Why is a lump sum dearer for buying years than periodic payments?

[Dave Vanian]

I'm looking at a quotation to buy a year's service and if I multiply out the monthly periodic payment by the number of months to 65, it works out about 36% cheaper than paying for the year in a lump sum.

I get that the periodic payments are based on salary so if the salary goes up, the periodic payments will too, but it still makes little sense to me. The person is already at the top of their salary scale so their salary increases are not likely to be huge over the next 5 or 6 years.

Surely paying a lump sum upfront should be cheaper than monthly payments? Or am I missing something?

 

[Groucho]

I assume that there's an actuarial calculation involved, based on the diminishing future value of a lump sum payment made today.

 

[Steven Barrett]

I assume that there's an actuarial calculation involved, based on the diminishing future value of a lump sum payment made today.

That works the other way round. A payment in a year's time is worth less than it is today. Net present value.

 

[Groucho]

That works the other way round. A payment in a year's time is worth less than it is today. Net present value.

You're dead right! Silly me.

Interestingly, that same issue was flagged in a thread dating from 2010 - see post #7!

periodic vs lump sum NS purchase

I am currently purchasing notional years of service (15) by periodic deductions through payroll and I have two questions which I have yet to find an answer for... 1. Can I swap to the lump sum purchase option? and 2. If it is possible, is it the most beneficial route? I have some capital...

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