Calling LPGS Pension Experts!

moneyfoolish

A couple of questions for the Pension Experts on the board!

I am currently in receipt of a final salary pension from October 2000 which is paying just over £20,000 per year. At the time I invoked the pension I took the maximum 25% cash sum available.

I began another job in January 2001 with another final salary pension (the Local Government Pension Scheme) and I am still currently working and adding to this pension.

I've now decided to add some AVC contributions for next 2 or 3 years at which point I will probably retire.

My questions are as follows:-

1. As I have already taken the full 25% lump sum from my previous pension, does this stop me taking a cash lump sum from my current pension?

2. If I use the AVC which runs alongside my final salary pension and I still can take a cash lump sum, can I take it from my AVC contributions instead of directly from my final salary pension? i.e. is the company AVC considered to be part of the overall company pension?

Linton

1) Each pension is considered separately for the 25% so you could take it from your new pension. Whether you would want to is something you would need to consider as the cash you get can be significantly less valuable than the pension you sacrifice.

2) Some FS schemes do allow the 25% to be taken entirely from an AVC, some dont. Others can advise on your particular pension.

moneyfoolish

Linton wrote: »

1) Each pension is considered separately for the 25% so you could take it from your new pension. Whether you would want to is something you would need to consider as the cash you get can be significantly less valuable than the pension you sacrifice.

2) Some FS schemes do allow the 25% to be taken entirely from an AVC, some dont. Others can advise on your particular pension.

Thanks for the reply. How would I get less if I could take the AVC as a cash lump sum? It would have only been saved for 2 or 3 years and I would put it in a cash fund option of the AVC. I would, therefore, get all (or virtually all) of the money back tax free and would have gained a 40% tax benefit by investing it in the pension fund. Or am I in dreamland?

Linton

russell_anderson wrote: »

Thanks for the reply. How would I get less if I could take the AVC as a cash lump sum? It would have only been saved for 2 or 3 years and I would put it in a cash fund option of the AVC. I would, therefore, get all (or virtually all) of the money back tax free and would have gained a 40% tax benefit by investing it in the pension fund. Or am I in dreamland?

I was talking about the situation when you take it from the FS scheme. Taking it from the AVC removes that problem.

jamesd

russell_anderson wrote: »

I am currently in receipt of a final salary pension from October 2000 which is paying just over £20,000 per year.

This is enough to meet the £20,000 minimum guaranteed income that lets you use Flexible Drawdown instead of Capped Drawdown.

Flexible dDrawdown lets you take the money out of all of your personal pensions at an unlimited rate, with no GAD Limit capping the rate. The 25% tax free lump sum can be taken. Then for the remaining 75% the income is added to your normal taxable income and you pay income tax as usual. Once you have elected to use Flexible Drawdown you are not permitted to make any more pension contributions.

russell_anderson wrote: »

I've now decided to add some AVC contributions for next 2 or 3 years at which point I will probably retire.

Because of the availability of Flexible Drawdown, pension contributions may offer you unusually superb value for money, since you can get the tax relief and tax free lump sum, then extract the rest of the money that you have paid in. You do need to consider the tax rates applying when paying in money and when taking it out, of course.

While it's worth examining the AVC options, using a personal pension to get availability of Flexible Drawdown may offer you better value for money. Depending on your specific circumstances it could pay you to even borrow money to make higher pension contributions, knowing that you can then use Flexible Drawdown to repay the money.

Note that borrowing money with the intention of repaying from the tax free lump sum is subject to severe limits, but those limits do not apply to repayment from pension income, not even Flexible Drawdown income.

You'll have to ask the scheme administrators about whether AVCs can be used for the lump sum. If this is possible it is normally a better idea than doing it by reducing pension income.

You might want to edit your post, go to the advanced editing screen, then change the title to include LGPS. That should attract those who have more knowledge of LGPS and who might be able to help with the AVC question.

Since you have the Flexible Drawdown capability it looks like a good idea to do all you can to maximise your pension contributions in some way, even if that turns out not to be LGPS AVCs.

moneyfoolish

jamesd wrote: »

This is enough to meet the £20,000 minimum guaranteed income that lets you use Flexible Drawdown instead of Capped Drawdown.

Flexible dDrawdown lets you take the money out of all of your personal pensions at an unlimited rate, with no GAD Limit capping the rate. The 25% tax free lump sum can be taken. Then for the remaining 75% the income is added to your normal taxable income and you pay income tax as usual. Once you have elected to use Flexible Drawdown you are not permitted to make any more pension contributions.

Because of the availability of Flexible Drawdown, pension contributions may offer you unusually superb value for money, since you can get the tax relief and tax free lump sum, then extract the rest of the money that you have paid in. You do need to consider the tax rates applying when paying in money and when taking it out, of course.

While it's worth examining the AVC options, using a personal pension to get availability of Flexible Drawdown may offer you better value for money. Depending on your specific circumstances it could pay you to even borrow money to make higher pension contributions, knowing that you can then use Flexible Drawdown to repay the money.

Note that borrowing money with the intention of repaying from the tax free lump sum is subject to severe limits, but those limits do not apply to repayment from pension income, not even Flexible Drawdown income.

You'll have to ask the scheme administrators about whether AVCs can be used for the lump sum. If this is possible it is normally a better idea than doing it by reducing pension income.

You might want to edit your post, go to the advanced editing screen, then change the title to include LGPS. That should attract those who have more knowledge of LGPS and who might be able to help with the AVC question.

