Need advice on LGPS - cash-in or not?

ToTo_Man

My mum was a deferred member of an LGPS (Strathclyde Pension Fund) during the time she worked for the council. She stopped work in August 2012 to become my full-time carer. Now that she is 60 she has been notified that she has three options on her pension entitlement:

1a) Take early retirement and receive the minimum lump-sum ("retirement grant") today of £1,912 and annual pension of £1,001, or 1b) maximum lump sum ("retirement grant") today of £4,973 and annual pension of £746.

2) Defer retirement until she is 65 and receive a minimum or maximum lump-sum ("retirement grant") in 2020 which is not subject to a 14% early retirement reduction, and an annual pension from 2020 which is not subject to a 24% early retirement reduction.

3) Cash in all of her pension today ("trivial commutation") and receive a one-off total payment of £21,582 (£1,912 lump sum + £19,670 commuted pension).

She has been told that the current value of her "pension pot" with regards to trivial commutation is £28,567. I'm not sure how this relates to the £21,582 she has been offered?

If she chooses 3), the first 25% (£5,395) is tax-free, and the remaining 75% (£16,187) I believe is added to her other income and taxed at 20%. Her Carers Allowance (her only source of income) is £3,230, so with a personal tax-free allowance of £10,600 I calculate that she would lose £1,763 in tax, reducing her payout to £19,189.

She has no other pension provision other than the £142 p/w state pension she is expecting to receive once she reaches 67.

She is also concerned that cashing her LGPS pension in now would affect her current entitlement to Carers Allowance. However, she phoned the DWP and was advised that occupational pensions do not affect entitlement to CA. I'd be grateful for confirmation of this please as I'm not 100% confident?

Assuming that her CA entitlement is not affected, she is unsure whether to choose option 1a) or option 3).

As measly as it is, the certainty of £19.25 per week could prove invaluable in later life. But I can't help but feel the £19,189 cash-in could be of more benefit in the short-term, e.g. if an opportunity arises to invest in property to provide an income stream, or if, heaven forbid, illness strikes and funds are needed for treatment etc.

Any advice would be greatly appreciated?!...

hyubh

She has been told that the current value of her "pension pot" with regards to trivial commutation is £28,567. I'm not sure how this relates to the £21,582 she has been offered?

It doesn't, beyond being based on the pension due. The £28,567 figure is determined using the government's standardised factor for trivial commutation purposes (20), the £21,582 from a LGPS specific calculation.

If she chooses 3), the first 25% (£5,395) is tax-free, and the remaining 75% (£16,187) I believe is added to her other income and taxed at 20%.

It will be added to her taxable income for the year, yes.

She has no other pension provision other than the £142 p/w state pension she is expecting to receive once she reaches 67.

This is presumably from a DWP estimate...?

Assuming that her CA entitlement is not affected, she is unsure whether to choose option 1a) or option 3).

The default is option 2; since you haven't given any good reason otherwise, she should choose it. Why are you ignoring it so easily?

But I can't help but feel the £19,189 cash-in could be of more benefit in the short-term, e.g. if an opportunity arises to invest in property to provide an income stream,

Are you serious? If you are, presumably she has previous experience as a landlady to throw away a guaranteed, CPI-linked income stream in her old age?

or if, heaven forbid, illness strikes and funds are needed for treatment etc.

In your grand scheme it would be tied up in property however, so she would likely be back with the NHS anyhow, though now with the added worry of making a big loss from a quick sale.

xylophone

£142 p/w state pension she is expecting to receive once she reaches 67.

You say that she is already 60 - even if her birthday were today her SPA would be 66?

Has she obtained a state pension statement under new rules?

https://www.gov.uk/new-state-pension/overview

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

Why does she not wait to draw an unreduced pension at 65?

System

Hi

My view, and it is only based on my knowledge of the circumstances, is...

There seems little to gain from commuting, certainly short term cash is attractive, but for the long term seems a poor choice.

Waiting until 65 to take the 'full' amounts would be preferable. There should be CPI increases to improve the final amounts, and early retirement reduction.

Of course there is at least 1 more option, and that is to take the pension when it suits her. From now until 75 years of age the choice is hers.

So at aged 63 your mother could choose to bring it into payment by applying, and CPI would have hopefully made a small increase and the early retirement reductions would be less. This would need her to make the application.

Also there is still ILL Health cover for your mother with the LGPS, up until 65 should she be too ill to work and makes a successful claim.

Maybe if your mother can wait she should do, and perhaps go to the CAB or similar for more information and guidance on her own particular circumstances.

ToTo_Man

hyubh wrote: »

This is presumably from a DWP estimate…?

Yes she requested a state pension statement from DWP.

hyubh wrote: »

The default is option 2; since you haven't given any good reason otherwise, she should choose it. Why are you ignoring it so easily?

She considered it initially but thinks receiving her pension now would be better for her as it would give a boost to her existing £62.10 p/w income, albeit at a 24% sacrifice to the amount she receives over her remaining lifetime (£19.25 p/w from now vs £25.35 p/w from 2020 if my calcs are correct). You can understand why she isn't exactly tickled by the prospect of deferring for 5 years in order to boost her p/w figure by £6.10?!

hyubh wrote: »

Are you serious? If you are, presumably she has previous experience as a landlady to throw away a guaranteed, CPI-linked income stream in her old age?

