LGPS redundancy: options for buying more pension

jamesd

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. (I'm not permitted to post links). This looks like good value to me.

That looks like a poor deal compared to the 6% using one of the more common drawdown income rules, with 100% spousal pension, and likely capital still available to pay for care home needs or inheritance.

inthebubble wrote: »

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?

It can be but that is likely to be an even worse deal than buying a standard annuity because of the limited competition in the market. These products tend to be priced for those with long life expectancy also and that reduces the payouts. There is a tax advantage because some of the income is treated as return of capital but that is not likely to matter unless he's a higher or top rate tax payer and may not even then be enough to overcome the likely payment rate. Of course this would also eliminate the potential to use the money for care home cover, inheritance or any other purpose. It's quite likely that such an annuity would end up paying less than half the amount of drawdown over his lifetime.

inthebubble wrote: »

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

There are trade offs. He can spend money to buy secured income but this costs a lot in likely lifetime income from the money.

At age 55 one of his needs is likely to be to take higher income until his state pension starts, so he has a level income from now through then and beyond. He can't achieve that by buying more work pension or using a lump sum to buy a lifetime annuity outside a pension.

Ultimately this comes down to his choices and willingness to see investment ups and downs to get a higher income in normal circumstances and inheritance or care home coverage from capital. Someone who is not well informed about the investment options may well opt for an annuity just because they don't know about the other options, when in fact in this case he has both work and state pension to come to provide a certain income and is very well placed to accept the sort of variations in capital and income that come from investments with drawdown rules, in part because those will only be a small part of his income.

The first challenge here is to determine whether he's even interested in learning how he can get the benefits that are available without annuity purchase. If he's not interested in learning then he'll pay the usual penalty exacted on those who decline to learn, a likely less good life outcome.

inthebubble

Thank you jamesd for this thoughtful, and thought-provoking, reply.


I thought it might be helpful to post the numbers, if any of you would be kind enough to look through them, and offer your thoughts about the options.


Man, 55, with partner, being made redundant on 31 March. (Unmarried. Our pensions are fully inheritable but there's inheritance tax to consider on my death, as I have more capital assets. We may marry.)






His income:


Current salary:
£56,500


Pension from 1 April (automatically released on redundancy, unreduced, CPI linked, with spousal pension):
£23, 250


Net profit from a holiday let property:
£3,000 (varies from nothing to £6,000 depending on repairs etc; is in an area of high capital growth; unlike a residential BTL, this income is classed as pensionable and he will put it in a pension or SIPP)


Income needs:
£24,000/year net plus some fun money for holidays


May not work again due to (non life-limiting) ill health






Lump sums payable on redundancy/retirement:


Lump sum from LGPS (automatic, cannot be reverse commuted for pension):
£45,700


AVCs (tax free as considered together with the value of the scheme pension when determining the 25% - LGPS rules for people with longer term AVC contracts):
£25,000


Redundancy (£23,400 is taxable):
£53,400


PILON (taxable):
£14,135


Other capital:

ISAs (S&S):
£25,000


ISAs (cash):
£30,000


Other cash:
£20,000


Property (holiday let)
£160,000 equity in £250k property (£90k mortgage)


He lives with me in my property (owned outright by me). I plan to semi-retire in the next couple of years at 55 when I'll have about £200k in SIPPs/transferable AVCs to bridge the gap until 60, when I'll take DB pensions of £29k/year and lump sum of £30k. I have another £50k in ISAs.


We are both on track for fully-funded NSP, assuming we continue to make voluntary/self-employed/employed NI contributions for another few years (I run a small business as a sideline, and will continue to do so; this can provide the basis for whatever the best NI options are for each of us).


My partner is a bit averse to stock market risk, but is up for learning more about different types of risk and how to create and handle a portfolio of this size, as jamesd suggests.


He's minded to shield the redundancy in excess of the £30k tax free sum (ie £23, 400) from tax in a pension, possibly the LGPS additional pension suggested by hybuh.


By my calculation, this would buy, at age 55 (ie reduced for early payment) £1,089/year CPI linked with no spousal pension (as I don't need it).


I think he's got enough headroom to make a further big pension payment this year:


Regular pension payments to be made by 31 March (LGPS and AVC):
£33,000


In earlier years, he paid a lower sum into AVCs and has more than enough Annual Allowance carry over.


Apologies for this very long post.


Thanks for all your help.

inthebubble

Bump...as I'd love feedback, if anyone has the time.


Agree with Jamesd that AVC shouldn't be swapped for pension. Thanks.

kidmugsy

In your/his shoes I'd see an IFA ASAP with a view to your man paying enough into pensions before the Budget on March 16th to let him avoid Higher Rate Tax completely in tax year 15/16. Otherwise he's going to pay excruciating amounts of tax this year. It looks to me as if up to about £56k would be exposed to 40% tax.