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  • FIRST POST
    • Golactico
    • By Golactico 5th Feb 18, 2:49 PM
    • 18Posts
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    Golactico
    Civil Service Pension at 55 - Reduction Buy-out
    • #1
    • 5th Feb 18, 2:49 PM
    Civil Service Pension at 55 - Reduction Buy-out 5th Feb 18 at 2:49 PM
    Iím always extremely impressed and very grateful for the knowledgeable and helpful advice that I get from my occasional posts on this forum, so here goes againÖ..

    I have a Classic Civil Service pension payable from Age 60. I can take this at 55, but with a reduction of about 5% per year (i.e. total reduction of about 25%).

    I am able to buy-out this reduction which, according to the calculator on the Civil Service Pensions website, would cost me about £45K, If I take the pension at age 55.

    Iím currently age 49. If, over the next 6 years I save into the separate Civil Service AVC scheme, achieving a fund value of £45K by the time I reach 55, can I use this to directly fund the buy-out of the reduction referred to above, avoiding any tax implications that would come into play if I were to simply withdraw it all as cash?

    Many thanks for any thoughts on this.
Page 1
    • hugheskevi
    • By hugheskevi 5th Feb 18, 3:13 PM
    • 1,957 Posts
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    hugheskevi
    • #2
    • 5th Feb 18, 3:13 PM
    • #2
    • 5th Feb 18, 3:13 PM
    Iím currently age 49. If, over the next 6 years I save into the separate Civil Service AVC scheme, achieving a fund value of £45K by the time I reach 55, can I use this to directly fund the buy-out of the reduction referred to above, avoiding any tax implications that would come into play if I were to simply withdraw it all as cash?
    No.

    The Civil Service AVC scheme is completely separate to the main scheme. So your question is the same as asking if you could save into an external pension and use the accrued pension to buy out the reduction.

    However, the contribution to buy out the actuarial reduction does count as a pension contribution and so is eligible for tax relief. So (depending on your earnings, which limit tax relief) you can achieve a similar outcome by saving into a DC pension, withdrawing it (and paying tax), and then buying-out the reduction (and getting tax relief). May need to be careful about recycling rules however.
    • OldBeanz
    • By OldBeanz 5th Feb 18, 4:19 PM
    • 719 Posts
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    OldBeanz
    • #3
    • 5th Feb 18, 4:19 PM
    • #3
    • 5th Feb 18, 4:19 PM
    You will have difficulty getting tax relief on a payment of £45k so buying additional pension then losing 25% of that may be a better option.
    • Golactico
    • By Golactico 6th Feb 18, 2:02 PM
    • 18 Posts
    • 3 Thanks
    Golactico
    • #4
    • 6th Feb 18, 2:02 PM
    • #4
    • 6th Feb 18, 2:02 PM
    Clear and very helpful information that I couldn't find elsewhere on the internet. Very much appreciated. Thanks to both responders.
    • Tom99
    • By Tom99 6th Feb 18, 4:23 PM
    • 1,267 Posts
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    Tom99
    • #5
    • 6th Feb 18, 4:23 PM
    • #5
    • 6th Feb 18, 4:23 PM
    Can you increase your final pension amount by buying "Added Pension". That would increase your pension at age 60 and therefore also at age 55.
    Last edited by Tom99; 06-02-2018 at 10:01 PM.
    • Golactico
    • By Golactico 6th Feb 18, 4:36 PM
    • 18 Posts
    • 3 Thanks
    Golactico
    • #6
    • 6th Feb 18, 4:36 PM
    • #6
    • 6th Feb 18, 4:36 PM
    Tom - unfortunately not. The Civil Service Classic pension scheme (which was Defined Benefit) is now closed, although accrued benefits to April 2015 are being honoured.

    Thanks for suggestion though.
    • Golactico
    • By Golactico 6th Feb 18, 4:47 PM
    • 18 Posts
    • 3 Thanks
    Golactico
    • #7
    • 6th Feb 18, 4:47 PM
    • #7
    • 6th Feb 18, 4:47 PM
    No.

    The Civil Service AVC scheme is completely separate to the main scheme. So your question is the same as asking if you could save into an external pension and use the accrued pension to buy out the reduction.

    However, the contribution to buy out the actuarial reduction does count as a pension contribution and so is eligible for tax relief. So (depending on your earnings, which limit tax relief) you can achieve a similar outcome by saving into a DC pension, withdrawing it (and paying tax), and then buying-out the reduction (and getting tax relief). May need to be careful about recycling rules however.
    Originally posted by hugheskevi
    Would the 75% taxable element of the withdrawal amount from the DC pension count as 'earnings' for this purpose? i.e. when making the buy-out payment, could I reclaim the tax paid on the taxable element of the amount withdrawn from the DC pension. Or, could I only reclaim tax on earnings from actual paid employment in the relevant tax year (or unused annual allowance from previous 3 tax years)? Apologies - I may not have explained that very well.
    Last edited by Golactico; 06-02-2018 at 4:59 PM.
    • hugheskevi
    • By hugheskevi 6th Feb 18, 7:54 PM
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    hugheskevi
    • #8
    • 6th Feb 18, 7:54 PM
    • #8
    • 6th Feb 18, 7:54 PM
    Would the 75% taxable element of the withdrawal amount from the DC pension count as 'earnings' for this purpose? i.e. when making the buy-out payment, could I reclaim the tax paid on the taxable element of the amount withdrawn from the DC pension. Or, could I only reclaim tax on earnings from actual paid employment in the relevant tax year (or unused annual allowance from previous 3 tax years)? Apologies - I may not have explained that very well.
    Originally posted by Golactico
    No, the taxable pension wouldn't count as earnings.

