Take the lump sum or take the increased annual pension?

I

IsleOfMan

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I am due to get a small pension next year. €20k per annum or €15k per annum plus lump sum of €50k. (figures rounded).

I don't need the lump sum but I am wondering if I am being foolish in not taking the tax free lump sum.

I expect not to be paying tax on my monthly pension if I opt to take the full €20k. If the state pension is added to my work pension of €20k, will this push me in to a tax bracket? My total annual income with work pension and state pension will be about €32k. (I have money in An Post savings Bonds/Certs to live off).

It will take me approximately 11 years to earn the lump sum back if I opt for the annual pension rather than the lump sum. After that I am on free money so to speak.

I could always take a smaller lump sum and increased annual pension but down the road tax rules might change.

Is the lump sum in the hand now the better decision?
 
1. Have nuff to live off so leave the lump sum in the pension.
2. Expect you to live 11 years + , so increased pension after 11+ = good.
3. Tax rules change, c,est la vie , but I expect pensioners to be ok.

Always tempting to take lump sum today , but if you take it without having a specific job for it ,it risks being frittered away and in 11 + years you have less .
 
On the face of it, a pension of €5k for life for only €50k looks like an absolutely fantastic deal but you have to take account of a number of factors:-
  • your age;
  • your marital status (and whether your spouse has an income);
  • whether there are any other sources of taxable income;
  • whether the pension is index-linked and whether there is any reversionary benefit in favour of a spouse;
  • whether the pension is payable for any guaranteed term;
  • the solvency of the pension scheme/employer;
  • your general health; and
  • whether there is a history of longevity in your family.
 
Sarenco said:
On the face of it, a pension of €5k for life for only €50k looks like an absolutely fantastic deal
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He could look at it the opposite way. He gives up a 5k pension for life and only gets 50k for it...the market cost is probably 125k + but that is not the way his scheme values it, nor should it be.

All the other factors should be considered but I think the main one is his tax position, what will the marginal rate be on the extra 5k.
If we say 28% ?? ( then his payback period rises to around 14 yrs ). Add in the interest (say Post office certs 1% ??) he would have on the 50k after 10 years and we are up to 15 yrs

Scheme solvency is a consideration but the difference ( on the 5k element) between the max possible cut under windup priority orders would be €500 per year for a scheme insolvency unless there is a double insolvency of scheme and employer where he could lose €2.5 of the 5k.
 
JoeRoberts said:
the market cost is probably 125k + but that is not the way his scheme values it, nor should it be.
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The market value of the additional €5k pension very much depends on the age, gender, etc, of the OP and the terms of the pension itself. We're just guessing without knowing those facts but the additional guaranteed income of €5k pa could actually have a market value as high as ~€250k if you make certain assumptions.

How the scheme values its liabilities to pensioners should be of no particular concern to the OP.

JoeRoberts said:
All the other factors should be considered but I think the main one is his tax position, what will the marginal rate be on the extra 5k.
If we say 28% ?? ( then his payback period rises to around 14 yrs ).
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Or the applicable marginal tax rate could be zero depending on the OP's age, marital status and other sources of income. Again, without knowing these details we're just guessing.

JoeRoberts said:
Add in the interest (say Post office certs 1% ??) he would have on the 50k after 10 years and we are up to 15 yrs.
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Interest received on State savings products is not taxable so that's not a relevant consideration.
 
Sarenco

I think you quite simply missed or didn't like the essence of my post.

This was to contradict your assertion that
"On the face of it, a pension of €5k for life for only €50k looks like an absolutely fantastic deal". Whether the figure is 125k+ or 250k we can't know but is irrelevant. The point is that the way you presented it, is meaningless.


I didn't mention how the scheme values liabilities to pensioners. I mentioned how it values the lump sum, which is a different concept. And my point of highlighting this is to prevent OP going down the road wondering " are they screwing me".

Interest on state saving is relevant as it is a guaranteed return he can have on the 50k. So it should be considered when calculating his break even point of "free money". I don't know why you think it was tax related.

Regarding the tax, the point is to show it needs to be considered and the effect that even the low rate of tax would have on his break even number..hence the term " If we say 28%?? "
 
JoeRoberts said:
Sarenco
I think you quite simply missed or didn't like the essence of my post.
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Either is entirely possible Joe.
JoeRoberts said:
"On the face of it, a pension of €5k for life for only €50k looks like an absolutely fantastic deal". Whether the figure is 125k+ or 250k we can't know but is irrelevant. The point is that the way you presented it, is meaningless.
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I don't see why the value of the pension entitlement is meaningless. Is the OP not asking for views as to which option would have the greater value to him/her - the lump sum or the pension for life?

My point was simply that, on the face of it, a guaranteed income for life of €5kpa looks like a fantastic deal - but the circumstances of the OP and the details of the pension itself are key.
JoeRoberts said:
I didn't mention how the scheme values liabilities to pensioners. I mentioned how it values the lump sum, which is a different concept.
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Would you not consider the obligation to make a lump sum payment to be a liability of the scheme? Regardless, I don't see why the OP should care what value the scheme is placing on the lump sum or the pension.

