Civil Service Pension - no more lump sum, what to do?

Debt_Free_Chick

laurel7172 wrote: »

So am I right in my interpretation that if I make AVCs, this could be the best of all possible worlds? Tax relief, tax free growth AND the whole of it back when I retire?

Thank you

Well, yes - but part of the total lump sum would have been provided by swapping some of your 1/60th pension anyway. The actual increase in the lump sum will be 25% of the value of the AVCs at retirement - the rest of the lump sum you could have had, anyway.

Having said that, it could be that you are still better off overall as the pension you give up (by taking your AVCs as cash, rather than using them to buy an annuity) could well be less that the 1/60th pension you would have swapped for the lump sum. Whether this is the case depends on the pension/cash exchange rate used by LGPS.

BobQ

laurel7172 wrote: »

This is LGPS, not civil service, but most of my accrued benefits are on the 1/60 system (no lump sum) and I've just had a letter encouraging me to pay AVCs which includes the following:

When you retire you can take the whole of your AVC fund as a tax free lump sum (including any income earned) subject to the total lump sum being no more than 25% of the value of your benefits.

So am I right in my interpretation that if I make AVCs, this could be the best of all possible worlds? Tax relief, tax free growth AND the whole of it back when I retire?

Thank you

Schemes that used to be based on 1/80ths usually had a lump sum, the later variants used 1/60ths without lump sum but they were almost similar in value. You will probably be able to commute some of your 1/60ths pension to have a lump sum, in the same way that those with a 1/80th pension can usually convert the lump sum into more pension within limits.

Obviously if you take out AVCs you will get more benefits however they allow you to take them. But they are based on investments unlike your main pension. So "whole of it" will depend on the investment.

laurel7172

Thanks, debt free chick. But what it seems to be saying is that, because I don't get any lump sum on the current LGPS scheme, I can effectively exploit a technicality, using the 25% allowance that my scheme doesn't utilise to get *all* my AVCs as a lump sum when I retire. (Assuming LGPS doesn't offer me an unmissable annuity rate to keep it in there)?

laurel7172

Thanks, Bob. As a late entrant on a low salary, I don't expect to be able to afford to commute any pension-certainly not at the rates they seem to be offering at the moment. I'm aware that the two pensions are actuarily similar. But...subject to investment risk..which also exists outside a pension...am I right that I could, potentially, use an AVC like a long term S&S ISA, with the added benefit of tax relief on the initial investment? Thank you.

Debt_Free_Chick

laurel7172 wrote: »

Thanks, debt free chick. But what it seems to be saying is that, because I don't get any lump sum on the current LGPS scheme

Are you sure about that? Can't you swap (commute/exchange) some of your 1/60th pension at retirement for a lump sum?

laurel7172

Yes. But I understand I'd be insane to take them up on their offer at current rates . I do take your point about the flexibility, though...if I did decide to commute some pension, that would definitely throw off my maths.

Andy_L

laurel7172 wrote: »

Thanks, debt free chick. But what it seems to be saying is that, because I don't get any lump sum on the current LGPS scheme, I can effectively exploit a technicality, using the 25% allowance that my scheme doesn't utilise to get *all* my AVCs as a lump sum when I retire. (Assuming LGPS doesn't offer me an unmissable annuity rate to keep it in there)?

The LGPS, uniquely(?), among the public sector schemes allows you to "merge" the FS pension and AVC pots , work out the 25% lump sum based on the total value (using a nominal calculation for the pot size of the FS bit) and then take all the lump sum from the AVC

Debt_Free_Chick

laurel7172 wrote: »

Yes. But I understand I'd be insane to take them up on their offer at current rates . I do take your point about the flexibility, though...if I did decide to commute some pension, that would definitely throw off my maths.

Agreed that using the AVC funds to provide the cash that would otherwise have been available by swapping some of the 1/60th pension is probably the best option. (But you'd need to compare the LGPS pension/cash exchange rate with a current annuity rate and remember that both vary over time).

But it was this point ...

So am I right in my interpretation that if I make AVCs, this could be the best of all possible worlds? Tax relief, tax free growth AND the whole of it back when I retire?

Where you say you get all of it back (as a lump sum) when you retire. My point was that you would have got some of it as a lump sum anyway.

Let's say that LGPS would have provided a lump sum of £100K. You then accumulate AVCs of £100k. Your total lump sum would be £125k (£100k that LGPS would have provided plus 25% of the AVC fund). So, your total AVCs would be paid to you as a lump sum - but only because your using it to fund a payment which LGPS was originally going to pay to you.

There's nothing wrong with your analysis :T but I wanted to be sure that you understood that the actual increase in cash is not simply the AVC fund. The increase is only 25% of the AVCs at retirement. Yes, you could get the whole AVC fund as a lump sum and, yes, that could well improve your retirement income - but the amount of cash you get is only increased, marginally.

jvh100

For those being offered voluntary exits be careful. The bumpf generally given out says you can take an unreduced pension early if you are 50 or over if you use some or all of your lump sum to buy out the reduction.

There are pages of this and they all imply you will get a full pension - NOT SO!

There is a single sentence in the bumpf somewhere that states it is base on accrued service. This means if made redundant you will only get a pension based on how many years service you have behind you at the time of leaving and not what you would get if you had retired at 60.

I have just found this out the hard way. I was facing voluntary exit and if I didn't take it I was to be made compulsary redundant for which for me would have made no difference but for some people it would make a big difference.

I had a bombshell dropped on me after using my lump sum to buy out the reduction and found my pension is less than £4300 pa which is only just over jobseeekers allowance.

At least I won't have the humiliation of having to sign on as unemployed every fortnight but neither will I have enough to live on until my other pensions kick in in 10 years time and my state pension kicks in when I reach retirement age.


Also be aware that having a civil service pension might affect your state pension. I wasn't aware of this either but there is a single sentance in the pension guides which is available on the civil service pension website at:
civilservice.gov....uk/pensions/scheme-guides (Remove the extra dots - I can't post links as a new user).

check your guides VERY carefully.

for example for the classic plus scheme:

Page 3.......

• is contracted out of the State
Second Pension Scheme (S2P).
This means that both you and your
employer pay National Insurance
Contributions at a lower rate. You
may not build up any rights to S2P
while you are a member of the
classic plus scheme although
you will still get the basic State
pension if you have paid enough
National Insurance Contributions.

So you will get the basic pension but probably not the S2P
(old serps) part.

page 15......
Changes at State pension age
When you reach State pension age,
some or all of the pensions increase
relating to your guaranteed minimum
pension is paid with your State
pension. Also at State pension age,
National Insurance modification will
take effect for people with service
before 1 April 1980.

so after state pension age, it looks like only your state pension is increased in line with CPI. I don't know what the reference to NI means yet.

page 21....
The pension payable from the State
is made up of two parts – the basic
pension and the additional earningsrelated pension, S2P. The State
pension is paid from State pension
age and increases each year in line
with inflation.
Your membership of classic plus
does not affect your entitlement to the
State basic pension. You will not be
entitled to the earnings-related element
as classic plus is contracted out of S2P.
To find out more about the State
pension and S2P, contact the
Department for Work & Pensions.


I hope this helps someone else.

:beer: :beer:

xylophone

so after state pension age, it looks like only your state pension is increased in line with CPI. I don't know what the reference to NI means yet.

See http://www.civilservice.gov.uk/wp-content/uploads/2012/04/CapitaNewsletter2012.pdf