Dithering

kidmugsy

How big is the penalty for making a bolt for the door and taking the FS pension early? i.e. how big is the "actuarial reduction"?

Another option: ask the scheme to quote you your CETV (cash equivalent transfer value). You could consider transferring the whole lot to a personal pension then taking the 25% tax-free lump sum. But, but, but … FS pensions are usually seen as much superior to a PP, unless (i) you are spouseless, or (ii) you have objective reason to expect a short lifespan, or (iii) the inflation protection on the FS pension is poor, or (iv) the FS scheme is in poor financial nick, or (vi) the terms on which the CETV is calculated are excellent.

Unfunded public sector FS schemes aren't allowed to permit a transfer to PPs at all. Funded public service schemes can, the only sizeable one being, I understand, the LGPS.

Is there any chance of taking redundancy and receiving the pension on favourable terms?

I suggest you gather your thoughts, and gather info, and await the Chancellor's Budget on March 16th - it could upend your considerations anyway.

olympictorch

Thanks kidmugsy.
At the moment I am on 93% pension.
I qualify for full pension next October when I'm 60. Then I don't get any more if I stay till I keel over.
Just a question of whether I can manage without my salary until state pension kicks in if I go early.

jamesd

olympictorch wrote: »

I am thinking of taking my accumulation account, (avc's) and using it to pay a lump sum off my mortgage, which is not due to finish until I am 65
Having put my figures into the overpayment calculator on this site it tells me I could save £5500 in interest and knock 3 years off my time. I would have to pay approx £3000 tax on the 75% balance of my avc's.
Can't make my mind up, I know it's a net gain but still not sure.

It's not a net gain, it's normally a net loss and one of the more common mistakes people make with their pension pots, buying an annuity instead of deferring the state pension being the other leading one.

The savings calculators show you only one side of the picture, the interest saved. They don't show you the loss of pension growth, which is normally likely to be more than the interest saved on any standard mortgage. Average gain of the UK stock market is about 5% a year plus inflation, vs 2.5% with no inflation on top for the mortgage interest saving. You don't get rich by throwing away more than half of your potential gain and even when the money is out of the pension you can do way better than 2.5% with investments.

For many AVCs if you take them when you take the main pension the AVC can be taken tax free to be part or all of the 25% tax free lump sum of the whole pension pot. If this applies it's a great deal to wait and do that. A key thing to find out.

While HR says you can't use flexible drawdown, that just means that their scheme doesn't offer it, you have a legal right to transfer the AVCs to a scheme that does. Glad HR confirmed that. Also good that the hassle has caused it to take a while so far that might save you from the costly mistake of paying off the mortgage.

Nothing wrong with something like living on credit cards until next October to avoid taking an actuarial reduction. A card with a nice 0% for purchase offer would be handy.

olympictorch

Thanks JamesD.
Maybe not such a good idea as I originally thought then?.
I don't fully understand the significance of the date but, apparently, because I started putting my avc's in prior to 1987 I can take my avc pot out 100% tax free, but only when I retire, prior to that if I take them early it's 25/75 split.
Maybe just as well to leave it there stewing, knowing its there when I need it.

jamesd

That 100% tax free AVC makes it seem as though you're in one of the defined benefit schemes which lets you use the AVC to provide the tax free lump sum if you do it when you take the main pension income. A great deal. For those still working at the place we'd normally recommend maxing out the AVC contributions to exploit this as far as possible! To do that you'd need to know what your maximum lump sum using this would be.

The gain comes from getting the tax relief on the contribution to the AVC but not paying income tax on the way out. Adds a very nice 25% to the money you pay in at basic rate. That's such a good deal that for someone as close to it as you are you can make a small killing even using things like cheap credit card money transfers to fund it.

greenglide

If this is AVC contracts set up before 1987 I wonder if this is a protected scheme which has effectively unlimited tax free lump sums?

Most are limited by the PCLS 25% rules. The maximum tax free lump sum that can be wholly used tax free is (Annual pension * 20) / 3, any remainder can normally be taken within or outside the scheme with its remainder 25% lump sum.

olympictorch

Me again. The budget has made me question my immediate plans. If I wait until next April I can take my avc's out without dropping into the 40% threshold.
My difficulty is this:
My mortgage is not due to complete until I am 65.
If I want to retire early I have to pay the majority of my mortgage off.
I could wait till I am 60, take the whole lot tax free, but I would still need to look for a full time job to pay the balance of my mortgage.
At least I have 12 months or so to make my mind up��

atush

No, if you retire at 60, you get 100% of the avc pot tax free- can you use that, then to pay your mtg? Can you live on your projected pension if you have no mtg?

How much is your AVC pot? will there be any left over if you use it to pay off your mtg? Do you have other savings and investments? Could put more in your AVC before you are 60?

jamesd

Why not replace your mortgage with one that runs until age 85? Your work and state pensions presumably have ample money to make the payments. Then you have eliminated the deadline effect.

Or instead of that, why not use an equity release mortgage to also provide "income" on top that can let you delay claiming the work pension for longer after stopping work? An equity release mortgage might not pay as much as the current mortgage value, though, so this may not be possible.

Just remortgage and use borrowing of some sort to delay taking the pension for as long as possible. Also check the rules to see if the amounts change on your birthday or continuously throughout the year - no point in waiting until six months after a birthday if the amount wont' change until the following one.

And of course the credit card deals remain available and an excellent way of getting a cheap short term delay.

olympictorch

Thanks both.
Didn't realise I could extend the mortgage out that far. Worth looking at.
Despite my deep desire to loosen the shackles of work, there seems little point in giving the taxman 3k+ when there is an alternative.
I may have to adjust my countdown timer.
B@gger.