# Take the lump sum or take the increased annual pension?



## IsleOfMan (25 Oct 2016)

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?


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## Gerry Canning (25 Oct 2016)

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 .


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## Sarenco (25 Oct 2016)

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.


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## JoeRoberts (25 Oct 2016)

Sarenco said:


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



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.


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## Sarenco (25 Oct 2016)

JoeRoberts said:


> the market cost is probably 125k + but that is not the way his scheme values it, nor should it be.



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 ).



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.



Interest received on State savings products is not taxable so that's not a relevant consideration.


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## JoeRoberts (25 Oct 2016)

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%??  "


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## Sarenco (25 Oct 2016)

JoeRoberts said:


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


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.


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.


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.



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%??  "


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.


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## JoeRoberts (25 Oct 2016)

Sarenco said:


> Either is entirely possible Joe.
> 
> 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?
> 
> ...



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.


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## Bronte (25 Oct 2016)

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.


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## Sarenco (25 Oct 2016)

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.



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?


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## Sarenco (25 Oct 2016)

Bronte said:


> If you think you are going to die in the next 10 years then you take the lump sum.



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.


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## elacsaplau (25 Oct 2016)

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?



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.]


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## Sarenco (25 Oct 2016)

_


elacsaplau said:



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

_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._



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 (25 Oct 2016)

Sarenco said:


> Fair enough.
> 
> I'm more than happy to concede that the later is technically a more accurate way of describing the position



Great - this was my understanding of what JoeRoberts was saying all along.


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## Sarenco (25 Oct 2016)

elacsaplau said:


> Great - this was my understanding of what JoeRoberts was saying all along.



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.


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## mtk (25 Oct 2016)

Keeping pension means you can better hedge the longevity risk


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## elacsaplau (25 Oct 2016)

Sarenco said:


> 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.



Really? Thanks for pointing this out....


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## Sarenco (25 Oct 2016)

elacsaplau said:


> Really? Thanks for pointing this out....



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!


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## elacsaplau (25 Oct 2016)

Sarenco said:


> 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.
> 
> ...



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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## Sarenco (25 Oct 2016)

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.



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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## elacsaplau (26 Oct 2016)

Sarenco,

I think we really should leave it at that please.


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## IsleOfMan (26 Oct 2016)

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 )



I will have a very low income. The work pension and the state pension. However I may have to pay some tax on these combined amounts so the payback period could easily be 14 years.

I am male and 64 years of age.  Married. In relatively good health. Non smoker. Both my parents lived in to their 80'a and 90's. (My father got 30 years out of his work pension.) However my lifestyle would not be as good as theirs.

I take on board what Bronte was saying. I may have no inclination to do much after I turn 80 however I may need home care or nursing home at that point in time and the extra €5k per annum could come in handy.
I can fund most things at the moment from my maturing An Post, certs and bonds, purchased over the years. These are paid DIRT free and from reading past posts on AAM I always thought that these were tax free. Interest not counted as income. I may be completely wrong on this and if that is the case then with the interest added to my work and state pension the payback may even extend beyond the suggested 14 years.

If I take the lump sum now it will probably sit in my current account or a new An Post cert or bond. I have no inclination to purchase a new car, kitchen or go on a world cruise. Mortgage has been paid and my children are in a good position financially.

In a way I am answering my own question here. I should not take the lump sum but part of me, from experience, certainly knows that a bird in the hand.......


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## Gerry Canning (26 Oct 2016)

Dear Isle of Man ,

50% take it .
50% don,t take it .

As my dear deceased Uncle Frank used to say {take all the advice you can , then do whatever you think yourself}
Good luck.


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## JoeRoberts (26 Oct 2016)

I've dealt with about 40 retirements from a previous company over the years. I wasn't advising people but would be involved in the paperwork etc so would know their intentions and thought process re TFLS.
Invariably, females took the absolute maximum TFLS and males took none or maybe 50%. Rarely did males take the full unless they had AVCs. Their main reasoning was they were afraid their wives would spend the lump sum. They all had financial advice re the options etc but usually it boiled down to simple ideas and fears.


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## cbreeze (28 Oct 2016)

IsleOfMan said:


> 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.
> 
> ...




One thing also worth considering is the income limit for the issuing of a medical card.  Also, are there things you might need to do to your home to make it easy for you to get around in it in several years time, stairlift, ramps, etc.


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## dub_nerd (28 Oct 2016)

Gerry Canning said:


> Dear Isle of Man ,
> 
> 50% take it .
> 50% don,t take it .
> ...


Or, for a modern take on dear Uncle Frank's adage:


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## SlugBreath (2 Nov 2016)

Sarenco said:


> Interest received on State savings products is not taxable so that's not a relevant consideration.



Is the income received from State savings products taxable as income and must it be declared on an annual basis.  Some interest is only paid after 5 years. How do you do an annual return if it is only paid after 5 years?


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## Sarenco (2 Nov 2016)

SlugBreath said:


> Is the income received from State savings products taxable as income



No, the interest is not taxable.


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## SlugBreath (2 Nov 2016)

Sarenco said:


> No, the interest is not taxable.



I know that DIRT is not taken from the interest. Is the interest received classed as income and subject to income tax?


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## Sarenco (2 Nov 2016)

SlugBreath said:


> I know that DIRT is not taken from the interest. Is the interest received classed as income and subject to income tax?



No.  The interest is tax free.


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## SlurrySlump (2 Nov 2016)

Interesting. Does the interest have to be declared when making a tax return even if it is free of any form of tax?


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## Sarenco (2 Nov 2016)

SlurrySlump said:


> Interesting. Does the interest have to be declared when making a tax return even if it is free of any form of tax?



No requirement to make a return -

http://askaboutmoney.com/threads/tax-on-state-savings-products-prsi-clarified.187691/


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## SlurrySlump (2 Nov 2016)

Thanks Sarenco for posting that link. Can I take this a stage further.

Does the Department of Social Welfare also ignore State Savings as a source of income in their means test calculations?


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## Kimmagegirl (22 Nov 2016)

Certainly with all the negative comments about pension plans circulating at the moment I have to say that I will be inclined to take my full tax free lump sum from my DB pension rather than a reduced tax free lump sum and higher pension.

As someone else commented. It is amazing all the effort being put in to Water Charges protests and the pensions time bomb is not even being talked about.


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## postman pat (22 Nov 2016)

IsleOfMan said:


> 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.
> 
> ...


 Small???


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