LGPS Deferred pension and reductions

cisamcgu

Good morning everyone,

I have, hopefully, a simple question. I am in the LGPS and was looking at early retirement and the actuarial reductions that apply. They average about 5% per year if you take it before your normal retirement age (67 for me), but putting some numbers into a spreadsheet, and using the exact reductions that I got from LGPS it doesn't seem to matter when you take your pension.

What I mean is, say I took it at 57, I would get approx. 50% reduction, however, I would be paid for 10 years more, the break even point ranges from 81 years old to 84 years old, after which having taken it early you begin to lose out.

So, my question is, why do people defer taking their pensions when they retire early, since it doesn't seem to really matter if you take it straight away, or wait for a few years then take it - the outcome is the same, you break even at around 82 years old.
Thanks
Andrew

Marcon

Reduction factors vary from one scheme to another - and many people just don't grasp how they work and see themselves as 'losing' a large slug of their pension if they retire early. There are also tax considerations - if someone is still working and paying tax, taking a pension early could mean they are pushed into a higher rate tax bracket (or they simply don't want to pay more tax at their basic rate).

Remember too that not all schemes allow early retirement.

Flugelhorn

OH and I both deferred taking pension, I was still working and would have paid ++ extra in tax and also would have had to arrange hours to <16 per week for a month (not easy without new contract). