A teenager wins a fortune with her first ever lottery scratch card, and must make a life-changing choice. But anyone saving up a pension pot may face a similarly big decision. What would YOU do? Article by Nick Green.
If someone offered you a million pounds now, or a thousand pounds a week for the rest of your life, which would you go for? More to the point, which one should you go for? And is there a right answer?
There is actually a correct response to this question (we’ll get to that in a minute) – but first, let’s look at how Canadian teen Charlie Lagarde faced a similar conundrum. A scratch lottery ticket that she bought on her 18th birthday proved to be a winner, and offered her either a) a million dollars as a lump sum, or b) a thousand dollars every week for the rest of her life. She would receive either prize tax-free. So what did Charlie do?
Charlie went for the weekly $1,000 for life. Basic arithmetic showed that it would take only 20 years to beat the original $1,000,000 – by which time she’d be still in her prime at 38. If Charlie lived to the average life expectancy for Canada (82) she’d receive a total of $3.3 million. Even though she wouldn’t be able to splurge on big luxuries right away, for her the decision was essentially a no-brainer.
But the operative words there are ‘for her’. Being so young (as young as any lottery winner can be) was a huge plus. Had she been in her 30s, the decision wouldn’t have been so easy. And if she’d already had big debts, or a need to find a large lump sum in a hurry (say, to buy a home), then she might have faced a dilemma.
So the right answer to the question turns out to be: ‘It depends’. The best prize to go for depends entirely on your personal circumstances, taking into account factors like your age, life goals, financial situation, state of health and even personality. Now for the next question: why are we talking about this at all?
This decision is more common than you think
Unless your lucky stars line up, you’ll never find yourself in Charlie Lagarde’s shoes. Except… in a way, you probably will. Although you may never get a chance to pick a lottery prize, you should (hopefully) have a pension pot of some kind. By the time you retire, this ought to be the largest sum of money you’ve ever had at your disposal… and it’s for you to decide how best to access it.
Now here’s the interesting part. The questions you’ll have to ask yourself when making that decision are strikingly similar to the questions Charlie Lagarde had to ask herself when choosing her prize. Things like:
- Do I take a large lump sum now?
- Is it better to have a smaller, guaranteed regular amount?
- Should I take some and invest the rest?
- If I invest it, where and how should I do that?
- How long am I likely to live?
- How long would it take for one option to beat another?
- How will my money be taxed?
- What are my spending needs now?
- How will these change in the future?
- What if I die prematurely – can someone inherit my money?
This list is already getting quite long, yet still only covers the broadest issues you’ll face when accessing your pension pot. And by now it should be clear that there is no one-size-fits-all answer. As with the lottery win, the right decision depends on who you are, what you want and a host of other personal factors.
The pension prize that’s right for you
This story shows why it’s so important to take advice when accessing your pension pot. The right answer for your friend or next-door neighbour may not be the right answer for you, as so much depends on your personal circumstances. An independent financial adviser looks at those circumstances in detail, while also helping you to understand things like investment options and tax on your pension income.
There’s no denying that to some extent the right decision also depends on chance – because no-one really knows how long they will live, or what unexpected events will happen over the next 20 or 30 years. However, good advice will even take that into account. Chance (which advisers refer to as ‘risk’) is factored into all financial planning, enabling you to weigh up your choices properly – rather than making rash decisions or being overly cautious.
So if you have ever dreamed of being a lottery winner (and who hasn’t?) then remember that your pension pot could be the next best thing. Whether you’re winning a million or simply saving it up, the important thing isn’t the decision you make – it’s how you make it. When you ask an adviser to help you take a really good look at your personal situation, your final choice may surprise you.
Nick Green is communications manager at Unbiased, the UK’s favourite place to find advice you can trust. He has been writing professionally on finance, business and many other topics for over 15 years.