JoeRoberts said:
Interest on state saving is relevant as it is a guaranteed return he can have on the 50k. So it should be considered when calculating his break even point of "free money". I don't know why you think it was tax related.
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My apologies, I didn't appreciate that you were assuming that the €50k lump sum would all be invested in a State savings product and that this would return ~1% pa - I assumed you were referring to the State savings products that the OP already holds.

Are there any other assumptions implicit in your advice?
JoeRoberts said:
Regarding the tax, the point is to show it needs to be considered and the effect that even the low rate of tax would have on his break even number..hence the term " If we say 28%?? "
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Absolutely agree that tax is a key consideration in this decision. However, without knowing certain key details we cannot determine the likely marginal tax rate that would apply to the pension payments.

Bear in mind that a married couple can receive €36,000pa tax free once one reaches 65.

Of course the lump sum will turn out to be the better choice if the OP dies within a few short years. However, none of us knows for certain how long we will live or what our cost of living will be in the future. We can make certain reasonable assumptions but that's about the best we can do.
 

The value is of course important, but you are viewing it "upside down".
He has the 5k in his hand, giving it away only gets him 50k.
That's very different than having a 50k lump sum and someone giving him a pension for life of 5k based on that. This is your presentation as I read it.

My point on the lump sum is that it is not calculated the same as the equivalent liability within the scheme. Schemes "like" lump sums for this very reason, they reduce scheme liabilities because they use a more favourable factor than the scheme liability. So yes, he shouldn't care as such but as I said it was explained so that he doesn't think he is being screwed with the 50k. I felt I needed to note this after asserting that 125k+ is the market value of the 5k.
 
If you think you are going to die in the next 10 years then you take the lump sum.

It is my opinion that all those things one planned to do in retirement has to be done before 70 and certainly before 80. After that one doesn't want to go nowhere. So you need more money in your sixties than your eighties.
 
JoeRoberts said:
He has the 5k in his hand, giving it away only gets him 50k. That's very different than having a 50k lump sum and someone giving him a pension for life of 5k based on that.
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Perhaps I'm missing some subtlety but I'm not sure I see the difference. Is that not just another way of saying the same thing?

I'm glad we can agree that the OP shouldn't care how the scheme would value either option. Perhaps we can also agree that it is difficult to provide any more concrete advice without knowing certain additional key facts?
 
Bronte said:
If you think you are going to die in the next 10 years then you take the lump sum.
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The problem, of course, is that none of us know when we are going to die!

For what it's worth, those aged 65 in Ireland now have an average life expectancy of 19.45 years, bringing their overall average life expectancy up to 84.5 years.
 
Sarenco said:
Perhaps I'm missing some subtlety but I'm not sure I see the difference. Is that not just another way of saying the same thing?
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Hi Sarenco,

Let me try explain!

The key issue in debate is that you said:

On the face of it, a pension of €5k for life for only €50k looks like an absolutely fantastic deal

to which Joe Roberts, essentially countered that one could say getting only €50k in return for commuting €5k p.a. is the direct inverse of an absolutely fantastic deal. In order words - it's not that the pension is so good, it's more like the commutation factor is so poor. This may be subtle but there's no doubt that Joe is on the right side of the line. In DB plans such as the one being described - one starts with a pension entitlement and elects to commute (part of) the pension in return for a lump sum.

[Commutation factors of 9 or 10 to 1 were the typical factors in existence 30 or 40 years ago. Many schemes have not changed these factors in the intervening period in spite of the enormous increase in cost of annuity purchase. Accordingly, commuting pensions, in general has been progressively less attractive over this time period.]
 
elacsaplau said:
On the face of it, a pension of €5k for life for only €50k looks like an absolutely fantastic deal
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Versus...
elacsaplau said:
one could say getting only €50k in return for commuting €5k p.a. is the direct inverse of an absolutely fantastic deal.
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Fair enough.

I'm more than happy to concede that the later is technically a more accurate way of describing the position but I really don't see how the distinction is of any assistance to the OP.
 
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elacsaplau said:
Great - this was my understanding of what JoeRoberts was saying all along.
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Ok but the OP is still left with the decision whether to take a pension in lieu of a lump sum or, if you prefer, whether to take a lump sum in lieu of a pension.
 
elacsaplau said:
Really? Thanks for pointing this out....
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Well, equally, what was the substantive point of the highly technical difference that you explained?

Very few people think in terms of commuting benefits or what constitutes the direct inverse of anything.

Frankly, I think it's a completely semantic distinction in the context of what the OP actually asked.

But thanks for pointing it out. Really!
 

I was simply trying to explain to you the point Joe was saying which you didn't seem to understand. That's all - I think we should leave it at that.
 
elacsaplau said:
I was simply trying to explain to you the point Joe was saying which you didn't seem to understand. That's all - I think we should leave it at that.
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Indeed but you then felt it appropriate to make a dimissive comment when I suggested that that the (acknowledged) difference was really semantic in terms of the actual question raised by the OP.

If you disagree then perhaps you could explain why you think it makes a substantive difference to the issue raised by the OP.
 
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