Your Pension: Lump Sum vs. Monthly Payment

Negotiating the right pension for your circumstances can be challenging. One aspect you’ll have to decide is whether to take a lump sum or a monthly payment. Both have their advantages and disadvantages. The choice that’s right for you will depend on personal circumstances. 

The following discusses the pros and cons of each.

A Pension Plan Overview 

• The pension plan decision point 

The pension plan decision point 

As you approach retirement, you’ll likely have to decide whether or not to draw a lump sum from your pension or to opt for monthly payments. The lump-sum option can be very tempting. For most of us, it’s the only time in our lives that such a large amount of money is offered to us.

However, there are things to consider before you make the final decision as to whether a lump sum is the right thing to do. 

Lump Sum vs. Monthly Payments 

• All about taking a pension lump sum
• All about monthly payments

All about taking a pension lump sum

Taking a lump sum means that you only get a single payment from your pension pot. This is then yours to save, spend, or invest as you see fit. 

There are many advantages to this, the greatest being the flexibility that it brings. 

• Invest to provide future income: Unlike a monthly annuity that’s generally fixed, you can benefit from wise investments that may well bring a higher sum over the course of your retirement.
• Leftover money can be passed to your children: After the death of your and your spouse, most monthly payments will cease. With a lump sum, anything left can be paid out to your children or beneficiaries.
• You have full control of your money: The decision of what to do with it is yours and yours alone. You won’t be at the mercy of inflation and a wise investor can do very well with the advantage of a large lump sum. 

Of course, there are also several potential disadvantages: 

• You could outlive the payment: You’ll need to budget carefully to ensure that your pension will cover you for the rest of your life.
• There’s a temptation to overspend: Splurging cash on a purchase you later regret should be considered. A study carried out in 2016 showed that 21% of those who participated and took a lump sum ran it dry in only 5.5 years.
• Investing means risk to the capital: Unlike younger investors, retirees don’t have the luxury of riding out stock market downturns. Investing in very low-risk assets means your money is unlikely to keep up with inflation.

All about monthly payments

Monthly pension payments are exactly that—a payout each month for the rest of your life. This will continue for however long you live. It may also include your spouse after your death, should the plan include that.

The advantages of this are: 

• You never have to worry about the money running out: It will continue to arrive every month.
• You can easily budget for your needs: Much as in the same way as when you were drawing a wage.
• There should be no nasty surprises: As your income is set, so you have the security this brings. 

The disadvantages of monthly pension payments: 

• A pension provider could go bankrupt: It’s not unheard of for an employer to go bankrupt and be unable to pay its pension obligations. Over many decades, this could always be a possibility. This is especially relevant if you worked in a volatile sector or the company has known financial problems.
• There’s little flexibility: Monthly annuities are fixed with very little (if any) flexibility.
• Payments stop after death: They might continue with your spouse, but after this, they stop. This means no lump sum to leave to your children.

Of course, one solution is to take a part lump sum and part monthly annuity, so giving you the best of both worlds. What’s right for you will depend on personal circumstances.

Planning for Retirement? Capita can help 

Financial planning for your golden years can never be started too soon. No matter what your age, the experts at Capita Financial Planning create bespoke plans to suit your current circumstances that flex as your income, needs, and expectations change.

Their expertise will also help you decide whether taking a pension lump sum or monthly payment will be most beneficial.

Don’t leave your future status to chance. Take control today and visit

https://www.capitafinancialnetwork.com/services/income-planning to begin the financial journey to the retirement of your dreams.