Seriously ill spouse - transferring out of LGPS?

emphyrio_2

My wife is a 52-year old LGPS member. She is now seriously ill with cancer and we have been told her life expectancy is severely restricted.

Alongside the emotional consequences there are some practical decisions that we need to make.

The main financial one is whether she should take an ill-health retirement under LGPS, or transfer out into a defined contribution scheme which might then allow her to take out her entire transfer value as a lump sum.

Is there a single right or wrong answer to this, or is it dependent on individual circumstances?

Many thanks for any help offered.

dunstonh

The main financial one is whether she should take an ill-health retirement under LGPS, or transfer out into a defined contribution scheme which might then allow her to take out her entire transfer value as a lump sum.

That would probably not be a good idea.

On death before age 75, the pension fund on a money purchase scheme is tax free. If she drew the transferred fund in full whilst alive, then it becomes taxable using income tax (and applicable bands). So, she could lose over half the pension in tax by doing this. In that case, she would be better off leaving it where it is as you would get 50% income which has some annual indexation.

Is she still working (or on sick pay) or has she already stopped? (if stopped, was it through ill health agreement or resignation)
Is her life expectancy less than a year?

Silvertabby

Has your wife been given an estimate for ill-health pension benefits? If not, there's a lot to consider. For example, if she is granted Tier 1 ill -health retirement, then her pensionable service would be enhanced to her normal retirement age (67?). If she opted out (the only way to transfer out of the LGPS) then only her actual service would count towards the transfer valuation. If given Tier 1, your wife would have the option of taking standard pension benefits and lump sum (if applicable) or she could give up some of her pension and take 25% of her benefits as tax free cash. LGPS administrators aren't allowed/qualified to give financial advice, but in my time as an administrator (I've recently retired) I would use my common sense and give details of options available without recommending which one to take. In cases like your wife's I would refer to the figures on the estimate, then say that if the member died within 10 years of drawing their pension, there would be an additional tax free lump sum in respect of the death grant, being 10 times the selected pension option minus pension already taken. This would be in addition to the widower's pension (which is unaffected by the commuted reduction). Dunstonh asks if your wife's life expectancy is less than 12 months, because that means that she could take all of her pension as a tax free lump sum (plus widower's pension on her death). However, the one-off pension would only be 5 times her standard annual pension, wth no further lump sum on death, so you'll need to compare this figure with either option pension and lump sum plus additional death grant on death. I'm sorry if all this sounds cold, but I've found in the past that people just want the facts, not shilly-shallying. My best wishes to both of you.

System

Hi

Speak to the Administrators and her employer IMMEDIATELY.

The option to stay with the LGPS is my suggestion, and have an IMMEDIATE tier 1 ill health retirement, taking the maximum lump sum.

The figures for the 1st ten years get more out of the scheme if as above.

Ill health and little or no lump sum only pays off from about year 13 onwards.

Death in service is 3 times salary and not likely to be anywhere near the pension option.

If in doubt please ask.

emphyrio_2

Thanks very much for all your advice. We already have a request for an ill health retirement in the works and it sounds like this is the best course.

Am I right in thinking that although the conversion rate is an ungenerous 12:1, it will be most advantageous to maximise the lump sum given

1. My wife's reduced life expectancy
2. Tax free status of the lump sum
3. Tax payable on the survivor's pension as I am a higher rate tax payer?

jamesd

One key thing to know about benefits after a transfer to a defined contribution pension is the possibility of a "serious ill health lump sum". This lets a person take out 100% of the pension pot value as a tax free lump sum, not just the usual 25%. The requirement to be able to do this is to have doctors saying that the life expectancy is no more than a year.

Alternatively, the whole pension pot can be inherited as a tax free lump sum after death before age 75. Since pension pots are outside a person's estate and not governed by their will this can be the more advantageous approach sometimes. A person can use some of each if desired, to help while alive and maximise when not.

However, the possibility of tier 1 ill health retirement and the likely huge jump in pension income available by treating things as if a full working life had happened may well provide a greater benefit and seems likely to be a good route to take.

But there is a catch: the spousal pension is only 50% of the full pension value. So the choice is a transfer at 100% of the pot value accumulated today or a spousal pension at half of the income that would be accumulated after a full working life. I think that the spousal pension is still likely to be a good deal but it's not quite as simple as it might seem.

As a higher rate tax payer you can presumably just make pension contributions in your own name and receive 40% income tax relief. Once you are 55 you can start to take 25% tax free lump sums from this. If you were to take any more than a 25% tax free lump sum your annual allowance for money purchase pension contributions would be reduced from £40,000 to £10,000.

Assuming that your health is normal you're likely to live far more than twelve years and even after income tax the higher income is likely to be more beneficial for you. What the lump sum might offer is the ability for you to draw on it at a high rate to allow you to retire early. Or for both while you're both around it may provide funds that can be used to make life easier.

One thing to resist is any temptation to do something like paying off a mortgage. The money can readily be invested with the prospect of a better financial result than that and it's entirely possible that a change of home might be desired in a year or two.

System

Hi

IMHO

The pension is guaranteed for 10 years as a minimum.

So you multiply the amount accordingly, add on any 3/80 lump sum awarded.

Then look at the Maximum Lump Sum option and apply the same criteria.

The MLS option gets the most money from the scheme for a death within the first few years.

Survivors pension is the same either way.

Silvertabby

jamesd - the LGPS spousal pension hasn't been 50% of the member's pension since 2008. It now less than 50%, but still has the advantage of being calculated on the memer's original pension - ie, before any reductions for commutation (as in this case) and/or early payment reductions (in other cases). As I said before, I'm reluctant to give actual advice, but I can say from experience that the best financial option (assuming Tier 1) would probably be the maximum tax free lump sum and reduced pension, then a further tax free death grant on death.

emphyrio_2

Thanks to all of you for your observations.

Silvertabby, I had ended up with the same conclusion as your very helpful summary.

System

Hi

It isn't strictly speaking a death grant, and therefore not a further death grant.

The pension has a minimum payment time of 120 months, any unpaid months are paid off at time of death, should there be 120 payments made then the payoff is ZERO. Obviously you can guess that if 20 are made, then the balance of 100 are paid over.

Then any survivors pension commences.

Silvertabby

Johndough - that isn't how the LGPS works. If this lady retired and then died then her nominee would receive a death grant of 10 times her annual pension minus any pension already paid. This is paid as a one-off tax free lump sum as soon as it can be arranged, along with a widower's pension paid from the day after the date of death. I understand that some pension schemes continue to pay the pension on a monthly basis up to the end of the guarantee period, but not the LGPS. You're right - I didn't mean to say 'further tax free death grant on death' - should have said 'further tax free lump sum on death, being the death grant'.