Take the pension lump sum, or wait for annual payments?

[patrickza]

I have a question that search couldn't answer. I have a pension through work. As I plan on FIREing myself at 40 in 3 years to go on all sorts of weird and wonderful adventures, I get the choice of having my pension paid out then in a lump sum, or waiting till either 55 or 62 for annual payments.

So, at the moment I'm worth about $500k. I'll add about $50k to that each year for another 3 years. I also have a sideline income of about $600 a month, and monthly expenses of around $1100. My wife wants to carry on working as she loves her job, we keep our money seperate and each pay our own way. I also have a 9 year old from a previous relationship, and I cover most of his costs (included in the $1100). I will also put away money for him into a local tax free savings account, until I'm sure it'll cover his University fees. It shouldn't affect my ability to put away $50k each year much at all, as the TFSA limit is only about $2500 a year here.

So assuming the market grows at inflation + 5% for another three years, I would have about $740k invested in today's dollars (my current holdings are all in South Africa, but I plan to migrate everything to VWRD by then). If my expenses stay the same, and I expect they will, I would only be using a 1.5% draw down rate, so there should be practically no way for the portfolio to fail. If the sideline income stays as is, then it'll work out to an even better 0.83% draw down. South Africa has no social security of any worth, so I'm completely on my own with that. Free medical is an option, but quality is questionable.

Now on to the pension question. If I take the lump sum at age 40, it'll be worth $188k. I can take that amount then, or I can defer to 55 and get $12300 for the rest of my life. The other option is to defer till 62, when it will be worth $21200 for life. Both options will increase along with inflation, and AFAIK are a defined benefit option. On a side note, my family generally live into their late 80s or even 90s, so it could be a long life, touch wood, hold thumbs, and pray as necessary :)

I'm leaning towards the "leave it alone until I'm 62" option. My thinking is this: I won't need the money, and I quite like the idea of this money is my "even in a massive market crash, or a moment of madness, I won't end up living in a box" money.

On the other hand, if I had to take the lump sum and invest it, even with a low 5% per year growth over inflation, it would be worth $550k, meaning at the 4% rule it would pay $22000. At 7% it would be worth $833k and pay out $33300 per year at a 4% draw down.

So what would you do, and have I missed anything?

[BPA]

I plan to take the commuted value of my pension because I'm leaving very soon and interest rates are low, making my commuted value quite high in comparison to what it would be otherwise. 

For me these are the pros and cons.

Pros:
1.  I'm not married, and so have decided that if I die, I'd rather have my son (who has some special needs) have the money instead of it disappearing into the pension fund.  If I were married, it might make more sense to take a pension, since my spouse would still receive a pension.
2.  They have been cutting benefits to my pension plan over the years.  We no longer have extended health benefits and are being continually de-indexed.  Some of the changes are retroactive, so it's not even like they are grandfathered in.
3.  There were hints the last time we had a Tory provincial government that they were looking to rip open and make changes to the pension plan. These would never be in the pensioners' favour. I don't even trust the Liberals in this regard.
4.  I like the greater flexibility of deciding how much I withdraw in a given year. 
5.  As I mentioned above, the commuted value amount is high right now because interest rates are so low.  They really only can go up from here (key interest rate here is at 0.5%) although they may remain stagnant for a while.


Cons:
1.  Significant tax hit of the non-locked in portion.
2.  I am on my own as far as investing it goes which is alright since I've decided to do Canadian Couch Potato Index investing, but, of course, there are no guarantees. 
Both of the cons are big ones, but I've decided they are worth the expense and risk.


Our situations are different, for sure, but good luck with whatever you choose.

[MayDay]

I took mine as a lump sum because it was smaller than yours (the monthly payment was going to be something pitiful like 200$ a month). 

In your case with no SS, I would probably leave it as a pension. 

[KCM5]

Are you planning on living in SA when you're 55 or 62 or whatever?

I'd be worried about currency risk, especially if you're planning on spending money outside of SA most of the time. The Rand has not had a good track record recently.

If you're planning on staying in SA, then it's a good hedge, but if you're not, I'd cash out at 40.

[patrickza]

Most likely not, my wife has a european passport, and I'm not fond of bullets in me, so we'll probably end up in Europe. That's why I'm moving my money into VWRD EVERY year with my foreign allocation.

[unno2002]

If I was in a situation with the info you presented, I would take the $188k and buy two small rental houses in the same market we’re already in.

Example, in 2013 we bought was a small rental property for $77,500, which is bringing in $805/month.  After expenses it has been putting out a consistent $583/month.  ($6996 per year).

Yes, we have the risk of no tenants, repairs, etc., but with the potential for the equity aspect of the investment increasing, available to leave to heirs, and the potential of raising rents in the future.