Civil Service Pension at 55 - Reduction Buy-out

Golactico

I’m always extremely impressed and very grateful for the knowledgeable and helpful advice that I get from my occasional posts on this forum, so here goes again…..

I have a Classic Civil Service pension payable from Age 60. I can take this at 55, but with a reduction of about 5% per year (i.e. total reduction of about 25%).

I am able to buy-out this reduction which, according to the calculator on the Civil Service Pensions website, would cost me about £45K, If I take the pension at age 55.

I’m currently age 49. If, over the next 6 years I save into the separate Civil Service AVC scheme, achieving a fund value of £45K by the time I reach 55, can I use this to directly fund the buy-out of the reduction referred to above, avoiding any tax implications that would come into play if I were to simply withdraw it all as cash?

Many thanks for any thoughts on this.

hugheskevi

I’m currently age 49. If, over the next 6 years I save into the separate Civil Service AVC scheme, achieving a fund value of £45K by the time I reach 55, can I use this to directly fund the buy-out of the reduction referred to above, avoiding any tax implications that would come into play if I were to simply withdraw it all as cash?

No.

The Civil Service AVC scheme is completely separate to the main scheme. So your question is the same as asking if you could save into an external pension and use the accrued pension to buy out the reduction.

However, the contribution to buy out the actuarial reduction does count as a pension contribution and so is eligible for tax relief. So (depending on your earnings, which limit tax relief) you can achieve a similar outcome by saving into a DC pension, withdrawing it (and paying tax), and then buying-out the reduction (and getting tax relief). May need to be careful about recycling rules however.

OldBeanz

You will have difficulty getting tax relief on a payment of £45k so buying additional pension then losing 25% of that may be a better option.

Golactico

Clear and very helpful information that I couldn't find elsewhere on the internet. Very much appreciated. Thanks to both responders.

Tom99

[FONT=Verdana, sans-serif]Can you increase your final pension amount by buying "Added Pension". That would increase your pension at age 60 and therefore also at age 55.[/FONT]

Golactico

Tom - unfortunately not. The Civil Service Classic pension scheme (which was Defined Benefit) is now closed, although accrued benefits to April 2015 are being honoured.

Thanks for suggestion though.

Golactico

hugheskevi wrote: »

No.

The Civil Service AVC scheme is completely separate to the main scheme. So your question is the same as asking if you could save into an external pension and use the accrued pension to buy out the reduction.

However, the contribution to buy out the actuarial reduction does count as a pension contribution and so is eligible for tax relief. So (depending on your earnings, which limit tax relief) you can achieve a similar outcome by saving into a DC pension, withdrawing it (and paying tax), and then buying-out the reduction (and getting tax relief). May need to be careful about recycling rules however.

Would the 75% taxable element of the withdrawal amount from the DC pension count as 'earnings' for this purpose? i.e. when making the buy-out payment, could I reclaim the tax paid on the taxable element of the amount withdrawn from the DC pension. Or, could I only reclaim tax on earnings from actual paid employment in the relevant tax year (or unused annual allowance from previous 3 tax years)? Apologies - I may not have explained that very well.

hugheskevi

Golactico wrote: »

Would the 75% taxable element of the withdrawal amount from the DC pension count as 'earnings' for this purpose? i.e. when making the buy-out payment, could I reclaim the tax paid on the taxable element of the amount withdrawn from the DC pension. Or, could I only reclaim tax on earnings from actual paid employment in the relevant tax year (or unused annual allowance from previous 3 tax years)? Apologies - I may not have explained that very well.

No, the taxable pension wouldn't count as earnings.

There is a list here of the earnings that count as tax relief.

Unused Annual Allowance and carry-forward is something separate (dealing with tax charges in the event the Annual Allowance is breached) - you can only get tax relief on the higher of £3,600, earnings or the Annual Allowance (subject to carry-forward and tapering) in a single tax year.

Tom99

How much extra pension pa at age 55 does the payment of £45k get you?

Also I tought it was Added Years they did away with not Added Pension?

jerrysimon

For the PS, I thought that increasing your pension when taking it early, could only be done in a redundancy situation where they allow you to use your redundancy to "buy" the years so you can take it early without penalty.

I know that was offered to me when I enquired, however as I was never given redundancy and still wanted to retire early I opted to take the reduced but albeit excellent PS DB pension aged 56 last year.

hugheskevi

Also I tought it was Added Years they did away with not Added Pension?

Correct, but the OP could not start a new classic Added Pension contract, only an alpha Added Pension contract.

I thought that increasing your pension when taking it early, could only be done in a redundancy situation where they allow you to use your redundancy to "buy" the years so you can take it early without penalty.

Any member can do this, although they will of course have to use their own funds whereas in a redundancy situation it would be wholly or partially funded by the employer. In practice, the sums involved may make it impractical for many members to buy-out the reduction without employer assistance.

I couldn't immediately find any good references, but the online calculator on the pension website makes it clear.