Civil Service Pension and Lump Sum

bigfreddiel

The advice always given is to take as much as a lump sum as possible from your pension pot as its tax free.

The new rules for civil service pensions allow for an additional 33/14 times your initial pension to be taken over and above the 3 times amount.

However for you need to give up £1 annual pension for every £12 taken out under the 33/14 rule.

Is this a good deal?

I will have 23/80ths of £27,000 as a pension i.e £7762 and a lump sum of £23,287 in 2011.

So for every £1000 reduction in annual pension I could take a £12,000 lump sum and invest it.

Annual pension Lump sum
=========== =======
7762 0
6762 12,000
6238 18,296 maximum amount (33/14*7762)


So I could have an annual pensiuon of £6238 and a total lump sum of £41,583 (23,287 + 18,296).

By 2011 I hope to have £150-180,000 in ISA's (cash and shares), paid off my mortgage so do I need the lump sum?

My gut feeling is to ignore this new 33/14 option and maybe even buy some added years.

Comments and advice gratefully accepted.

fj

Ian_W

Thanks for that post bigfreddiel. Mrs W has been buying extra years in the NHS pension scheme and can retire in 2009 with the full 40yrs at age 55 and I had been working on the 3x pension as being her lump sum with a pension of around £19K.

As a result of your post I looked on the NHS employers site and have discovered they're doing the same thing, obviously to comply with A day changes. Although it doesn't apply in your case she can take an extra lump and reduce her pension to £15k which, if I understand the age allowance correctly, combined with her State Pension at age 64 [she lost out there!] will give her [us!] maximum tax free benefit on her pension.

On that basis, and subject to further consideration and thought, taking the higher lump sum looks a better option for her [and me! :j]. What I can't find on the site is whether survivor spouse benefits are based on the lower pension or as with some schemes that have always worked on commuting the lump sum the pension before a lump is commuted.

In respect of your own situation in view of the large ISA amounts you already hold I can see why you might want to keep it in the pension but my thoughts, which may or may not be correct are that the lump sum is:
1. A bird in the hand, and
2. It's yours to do with as you wish and doesn't die with you :eek: [or surviving spouse] as your pension eventually will.

bigfreddiel

Thanks for showing an interest, and this is what is said - the lump sum is yours to do as you wish with - not bound into your pension.

I'm still not sure what to do - probably nothing! Don't forget I retire at 60 so have 5 years before my state pension (also about £7,000 p/a) kicks in.

There was some mention on the affect it would have on your spouses entitlement should the pension holder die. I cannot remember the exact details, but I believe it could have a considerable affect on the survivor getting any income at all.

Andy_L

bigfreddiel wrote: »

The advice always given is to take as much as a lump sum as possible from your pension pot as its tax free.

That's for money purchase schemes where you have a big pot of money in your name.

You can't buy £1 of index linked guaranteed for life income from age 60 onwards for £12 on the open market so in that respect it's a bad deal.

However, a lump sum gives you flexibility to, eg, buy a sportscar, repair the roof/boiler, invest for tax free income (as the pension is subject to income tax) give away to you heirs etc.
Since you've got a sizeable wodge of ISA is that flexibility worth the cost, I woudln't take it but ymmv & all that.

The survivors pension is based on the pension in payment so reducing it will lower the survivors pension.

bigfreddiel

Thanks for the reply and the way you put it £12 not buying £1 of index linked pension is a good way of looking at it.

I am inclined to just take my 3 times my annual pension lump sum and leave the rest as is. In fact I may even contemplate buying added years, but cannot find out how much it would cost - the civil service pension calulator seems to have gone missing!

What I want to know with 4 years to go to 60 how much would buying an additional £1000 on my pension cost a) as a lump sum and b) montlhy contributions?

Probably frighteningly expensive and out of the question!

fj

Andy_L

ISTR that you have to get an individual quotation for the cost, they don't publish a ready reckoner as there are to many variables.