Since you have the Flexible Drawdown capability it looks like a good idea to do all you can to maximise your pension contributions in some way, even if that turns out not to be LGPS AVCs.

Thanks for all the information. You have confirmed what I had thought but not with complete certainty. My reason for thinking of a company AVC was because if I could take a cash lump sum from that then I could take out the whole of my AVC contributions as a tax free lump sum as it would be a small proportion of the fund if combined with the final salary pension. However, I don't know if that depends on the scheme rules or is possible at all but I thought I had read it was somewhere on the web.
Incidentally, in what way is a Personal Pension likely to be better than an AVC?

jamesd

The AVC may have restrictions on what you can do with it. I'm not sufficiently familiar with the LGPS to know. I can be certain that a standard personal pension won't have restrictions on Flexible Drawdown.

Ignoring Flexible Drawdown for the moment, if the 25% tax free lump sum from a final salary scheme can be taken from an AVC part, that's normally a good deal. If it is possible, you should probably do that as far as required to get all of the 25% lump sum that way. And do that in preference to Flexible Drawdown, because of the certainty of the pension income from the work scheme.

From the look of it your income won't be higher tax rate in retirement, so you can benefit from Flexible Drawdown, though that depends to some extent on how much the LGPS will pay you on top of the existing £20,000 plus and the state pensions.

Overall, you seem to be in a great position to benefit from high pension contributions.

If you would go over £50,000 in contributions in a year, including the increase in value of the LGPS pension benefits, you can use the remainder of the unused portion of £50,000 from the last three years to boost contributions.

hyubh

russell_anderson wrote: »

I've now decided to add some AVC contributions for next 2 or 3 years at which point I will probably retire.

I would check whether the AVC provider will impose charges in such a situation (some do, some don't). It's also possible your particular LGPS fund has more than one AVC provider you can choose.

1. As I have already taken the full 25% lump sum from my previous pension, does this stop me taking a cash lump sum from my current pension?

No, even if the previous pension was an LGPS one too.

2. If I use the AVC which runs alongside my final salary pension and I still can take a cash lump sum, can I take it from my AVC contributions instead of directly from my final salary pension?

That is indeed one of the main benefits of taking out an AVC contract with the LGPS, speaking in general terms.

moneyfoolish

jamesd wrote: »

The AVC may have restrictions on what you can do with it. I'm not sufficiently familiar with the LGPS to know. I can be certain that a standard personal pension won't have restrictions on Flexible Drawdown.

Ignoring Flexible Drawdown for the moment, if the 25% tax free lump sum from a final salary scheme can be taken from an AVC part, that's normally a good deal. If it is possible, you should probably do that as far as required to get all of the 25% lump sum that way. And do that in preference to Flexible Drawdown, because of the certainty of the pension income from the work scheme.

From the look of it your income won't be higher tax rate in retirement, so you can benefit from Flexible Drawdown, though that depends to some extent on how much the LGPS will pay you on top of the existing £20,000 plus and the state pensions.

Overall, you seem to be in a great position to benefit from high pension contributions.

If you would go over £50,000 in contributions in a year, including the increase in value of the LGPS pension benefits, you can use the remainder of the unused portion of £50,000 from the last three years to boost contributions.

No chance of me going over the limit. I'm looking to put in around £14,000 for each of the next 2 or 3 years which will give me a 20%uplift in pension to around £17,500 and remove the £3500 I pay in 40% tax so making me a standard taxpayer. To get then money, I'm going to sell an ISA which is only paying 2.60%. So I'll be saving 40% against getting 2.60%. IF I can get all of that money back as a tax free lump some through the AVC linked to my Final Salary Pension it will be a bonus but even without that boption it seems too good to miss. Having said that I've missed the opportunity for several years because we needed the money initially and I was very slow to see the opportunity to do this! You are correct in saying I won't be paying 40% when I retire because I'll be lucky to get £10,000 from my LPGS pension which will make a total of £30,000 from my 2 pensions plus my old age pension. One downside is that I think I read that I can only contribute to the company AVC via the payroll and can't put in more than 50% of my taxable income which, I guess, means that I can only put in 3 months for this year so it may be that I put the whole £14,000 into some kind of a Personal Pension for this year and start the company AVC next year.

moneyfoolish

hyubh wrote: »

I would check whether the AVC provider will impose charges in such a situation (some do, some don't). It's also possible your particular LGPS fund has more than one AVC provider you can choose.



No, even if the previous pension was an LGPS one too.



That is indeed one of the main benefits of taking out an AVC contract with the LGPS, speaking in general terms.

Thanks for the reply. I've got some very useful information from everybody who has replied. Thank you all.

Yes, I'm going to check with the company Pension Dept. next week and try to find out more about the details of the AVC scheme. I've checked on our intranet site and we use Standard Life with the option of 3 funds - Sterling, Managed Cash and Managed. It allows me to choose other providors but I'm not sure if the AVC would then be linked to my Final Salary Pension to allow me to take it all as a cash free lump sum or whether I would then be restricted to 25% of the AVC?

jamesd

You can have an unlimited number of pensions so you can both use the company AVC and make personal pension contributions this year if you like.

Can't really say more without knowing what your pension people say. If you can't use the AVCs for the full pension lump sum, the three investment choices from SL don't look particularly good.

Why settle for only 2.6% from an ISA? You can get 6% without trouble from investments within a stocks and shares ISA. But that won't beat the benefit you get from making pension contributions.

What are your home plans when retiring? Thinking of downsizing? Asking now because downsizing sooner to boost pension contributions could do very well for you on the pension front.