and didn't take either into consideration. Swings/roundabouts.

[New Judge]

"The £590 ought to be increased annually by 3% - that's pretty standard in pension arrangements,"

You must be joking!!!

Really jenny you don't needd to get too bogged down with the details. It's fairly easy to take a stab at which is the best deal in absolute terms. However it would only be a stab because there are too many variables which you have not a hope in hell of forecasting correctly: the rate of inflation and, most importantly, how long you will live are the most critical.

So your decision depends on whether you'd like £8,400 now (of which you'd probably lose 20% to income tax leaving you with £6,720) or whether you like just under £50 per month (again, if taxed, just under £40).

[buildersmate]

Too many Answerbankers with a lifetime's experience of public sector pensions?

[Jennykenny]

Rightly or wrongly, opted for the monthly payments.
Again, thanks to all.