Early retirement at 55...help please

robin61

Hi Tigerspill, I take it you are in scheme B like me and if so here's how the AVC works.

When you take the pension and AVC together:-
You can take 25% of your total pension pot as a tax free lump sum. The standard pension gives you a tax free lump sum but that won't be anything near 25% of the total pension pot. Therefore if you build up an AVC you can use that to increase the TFLS. Example if you had a lump sum of £60K and you had £40K AVC you could actually get £100K TFLS or more as long as you don't exceed 25% of the total pension pot. If you build up a big AVC you might be left with a residual after you have maxed out on the TFLS. So you have 2 choices you can buy an annuity with the residual or move the residual into a SIPP.

If you want to take the AVC before drawing the pension:-
You can do this and defer your pension. But you have to take the whole AVC not just some of it. If you do this you have to buy an annuity or move it into a SIPP. So you miss out on a bigger TFLS by doing this.

Tip - if you do decide to take out an AVC make sure you do it via regular monthly contributions (Smart AVC) that way if you are a 40% taxpayer you will get the full tax relief without having to claim it back via your tax code and you will also make a substantial saving on National Insurance. Don't make one off payments you only get 20% tax relief in your pay and you have to claim the 20% extra tax relief via your tax code. You also don't get the NI saving.

I hope that explains it OK. If not just ask.

Regards.

robin61

Mr_Prudent wrote: »

Hi Robin61 Looks as if you and I are thinking along very similar lines, to take the pension a little earlier and invest the years of earlier payments and lump sum. I cannot see the point of waiting until actuarial reduction hits zero on the vast proportion of your pension in the hope that twenty years later when you’re fast approaching your eighties (if you make it that far) that index linking will give you a larger pension (dependent on CPI inflation) Who knows, if you have invested those early payments wisely you may well end up in a better position. Also don’t forget you should be receiving your state pension from your middish sixties. How much does an eighty odd year old need to live on!
That said I do appreciate that everybody has different circumstances and I am not going to criticise anybody who has a different plan in their mind.

Yes agreed everyone's circumstances are different.

I just went through all the calculations again and I am pretty confident in the rationale and the assumptions made.

Good point about the state pension. When I look at my retire easy projection at age 67 our income increases substantially between the two of us and we start to build up a pretty substantial surplus over expenditure from that age. So for me as long as you are not leaving yourself destitute it makes no sense to make huge sacrifices during the early years of retirement.

You can't take it with you !!

tigerspill

robin61 wrote: »

Hi Tigerspill, I take it you are in scheme B like me and if so here's how the AVC works.

When you take the pension and AVC together:-
You can take 25% of your total pension pot as a tax free lump sum. The standard pension gives you a tax free lump sum but that won't be anything near 25% of the total pension pot. Therefore if you build up an AVC you can use that to increase the TFLS. Example if you had a lump sum of £60K and you had £40K AVC you could actually get £100K TFLS or more as long as you don't exceed 25% of the total pension pot. If you build up a big AVC you might be left with a residual after you have maxed out on the TFLS. So you have 2 choices you can buy an annuity with the residual or move the residual into a SIPP.

If you want to take the AVC before drawing the pension:-
You can do this and defer your pension. But you have to take the whole AVC not just some of it. If you do this you have to buy an annuity or move it into a SIPP. So you miss out on a bigger TFLS by doing this.

Tip - if you do decide to take out an AVC make sure you do it via regular monthly contributions (Smart AVC) that way if you are a 40% taxpayer you will get the full tax relief without having to claim it back via your tax code and you will also make a substantial saving on National Insurance. Don't make one off payments you only get 20% tax relief in your pay and you have to claim the 20% extra tax relief via your tax code. You also don't get the NI saving.

I hope that explains it OK. If not just ask.

Regards.

Thanks for this.
I am in Section C which I believe is broadly similar to Section B except that I only started building a lump sum after the 2009 change. Before this, Sec. C was 1/60 accruement and no lump sum. Now it is 1/80 accruement and 3/80 lump sum. So my main pension lump sum is currently small.

The bit I think I was missing was that if I take the AVC earlier than the main pension, that I can't take this as cash and that I need to put in a SIPP or buy an annuity. I am nearly certain what when I called the pension guts a few weeks ago, they said I could take this AVC as cash and that I wouldn't have to buy an annuity or move to a SIPP (I definitely told them I would be taking this sooner than the main pension).

My plan was to retire at 55 and collect the pension at 60. I was hoping to take the AVC as a cash lump sum at 55. Sounds like I can't do this.

I still think AVCs are a good thing. I haven't actually put any in, but plan to make a one off payment this tax year and start salary sacrifice for everything I earn where I pay HRT

ExBT_Bob

tigerspill wrote: »

Thanks for this. Are these the formal figures from BT?
Can they change or are they fixed?

These were last year's figures and yes, they can change (and have since I left) through Actuarial decisions made by the trustees

ExBT_Bob

tigerspill wrote: »

I dont understand why you would move the AVCs to a SIPP?
As long as your AVC is under 25% of the full BT Pension, then you can take it all tax free.
If you move it from the AVC to a SIPP, then you can only withdraw 25% of the SIPP tax free.
Unless you mean take the AVC as tax free cash and then re-invest it in a SIPP?

You wouldn't do it if you were leaving and claiming your pension immediately. Mine is deferred but I wanted to control my own investments in my AVC. No cost move to Hargreaves Lansdown and then capped drawdown to get at 25% tax free from SIPP and then take advantage of new rules from April to get at the rest tax-free (annually). Meanwhile my main BT Pension remains deferred and growing by CPI (as well as approx. 5-6% each year as actuarial reduction diminishes). Would have been RPI of course but for this **** government!

"From next April, the rules change. Most people over the age of 55 with a private pension will then be eligible for flexible access drawdown, if they don’t need secure income and are happy making their own decisions on how much to withdraw, and where to invest.
One way of taking advantage, if you would like access to your full tax-free cash now, is to go into current capped drawdown. There is a limit on the income you can take this year, but from April 2015 the cap will be removed and you can effectively move to the new, flexible access rules if you wish. You will also be able to continue to make pension contributions."
http://www.hl.co.uk/pensions/income-drawdown/what-is-flexible-drawdown

mgdavid

ExBT_Bob wrote: »

.......Pension remains deferred and growing by CPI (as well as approx. 5-6% each year as actuarial reduction diminishes). Would have been RPI of course but for this **** government! ..........

Absolutely nothing to do with the government and everything to do with the Pension Scheme Trustees. There are still good schemes using RPI.

ExBT_Bob

mgdavid wrote: »

Absolutely nothing to do with the government and everything to do with the Pension Scheme Trustees. There are still good schemes using RPI.

I'm afraid that's incorrect. It was the Government that changed the annual indexation rate for public sector pensions from RPI to CPI in April 2011.
BTs pension indexation (Sec A/B) is linked from the pre civil service days to the indexation used for public sector / Civil service pensions (the Pensions Increase Act).
BT decided to stick rigidly to its scheme rules (see below). It wasn't mandatory for private companies to change to CPI but BT put its shareholders before its staff and pensioners and wouldn't make an exception (it saved BT around £4bn I think). The trustees were unable to maintain the indexation at RPI without BT's support, which wasn't forthcoming. Section A/B is affected, with Section C less so, as it's rules specifically state RPI (for pensions in payment), rather than the government indexation measure (although they are still restricted to max 5% a year).


Check: http://www.prospect.org.uk/news/id/2010/01908

Also: http://www.parliament.uk/briefing-papers/SN05434.pdf


Also: http://library.prospect.org.uk/id/2010/00958?display=authoritypdf&revision=1&_ts=333311

Also Extract from BTPS Section B Rules:

10.2 Pension Increases

Any pension in payment will be increased from time to time in accordance with:
* the Pensions (Increase) Act 1972, and
* Sections 59 and 59A of the Social Security Pensions Act 1975

as if the pension was payable under the Principal Civil Service Pension Scheme 1974

..So like millions of public sector workers (and 1000's of BT employees), I paid all my working life (36yrs) into a scheme that increased annually by September's RPI, only to find that when I'd left it would now be indexed by the lower CPI. Broken promises etc...!
Don't even start me on pensions holidays, government tax grabs on private pension schemes, etc...! :mad:
(So if it's ok with you I'll blame the Gov't then BT)

tigerspill

ExBT_Bob wrote: »

You wouldn't do it if you were leaving and claiming your pension immediately. Mine is deferred but I wanted to control my own investments in my AVC. No cost move to Hargreaves Lansdown and then capped drawdown to get at 25% tax free from SIPP and then take advantage of new rules from April to get at the rest tax-free (annually). Meanwhile my main BT Pension remains deferred and growing by CPI (as well as approx. 5-6% each year as actuarial reduction diminishes). Would have been RPI of course but for this **** government!

"From next April, the rules change. Most people over the age of 55 with a private pension will then be eligible for flexible access drawdown, if they don’t need secure income and are happy making their own decisions on how much to withdraw, and where to invest.
One way of taking advantage, if you would like access to your full tax-free cash now, is to go into current capped drawdown. There is a limit on the income you can take this year, but from April 2015 the cap will be removed and you can effectively move to the new, flexible access rules if you wish. You will also be able to continue to make pension contributions."
http://www.hl.co.uk/pensions/income-drawdown/what-is-flexible-drawdown

Thanks for this.
I have read the HL article you posted but I am a little confused by the comment you made above (underlined) where you plan to take a yearly tax free sum. How would this be tax free (or is it just that you aren't taking other income so it sits below the income tax threshold?

ExBT_Bob

tigerspill wrote: »

Thanks for this.
I have read the HL article you posted but I am a little confused by the comment you made above (underlined) where you plan to take a yearly tax free sum. How would this be tax free (or is it just that you aren't taking other income so it sits below the income tax threshold?

I am currently living off tax free investments and using my former BT AVC (now in a SIPP) to supplement these annually until I'm 60. I've already taken the 25% tax free. From April the tax-free allowance is £10600 so I will limit further annual withdrawals to that amount to get at the remainder tax-free too. So when I am 60 I will have withdrawn/emptied my BT AVC fund completely tax-free whilst leaving my deferred BTPS Sec B pension untouched.

tigerspill

ExBT_Bob wrote: »

I am currently living off tax free investments and using my former BT AVC (now in a SIPP) to supplement these annually until I'm 60. I've already taken the 25% tax free. From April the tax-free allowance is £10500 so I will limit further annual withdrawals to that amount to get at the remainder tax-free too. So when I am 60 I will have withdrawn/emptied my BT AVC fund completely tax-free whilst leaving my deferred BTPS Sec B pension untouched.

Thanks again.
Forgive me for being nosey, when you refer to tax free investments - do you mean things like ISAs and possibly other SIPPs?

There are so many permutation and options to get my head around.