Government Offer – the Money or the Box?
I recently had a 60 year old client come in who was retiring from the public service and had a choice between receiving a $400,000 lump sum or a $37,000 pension for life.
That is the kind of offer many can only dream of but there is something badly wrong with this offer, in so far as the $400,000 part if offered by a private institution, would normally have the government all over the perpetrator for not informing the client that the $37,000 pension is vastly superior to the $400,000 lump sum.
However, when you read through the documentation there is no word about the relative merits between the lump sum and the pension and I suspect many people take the money rather than the box even though the box is worth so much more.
How do I know that the box is worth so much more? The answer is simple: I look at what it would cost to buy a $37,000 lifetime, CPI-adjusted pension, 60% of which goes to my partner when I pass away.
So, how much would such a lifetime annuity cost? The answer is $960,000, almost a million dollars, yet the government only offered our client $400,000.
There is something wrong here when the government is allowed to present two very different options as if they are equal and chooses not to educate its faithful public servants about the difference.
It would make sense to take the lump sum if you think that you and your partner will not live for a further 15 years or longer – but then again of course you might. Some people live a very long time even with poor health.
It always pays to ensure you receive trusted financial advice and are fully informed before making any such decisions.
We found the action of the government to be quite unconscionable and are glad that our client and their partner checked with us before taking the money – now they are fully aware of the consequences of each choice.