LGPS redundancy: options for buying more pension

inthebubble

Hello, I'm asking for a 55 year old considering redundancy in September.

If it goes through, he'll release an AVC fund which I think can be used to provide additional annual index linked pension, with survivor pension, of £4.60 for every £100 of AVC used. This is according to GAD LGPS guidance of 2014 for a 55 year old. (I'm not permitted to post links). This looks like good value to me. Any thoughts?


He'll also have a lump sum relating to pre 2008 service which I think cannot be reverse commuted for pension: is that


Lastly, he'll have a redundancy payment. You advised in reply to an earlier post that this cannot be put into AVC - but can it be used to buy pension?

The person this concerns gives a high priority to security and stability of income. He had other savings to provide a cash buffer.

His local scheme is small and not very informed. Due to pressure of work they prefer to provide figures once redundancy has been applied for, rather than to help members make a decision about whether to apply.

Thanks.

hyubh

inthebubble wrote: »

If it goes through, he'll release an AVC fund which I think can be used to provide additional annual index linked pension, with survivor pension, of £4.60 for every £100 of AVC used. This is according to GAD LGPS guidance of 2014 for a 55 year old. (I'm not permitted to post links). This looks like good value to me. Any thoughts?

Other than 'yes indeed'...

He'll also have a lump sum relating to pre 2008 service which I think cannot be reverse commuted for pension

Correct.

Lastly, he'll have a redundancy payment. You advised in reply to an earlier post that this cannot be put into AVC - but can it be used to buy pension?

Not directly. He could I suppose purchase an APC as late as possible through other means, paid back once the redundancy money actually comes through.

His local scheme is small and not very informed. Due to pressure of work they prefer to provide figures once redundancy has been applied for, rather than to help members make a decision about whether to apply.

What did the last annual benefit statement say? A 55 made redundant won't have an actuarial reduction because the employer will have to pay a strain charge to the pension fund preventing one, so there's no special adjustments to think about. Also, the CARE pension earned during the current financial year should be easy to calculate (total pay that pensionable contributions were paid on, divided by 49).

kidmugsy

inthebubble wrote: »

he'll release an AVC fund which I think can be used to provide additional annual index linked pension, with survivor pension, of £4.60 for every £100 of AVC used. This is according to GAD LGPS guidance of 2014 for a 55 year old.

That's good value. First it gives the usual annuity advantage; it lasts as long as he does, and (in part) as long as his widow does.

Secondly it's index-linked (CPI, I assume?). Here's one way of looking at that. The 4.6% p.a. annuity is worth 3.68% p.a. after 20% income tax. Suppose your friend lasts to age 85 and that his spouse has pre-deceased him. So look upon the payback of his capital over 30 years taking up 3.33% p.a. of that return. On the face of it that leaves him only 0.35% p.a. return over-and-above getting his capital back. That 0.35% is index-linked. BUT SO IS THE 3.33%. Looked at that way, he gets 0.35% p.a. with index-linking equal to more than ten times the CPI inflation rate.
Where else could he get such inflation-protection?

There may, or may not, be a chance of high inflation over the next few years, but it would be wise to fear at least one burst of high inflation over the next thirty years. Deciding on the fate of the AVC is partly a matter of temperament. "The person this concerns gives a high priority to security and stability of income": in which case using the AVC to buy extra pension is probably a good idea.

When he reaches State Pension age, and if his capital from pre-2008 service and redundancy pay is still healthy, he could even consider buying more annuity-equivalent by deferring drawing his State Pension. The return on that is (roughly) 5.8% p.a. I suppose it could be argued that it might be advantageous to wait for that opportunity instead, but for someone of a cautious disposition it might be wiser to look upon it as a potential complement rather than an alternative to taking the AVC as extra pension.

System

Hi

The AVC can be converted to pension for just the individual, or for individual and survivor.

Obviously the Individual is a higher rate than the dual option.

CPI adjusted over time, so expect increases.

NB: The individual could go to the open market for an annuity with that AVC pot and any other money they may have.

kidmugsy

Afterthought: you said

inthebubble wrote: »

He'll also have a lump sum relating to pre 2008 service which I think cannot be reverse commuted for pension.

Lastly, he'll have a redundancy payment. You advised in reply to an earlier post that this cannot be put into AVC - but can it be used to buy pension?

Both these lumps could be spent on a Purchased Life Annuity (PLA), which brings tax advantages with it - part of it is looked on as return of capital and is therefore not subject to income tax. Many people, however, would think that an annuity for a 55 year-old is likely to be poor value - much poorer than the AVC provides, for example. Some people reckon that the age at which to buy an annuity is 75-80! On the other hand, if he bought a level PLA then he's hedging his risks on inflation: if it roars away, the AVC-pension is good value; if it is quiescent, the level annuity might be decent value. Moreover the level annuity would perhaps be a way of bridging his income gap until his State Retirement Pension begins, since it would pay out more than an inflation-linked annuity.

An alternative is to invest that money (using ISAs probably) with a view to "buying" extra income by deferring State Pension in a dozen years time, as I mentioned above. Yet another possibility is to invest as much as possible of the capital into a personal pension of some sort, with a view to buying an annuity there when the time seems right, or just of doing income drawdown as suits best. And further, he could also try just saving the capital in those current accounts that pay good interest at the moment - using these loss-leaders while they still exist - so he could look at Lloyds Bank, TSB, Nationwide, Santander, and BOS.

Your friend has a decent range of choices.

inthebubble

johndough wrote: »

Hi

The AVC can be converted to pension for just the individual, or for individual and survivor.
nnuity with that AVC pot and any other money they may have.

Thanks johndough: Does anyone know where I can find the tables for the non-spousal option?

Thanks too to Hybuh and kidmugsy for your help, which is much appreciated.

System

Hi

Your LGPS admin authority have them, and perhaps they will provide them, or a link to a site where you can view them.

Something like this....

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299377/LGPS_E_W_AVC_Conversion_to_Additional_Pension_March_2014.pdf

inthebubble

Thanks johndough.

That link is now broken but, belatedly, I have now found the table which gives the costs of turning AVCs into pension without dependants' benefits:


http://www.lgpsregs.org/images/SecStateGuidance/2012-03-20AVCGuidance.pdf




All best wishes

System

Hiya


Well you are certainly correct, so...

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299377/LGPS_E_W_AVC_Conversion_to_Additional_Pension_March_2014.pdf

is currently valid.

inthebubble

Withdrawn; apologies

kidmugsy

It must be worth getting a projection of the State Retirement Pension that he'll eventually get