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My mother in law chose not to retire at 60 and has worked another 5 years. At the time she chose to defer her state pension and it's been increasing in value since. Now at 65, she has chosen to retire she has an option to take a lump sum of £41,000 (minus tax at 20%) or take £86 extra in her weekly pension.

My gut feeling is that it's probably best to take the lump sum and either invest it or maybe use it to help fund moving into another house. They currently live in a mid terrace house worth ~£110,000. They're considering maybe buying a smaller better bungalow in a better location for ~£140,000.

I just want to make sure we've not overlooked anything before taking the plung and calling off the money. Does anyone have any thoughts on NOT taking the lump sum or maybe a better way to invest the lump sum?

Thanks for taking the time to read.

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    By all means take out the lumpsum, but explore opportunities where to invest in,first. Considering the low interest rates it is difficult to put it in savings accounts. So probably the markets are one option. Why to lock up in a house rather than keeping it in liquid format or put it where it can be easily accessed in terms of need ? – DumbCoder Jun 11 '15 at 9:37
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As I see it the two main considerations are:

  1. Total amount of money received, for which the key variable is life expectancy. 41000 * 0.8 = 32800, so at £86 / week she would only be better off with the lump sum if she expected to live for less than ~7.3 years. Obviously none of us have a crystal ball, but you could make some assessment based on her current health, risk factors etc. to see whether that seemed feasible. Also you do have to bear in mind that the value of £86 in 7 years' time will be less than it is now - but I guess the £86 would be inflation adjusted?

  2. Her need for income (versus capital). If she takes a lump sum and invests it in a house, that is great but doesn't provide any income at all. If she has sufficient income from other sources (and forecasts this other income to continue until her death) then the lump sum might be more attractive, but if not then she would need to be sure that she wasn't tying up the money unnecessarily. Another option here would be using the lump sum to buy an annuity, and it might be wroth exploring this, but I doubt whether the rates would be good enough to beat the £86 / week she is being offered as an alternative.

Another (lesser?) consideration is her future entitlement to state-funded care if needed in her later years. If you have assets above a certain amount you are expected to fund your own care, in which case having an expensive house might actually be more of a liability than a help.

  • Thanks Vicky, you basically summised my thoughts. The reason they're thinking about the house is I think they beleive its probably the best investment for their children right now and that's their biggest concern. – paulpitchford Jun 11 '15 at 15:51

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