It is indeed a serious contemplation. Neither of my parents have a size of pension provision to be comfortable in retirement (not through ignorance I might add, unfortunately they have never been in a financial position to do so). My dad is likely going to have to continue working his existing job into old age unless he can supplement with an alternative income stream. Their biggest asset is their home, which they are intending to sell in the near future and downsize, hopefully freeing up a decent chunk of money to invest somewhere to make their twilight years a little more comfortable financially. These funds will need to work harder than earning 2%-3% in a Cash ISA or Savings account, and neither I nor my parents understand enough about the stock market to invest in it, hence the suggestion of investing a portion of the funds into a flat to rent out.

ToTo_Man

xylophone wrote: »

You say that she is already 60 - even if her birthday were today her SPA would be 66?

Apologies for the typo, her SPA is indeed 66.

xylophone wrote: »

Has she obtained a state pension statement under new rules?

Yes, thanks.

xylophone wrote: »

Why does she not wait to draw an unreduced pension at 65?

For the reasons given in the middle paragraph of my reply above to hyubh.

hyubh

ToTo_Man wrote: »

You can understand why she isn't exactly tickled by the prospect of deferring for 5 years in order to boost her p/w figure by £6.10?!

You sound like you are seeking rationalisations for an already settled mind. Put another way, the difference is £163 pa, increasing each year as the full amount is uprated by CPI, e.g. by the time she's 65 it will more likely be something like £170 pa and so on.

It is indeed a serious contemplation. Neither of my parents have a size of pension provision to be comfortable in retirement

Even more reason not to blow what guaranteed income she has on a punt on property.

Their biggest asset is their home, which they are intending to sell in the near future and downsize, hopefully freeing up a decent chunk of money to invest somewhere to make their twilight years a little more comfortable financially.

Using money got from downsizing on their home on a property investment sounds more sensible to me given the opportunity cost is different, i.e. unlike in the triv comm case they won't be giving up a guaranteed, index linked income stream.

These funds will need to work harder than earning 2%-3% in a Cash ISA or Savings account, and neither I nor my parents understand enough about the stock market to invest in it, hence the suggestion of investing a portion of the funds into a flat to rent out.

I still don't understand the assumption that someone becoming a first-time landlady in their dotage is such an obviously risk-free enterprise.

xylophone

Being a landlady is not an easy option.

https://www.gov.uk/renting-out-a-property/landlord-responsibilities

https://www.gov.uk/private-renting/your-landlords-safety-responsibilities

Your father will have a state pension and some private pension provision?

If they are planning to sell their home, buy a home for retirement and will have a substantial lump sum, they might be wish to consult an IFA about how to use their state and private pensions and the lump sum to optimise their retirement income?

https://www.unbiased.co.uk/

With regard to your mother's forecast, this is the Foundation Amount?

She should receive credits as a carer up to state pension age to enhance it?

https://www.gov.uk/new-state-pension/your-national-insurance-record-and-your-state-pension

ToTo_Man

xylophone wrote: »

With regard to your mother's forecast, this is the Foundation Amount?

I'm not sure I understand "Foundation Amount". Her state pension statement says she has 43 qualifying years and estimates that she will receive £142.29 p/w SP, and explains that this is £8.96 lower than the full £151.25 estimate to reflect the period of time she was contracted out of the additional state pension (due to her making contributions to her LGPS).

xylophone wrote: »

She should receive credits as a carer up to state pension age to enhance it?

Yes, as far as she is aware she has been receiving NI stamps towards her state pension for all of the time she has been receiving Carers Allowance. So the continuation of these stamps between now and her SP retirement date will continue to increase the value of her SP each year by 1/35th (i.e. £4.32 p/w based on the £151.25 p/w rate), despite her already having 43 qualifying years?

EDIT - I'm confused why the DWP state pension statement refers to my mum being contracted out of the additional state pension, when the ADP only applies to women born before 6th April 1953?

hyubh

ToTo_Man wrote: »

I'm not sure I understand "Foundation Amount".

When the state pension changes, accrual under the old system stops and you start with the higher of what you had earned under the old system to date and as if the new system had always been in place. As such, many people with one or more periods contracted out but still a few years away from their SPA will be able to earn, in effect, additional state pension they wouldn't have been able to earn (due to having contracted out) under the old system (and so under the old system's assumptions, 'double dip').

So the continuation of these stamps between now and her SP retirement date will continue to increase the value of her SP each year by 1/35th (i.e. £4.32 p/w based on the £151.25 p/w rate), despite her already having 43 qualifying years?

It will allow her to progressively cancel out the contracted out deduction under the old system.

I'm confused why the DWP state pension statement refers to my mum being contracted out of the additional state pension, when the ADP only applies to women born before 6th April 1953?

Not sure what you mean by 'ADP'. It will be like you said before - she was contracted out of the state second pension for the time she was a member of the LGPS.

ToTo_Man

hyubh wrote: »

Not sure what you mean by 'ADP'. It will be like you said before - she was contracted out of the state second pension for the time she was a member of the LGPS.

Apologies, autocorrection meddling! I meant ASP (additional state pension).

Thanks for all of your input BTW, - it's certainly given us something to think hard about.