lump sum conversion

Brynglas_3

I'm new here, and very impressed by the help given on this forum. I am trying to untangle my occupational pension. I have decided to retire at 60, in the knowledge that my pension will leave me quite limited, and wonder about the benefits or otherwise of converting some of my occupational pension into increased lump sum. My pension is not high - just £9,500, with a lump sum of just under £29,000. I am trying to work out if it would be worth comuting £1,874 of my pension to provide an extra lump sum of £22,494. I expect to live on little income, but I will also have a small income from some part time work later in the year which will not affect my pension; I have no debts; it is likely that I will use some of my lump sum gradually for larger but infrequent expenditure (for example if I can't afford holidays from my income). I have about £10,000 in an ISA so could only invest a part of the lump sum that way, and a small amount in a savings account giving 6.4% (interest taxable). I would be wary of tying up too much of the capital from the lump sum until I am more certain of how I will manage - I just knew that this is the time to give up full time work!! I am single (divorced), and waiting for the state pension increase that I should get from my ex husband's previous employment, so I should get an almost full state pension, though the pension service seems to be taking for ever to work this out. I am, however, completey foxed by the comutation issue and would welcome any comments.

MikeJones_2

Hi Brynglas,

Just to make sure, when will you be 60?

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser.

Brynglas_3

Oh I wasn't clear - I have just turned 60 in May this year, and I have finished work in August.

MikeJones_2

Was your occupational pension scheme a pure defined benefit scheme (e.g. a final salary scheme is one type of defined benefit scheme). What I'm trying to establish here is whether there was any money-purchase element (such as an 'underpin') which if there was might make a difference to how you take a cash lump sum.

At the same time of asking, did you make any AVCs/FSAVCs (Additional Voluntary Contributions or Free-Standing AVC) in the scheme?

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser.

EdInvestor

It is worth bearing in mind the tax position later when you get to 65 and the age allowance goes up (by then) to the equivalent of 10,000 a year.

Both your pensions are taxable.So if you can get a better fix on your state pension amount (any S2P in your own right included?) that would be helpful so we can see how much of the tax free allowance is left over..

Given you will be able to reinvest the tax free cash from a commutation into a tax free ISA wrapper over the 5 years, this might argue in favour of commuting more.

On the other hand given your income is low, and especially if the pension is index linked in retirement, that might argue against commutation.

Do you own your own home?

Are you prepared to follow an investment strategy which involves some carefully calculated risk?

Do you expect to live a long time?

Brynglas_3

I'll try to give you as much info as I can. Bear with me as finances are not my strong point!! Firstly, it is a final salary pension scheme, local govt; I didn't make any AVCs; As for the state pension, I don't have a long contribution record so that is none too high, but I was told when I applied that my ex husband's contributions would raise it - the pension service have had all the information needed to calculate this for 4 months now, though it might be complicated by the fact that he worked out of the country before we divorced and those contributions might be taken into account. (I don't know what "Sp2 in my own right" is). I do own wy own home, the mortgage is cleared, and I have a tiny income from renting a room, this is not taxable.
Thanks for your perseverance!!

Brynglas_3

Oh yes - I hope to live a very long time, my health is excellent (crossing all that can be crossed) and I would be wary of risk unless it was small.

MikeJones_2

If you are in the Local Government Pension Scheme with service before 1st April 2008, then for that specific period of service your tax free cash lump sum will be in addition to your pension rather by commutation (i.e. rather than by exchanging pension for a lump sum).

For any service after 31st March 2008, the tax free cash for that part of your pensionable service is by commutation.

See here:

How LGPS benefits are worked out for employees in England and Wales from 1 April 2008

I hope this helps. If not, can you expand further?

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser.

Brynglas_3

Yes that is so, but there is also the facility to "increase the tax-free lump sum payment by giving up a part of your pension. You may only elect to convert the pat of your pension which does not take you below your Guaranteed Minimum Pension.....The maximum tax-ree lump sum is 25% of your personal fund" which in my case is £1,874.00. I am having difficulty calculating whether there would be any benefit in doing this with part or all of the allowed amount. Hope this makes sense!

Andy_L

You are getting £12 of lump sum for every £1 of pension you give up. It's impossible for you to get £1 of fully RPI linked, guaranteed for life income for £12 so in that sense it's a bad deal.
However, as others have said, the lump sum gives you flexibility &, possibly, tax advantages.
If you are a member of Unison they should be able to provide you with free financial advice via a, retained, IFA

MikeJones_2

Okay. Well I'd suggest that you would be well served by seeking out the services of an IFA who, when you have explained what you are considering, will look at your entire situation (tax, health, risk profile, guarantees, IHT to name a few).

An IFA will start by completing a Fact-Find which acts as a road-map to help the adviser advise you in the right course of action - i.e. what is best for YOU.

No two people's circumstances are the same and there is no substitute for one-to-one advice.

You can source an IFA using various methods, but a frequently used resource is available here:

http://www.unbiased.co.uk/

An initial meeting should be free and an IFA will explain the firm's basis of remuneration. Be prepared to pay (notwithstanding AndyL's reference to Unison, above), accepting that a good adviser may be able to save you much more money in the longer term by using your personal circumstances to achieve a tax-efficient retirement plan. For example, you might decide upon returning to work via a part-time-job in the future (as many people choose to do for a variety of reasons, not necessarily financial) and this might have a bearing on your situation.

Enjoy your retirement.

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser.