Early retirement company pension

beardiedog

I'm 61 in a few months and I'm considering taking my company pension early. I received a quote for this year from Legal & General and they also gave illustrations for both 2016 and NRD 2019.

There's very little difference between the first two years and I'm considering going for option 2 which offers a substantial 5 figure (it says tax free) lump sum with a slightly reduced annual pension. NRD is about 25% higher.

I'm also considering carrying on working part time (self-employed) for a few years and the pension would help me fund this. I work long hours and the work is often very stressful and I just feel like it's time to slow down and enjoy life a bit more. The plan is to sell up and move to the country at some point in the not too distant.

Are there any reasons why I shouldn't take my pension early (apart from the extra benefits at NRD)? i.e. would I be stung for tax if I carried on working, or would I be better off waiting a little longer? Is the lump sum really tax free?

Any thoughts or advice would be greatly appreciated. Thanks.

jamesd

Is this a defined benefit pension to you as a former employee of L&G or are you a customer of theirs with a defined contribution or defined benefit pension invested with or managed by them?

The best choices are radically different depending on whether it's DB or DC.

If it's DB it's likely to be best to borrow instead of taking the pension early. However, from 6 April 2015 you have a legal right to transfer out AVCs to a personal pension and that can be a way to take some of the money. Before doing that you'd best find out if the AVC can be used to pay the 25% tax free lump sum from the whole pension value. This capability is very valuable because the commutation rate from normal pension to lump sum is usually horribly bad. Something like equity release that lets you draw money gradually then repaying over the first fifteen to twenty years from reaching NRD would typically be a better deal than taking it early.

If it's DC it can be fine to take the really tax free lump sum at any time but it would usually be crazy to buy an annuity when deferring the state pension will pay out more except to those in very poor health.

beardiedog

Hi jamesd.

Not sure. The company I worked for closed down in 1993 and the pension fund was negotiated between our trustees and Godwins who sold or transferred it to Legal & General, so I assume this was invested with them and is now managed by them. I paid into it monthly for about 18 years. When the company closed I set up on my own.

So you're saying I could take the lump sum offered now and leave the rest until NRD? That isn't mentioned in the documentation.

xylophone

Was the pension a Final Salary Scheme? Were you contracted out?

Is this a Section 32 buyout bond? Is there a GMP element?

Is there inflation linking?

beardiedog

Was the pension a Final Salary Scheme? Don't think so.

Were you contracted out? Yes

Is this a Section 32 buyout bond? Is there a GMP element? :huh:

Is there inflation linking? Yes, I think so.

mgdavid

OP you are going to need to look out ALL docs and papers in your possession regarding this pension. If you don't have the answers to the questions above you are going to have to ask the pension administrators, and come back with the answers. The details are absolutely vital in order to form opinions and suggest options to you.

jamesd

Sorry, we don't yet have enough information to know the answers for certain. It's common for firms to sell the obligations that they have to pay defined benefit pensions to insurance companies like L&G so we can't tell the difference between one of those and you having a money purchase pension pot at the moment.

At the moment the mention of trustees negotiating implies that it is a defined benefit scheme.

Without knowing all of the answers yet, what are the amounts that you have been quoted? They can give us enough of a clue so that we might be able to say what type it is or at least to say whether taking the lump sum looks like a good or bad idea. the exchange rate (commutation rate) between lump sum and income would be the biggest clue for us.

beardiedog

It's all so confusing to me but I'll try to give you as much information as I can.

On closure of the company, Godwins wound up the contracted out Staff Benefits Plan and Legal & General eventually took over the administration.

Godwins had bought back GMP into the State scheme.

Until 2010 there was a fixed annual increase of 6%. This was reduced to 5% due to new tax legislation.

The figures for 2015 are:

Option 1 - Scheme Pension: £11,170.68 p.a. taxable
Represents 17.87% of the Standard Lifetime Allowance

Option 2 - Scheme Cash Sum: £62,647.00 tax free
Plus reduced pension of £9,397.08 p.a. taxable
Represents 20.4% of the Standard Lifetime Allowance

The figures for 2019 (NRD) are:

Option 1 - Scheme Pension: £15,187.56 p.a. taxable
Represents 24.3% of the Standard Lifetime Allowance

Option 2 - Scheme Cash Sum: £82,895.18 tax free
Plus reduced pension of £12,434.28 p.a. taxable
Represents 26.52% of the Standard Lifetime Allowance

Hope this helps, thanks

mgdavid

who was your employer? Godwin's?
are you still working for them, or someone else?
when was the scheme closed, and have you been paying into a pension since then?
It is very difficult to see the picture without the story that goes with it!

xylophone

The OP stated that his employer closed down in 1993 and the pension scheme was wound up. It may be that Godwins was the firm that the Trustees chose to oversee the process?

At all events, L&G ended up with the administration of the Scheme.

I think that the Scheme must have opted to end its contracted out status by paying what was called the State Scheme Premium - this ended the right to a GMP from the Scheme.

OP, is the pension you will receive from the scheme index linked in payment? If so, how?

Have you obtained a new state pension statement?

https://www.gov.uk/state-pension-statement

You say that you set up on your own after leaving the old employer- have you been paying into a private pension?

beardiedog

mgdavid
No, Godwins administered the scheme for the engineering company I worked for which closed in 1993.

It took 2 years to wind up the scheme and pass on administration to L & G.

Godwin's contracted everyone back in to SERPS.

I've been self-employed since 1995 and have been paying into a small private pension for the last 15 years (£56 a month).

xylophone
I can't see it mentioned anywhere that it's index linked.

I haven't asked for a state pension statement as yet.


Not sure what else you need to know.