    There is a list here of the earnings that count as tax relief.

    Unused Annual Allowance and carry-forward is something separate (dealing with tax charges in the event the Annual Allowance is breached) - you can only get tax relief on the higher of £3,600, earnings or the Annual Allowance (subject to carry-forward and tapering) in a single tax year.
    • Tom99
    • By Tom99 6th Feb 18, 10:00 PM
    • 1,267 Posts
    • 807 Thanks
    Tom99
    • #9
    • 6th Feb 18, 10:00 PM
    • #9
    • 6th Feb 18, 10:00 PM
    How much extra pension pa at age 55 does the payment of £45k get you?

    Also I tought it was Added Years they did away with not Added Pension?
    Last edited by Tom99; 06-02-2018 at 10:06 PM.
    • jerrysimon
    • By jerrysimon 6th Feb 18, 10:12 PM
    • 266 Posts
    • 207 Thanks
    jerrysimon
    For the PS, I thought that increasing your pension when taking it early, could only be done in a redundancy situation where they allow you to use your redundancy to "buy" the years so you can take it early without penalty.

    I know that was offered to me when I enquired, however as I was never given redundancy and still wanted to retire early I opted to take the reduced but albeit excellent PS DB pension aged 56 last year.
    • hugheskevi
    • By hugheskevi 6th Feb 18, 10:49 PM
    • 1,957 Posts
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    hugheskevi
    Also I tought it was Added Years they did away with not Added Pension?
    Correct, but the OP could not start a new classic Added Pension contract, only an alpha Added Pension contract.

    I thought that increasing your pension when taking it early, could only be done in a redundancy situation where they allow you to use your redundancy to "buy" the years so you can take it early without penalty.
    Any member can do this, although they will of course have to use their own funds whereas in a redundancy situation it would be wholly or partially funded by the employer. In practice, the sums involved may make it impractical for many members to buy-out the reduction without employer assistance.

    I couldn't immediately find any good references, but the online calculator on the pension website makes it clear.
    • Tom99
    • By Tom99 6th Feb 18, 11:07 PM
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    Tom99
    Correct, but the OP could not start a new classic Added Pension contract, only an alpha Added Pension contract.
    .
    Originally posted by hugheskevi
    Does that make any difference? Won't an Alpha Added Pension increase the pension paid at age 55 just the same as a classic Added Pension would have done?
    • BobQ
    • By BobQ 6th Feb 18, 11:59 PM
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    BobQ
    Correct, but the OP could not start a new classic Added Pension contract, only an alpha Added Pension contract.
    Originally posted by hugheskevi
    As the OP is now in Alpha building up just 6 more years which gets paid when he/she is 68+ may not be sensible.

    An alternative might be to opt to move to the Partnership Scheme which is a DC scheme with a good employers contribution and pay into it more than his current employees contribution. So at age 46+ the employer would pay in 14.75% plus up to 3% of matched contributions. So if the OP paid 7% of salary the fund would see 24.75% of salary each year.

    The Alpha is better and guaranteed but if he/she does not want to wait to draw it until 68+ or have it actuarially reduced to get it earlier and is willing to take some risk it is an option for someone retiring 5 years before the Classic NRA
    Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.
    • hugheskevi
    • By hugheskevi 7th Feb 18, 7:41 AM
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    hugheskevi
    Does that make any difference? Won't an Alpha Added Pension increase the pension paid at age 55 just the same as a classic Added Pension would have done?
    If the OP plans on commencing their alpha pension at age 55 the effect would be pretty much the same. But that is not clear, especially as the OP is trying to avoid an actuarial reduction in one pension, so solving that by creating an actuarial reduction in another may not be desirable.
    • Tom99
    • By Tom99 7th Feb 18, 7:42 AM
    • 1,267 Posts
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    Tom99
    £45k sounds very cheap for 5 extra years of pension. If the OP is in the Classic scheme then I presume they have been with the Civil Service for quite a few years.
    • Golactico
    • By Golactico 7th Feb 18, 1:53 PM
    • 18 Posts
    • 3 Thanks
    Golactico
    [QUOTE=Tom99;73841503]How much extra pension pa at age 55 does the payment of £45k get you?

    Just over £2K pa
    • Golactico
    • By Golactico 7th Feb 18, 1:56 PM
    • 18 Posts
    • 3 Thanks
    Golactico
    £45k sounds very cheap for 5 extra years of pension. If the OP is in the Classic scheme then I presume they have been with the Civil Service for quite a few years.
    Originally posted by Tom99
    circa 30 years
    • BobQ
    • By BobQ 7th Feb 18, 8:10 PM
    • 9,952 Posts
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    BobQ
    £45k sounds very cheap for 5 extra years of pension. If the OP is in the Classic scheme then I presume they have been with the Civil Service for quite a few years.
    Originally posted by Tom99
    If the OP is 49 now he has moved into Alpha already and has a "closed" Classic/Premium pension.
    Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.
    • BobQ
    • By BobQ 7th Feb 18, 8:14 PM
    • 9,952 Posts
    • 12,990 Thanks
    BobQ
    If the OP plans on commencing their alpha pension at age 55 the effect would be pretty much the same. But that is not clear, especially as the OP is trying to avoid an actuarial reduction in one pension, so solving that by creating an actuarial reduction in another may not be desirable.
    Originally posted by hugheskevi
    Except one involves an actuarial reduction of 5 years and the other at least 13 years.
    Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.
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