Civil Service Pension and Lump Sum on Retirement

BucksLady

My father is set to retire within the next year and consequently was invited to attend a ''pre-retirement planning session'' organized by his department.

A Finacial Adviser suggested that it would be extremely beneficial to actually commute any pension due to be received into an additional lump sum payment. My father's understanding was that his lump sum could be used to buy additional pension, but not the other way round?
Is this in fact possible? and what would your thoughts be on doing so?

Thanks for reading and any comments gratefully received

jem16

BucksLady wrote: »

A Finacial Adviser suggested that it would be extremely beneficial to actually commute any pension due to be received into an additional lump sum payment. My father's understanding was that his lump sum could be used to buy additional pension, but not the other way round?
Is this in fact possible? and what would your thoughts be on doing so?

It is possible and it is more normal than the one your father is referring to.

Giving up pension for tax-free lump sum is called commutation. Giving up lump sum for pension is inverse commutation but is more rare.

The commutation rate in Public Sector schemes is 12:1 and is considered dire. Unless your father has very good reasons for wanting more lump sum, he is going to be better off not taking it and keeping the more valuable index-linked pension.

Does he need the money? Is he in bad health?

mania112

i'm not sure i would say extremely, it' horses for courses.

any additional lump sum will reduce the pension, so it needs to be considered what is needed or preferable.

check out the spreadsheet calculator here: http://www.civilservicepensionscheme.org.uk/members/member-calculators

The default option is likely to be a lump sum of 3x the pension - so any more lump sum will lower the pension by the 'commutation factor'.

The lump sum is paid as tax free cash, so what you do with it is up to you - HOWEVER, investing it back into a pension is NOT allowed unless rules have changed this year (which is strange as it's the one reason he was given to do it!)

BucksLady

Jem16, many thanks for your reply and clear explanation. No, he isn't in need of any additional lump sum payment and fortunately is in very good health. I will advise him accordingly

mania112

sounds like he's could have been told 2 different things - the other being the option to buy more pension to increase the payout??

jem16

mania112 wrote: »

The lump sum is paid as tax free cash, so what you do with it is up to you - HOWEVER, investing it back into a pension is NOT allowed unless rules have changed this year (which is strange as it's the one reason he was given to do it!)

I don't see any mention of investing the increased lump sum back into a pension.

BucksLady

Mania112, many thanks for your reply and the link provided. I know a couple of his friends are in a quandry as to the best way forward for them, so the calculator will be really useful.

jem16

mania112 wrote: »

sounds like he's could have been told 2 different things - the other being the option to buy more pension to increase the payout??

He's not being told that at all.

Her father knows that he can choose to give up some of his lump sum for additional pension as this option is available in the Civil Service scheme - ie inverse commutation.

However the financial adviser is suggesting that he gives up pension for more lump sum - ie commutation.

mania112

jem16 wrote: »

I don't see any mention of investing the increased lump sum back into a pension.

It was 'buying additional pension' - which is the inverse commutation option i guess (and not using the lump sum to contribute into another pension).

This is not the 'only option' and is actually more rare than lowering the pension to increase the lump sum.

EDIT: 'My father's understanding was' is pre-tense, ok ignore me.

BucksLady

Jem16, that's exactly right:)

Andy_L

Which of the many Civil Service Pension Schemes is he in? If he is in the Defined Contribution scheme called Partnership then its likely to be good advice to take the max lump sum