Early-retirement wannabe

hugheskevi

MaxZorin said:

Do you know if the Alpha minimum pension age is protected?

No, alpha pension is not protected as it is a pension scheme established in 2015, well after 2006.

MaxZorin

Thought as much.  Thanks.

r2i

hugheskevi said:

However, both my and my wife's pensions have protected minimum pension ages from the 2006 changes to minimum pension age, and it would be extremely surprising if any change were made to that, as it would be a retrospective detrimental change which Governments strive to avoid due to the very high risk of successful legal challenge. Given the small numbers with this type of protection there is no reason a Government would want to force through a retrospective detrimental change on this. 

Hence I don't care about possible minimum pension age changes with regard to our Defined Benefit pensions, which are the bulk of our pension provision. They would however affect when we can draw our Defined Contribution pensions, so I assume minimum pension age is 58 in modelling (as our State Pension age is at high risk of being increased to 68 at the next State Pension age review, due in 2023). If minimum age is lower than 58 that is just pure upside, as I can fund the earlier period from tax efficient Defined Contribution pension rather than ISAs.

Hi Glad that you've looked into this and you would be fine. Best wishes

bristrew

Well early retirement along is on the cards at the end of the year, when both my partner and I are going to be made redundant.

We will both be just over 58 and as we both work for the same government department will get decent payoffs of around £170,000 between us.

We both have around 31 years service in the Classic pension scheme and 5 years in Alpha  - we made the choice to move to Alpha as it seemed to deliver a slightly better result than Classic at that point in our careers, but with McCloud will be interesting to see if we will be able to revisit that decision. 

Taking an actuarially reduced pension at age 58 and a few months will give us around £45,000 a year for the both of us (increasing with CPI) with a tax free lump sum of £116,000.

In addition since we are not married then we will get the widows/widowers payments refund, so around another £25,000 - but will then be immediately marrying so the survivor will get the others pension benefits - crazy system!

We have no mortgage but a property worth about £450,000 and no debts, and around £500,000 split across cash ISAs and Vanguard Lifestrategy investment funds.

We will both get the full New State Pension of around £18,000 a year (or whatever it is then) when we get to 67 provided we pay voluntary NI contributions for another couple of years.

We have no children so there is no intention of leaving any money to anyone.

Some expenditure will be less in retirement as we won’t be paying £10,000 a year to commute, but our intention is to travel and spend winters aboard for the next few years.

The only question to resolve before next year is whether to use the redundancy payment to buy out the actuarial reduction. That would cost around £165,000 for both of us, but would mean the pension increasing to £53,000 a year and a slightly increased lump sum of £121,000.

Thoughts on buying out the actuarial reduction?

michaels

8k pa extra pension taxed at 20% is 6 and a bit k so quite a lot of years to get back 165k especially as that 165k would be invested and earning an income of its own.

hugheskevi

michaels said:

8k pa extra pension taxed at 20% is 6 and a bit k so quite a lot of years to get back 165k especially as that 165k would be invested and earning an income of its own.

I don't think that is the right comparison though, as it doesn't take account of tax relief on the £165,000 pension payment.

With a redundancy payment of £170K (of which £60K is tax free) as well as normal salary for part of the year, it is likely that bristrew and partner will both have a lot of income in the higher rate tax band, so will receive 40% relief (or even 60%) relief on some or even all of the contribution. That would make a very meaningful difference to the pay back period as the net cost of the £165,000 might be closer to £100K after tax relief.

bristrew

hugheskevi said:

michaels said:

8k pa extra pension taxed at 20% is 6 and a bit k so quite a lot of years to get back 165k especially as that 165k would be invested and earning an income of its own.

I don't think that is the right comparison though, as it doesn't take account of tax relief on the £165,000 pension payment.

With a redundancy payment of £170K (of which £60K is tax free) as well as normal salary for part of the year, it is likely that bristrew and partner will both have a lot of income in the higher rate tax band, so will receive 40% relief (or even 60%) relief on some or even all of the contribution. That would make a very meaningful difference to the pay back period as the net cost of the £165,000 might be closer to £100K after tax relief.

Sorry, should have said - yes the tax due on the £170k redundancy payment will be around £37k (a mix of 20% and 40% for both of us), which would mean it is £133k in our hand vs handing over all bar £2k (after tax) and getting an extra £5k tax free lump sum plus £8k (before tax) so £6k after tax pension but guaranteed to be increased by CPI (and with a survivor’s 50% pension).

Some back of the envelope maths taking into account inflation and interest from a safe place to put the £133k would seem to mean a payback over around 18 or so years. So sure if we drop dead before then we lose, but then... well we are dead.

Another thing is the intention is also to spend the pension lump sum before 67 to make up the difference until the New State Pension kicks.

RetSol

I took my Classic civil service pension early in April 2020, at age 55.  I inversely commuted the lump sum to give myself extra pension and I signed on the dotted line in the second week of lockdown, following an eight-month bureaucratic nightmare with CSP. regarding my entitlement.  I am so glad to have the pension now.  It's not all about the maths.  I have a sufficient income to pay my basic outgoings and to give myself a few treats.  I have never been happier.  I am frugal but I am willing and able to to spend extra when necessary.  There are 12 years to go before my SPA but I also have a small-ish dc pot to draw on for that period and, in addition, I hope to find some fulfillling, paid work for the next 10 - 12 years.

hugheskevi

bristrew said:

Sorry, should have said - yes the tax due on the £170k redundancy payment will be around £37k (a mix of 20% and 40% for both of us), which would mean it is £133k in our hand vs handing over all bar £2k (after tax) and getting an extra £5k tax free lump sum plus £8k (before tax) so £6k after tax pension but guaranteed to be increased by CPI (and with a survivor’s 50% pension).

Some back of the envelope maths taking into account inflation and interest from a safe place to put the £133k would seem to mean a payback over around 18 or so years. So sure if we drop dead before then we lose, but then... well we are dead.

Your life expectancy at age 58 is about another 30 years, so the buy-out option looks best, especially as you have two bites of the mortality cherry due to survivor benefits.

Buy-out is particularly attractive as you have lots of cash available already, so you benefit both in terms of efficiency and also in securing a bit more guaranteed income which might well be more valuable than cash in your situation.

A slight alternative you could consider is leaving the pension deferred for a few months after leaving employment, and commencing it just before the end of the financial year and buying out the reduction. That would reduce the cost a bit but you would still get all the main benefits, including all the benefit of relief at 40%. But I don't think that would be a materially better outcome, just something slightly different.

Minor point, I think you would hand over all bar £4,000 after tax, as the remaining £5K would only be taxed at 20%, but it might just be rounding and you have already accounted for that.

bristrew

Thanks for your thoughts.

There is a bit of rounding in the numbers as I was manually adding them up, and in my calcs the numbers are split across a number of items as I had been buying Added Pension and Added Years and my partner only Added Years, but they are in the right ballpark.

Now just waiting for the paperwork for the Voluntary Redundancy offer to come out tomorrow.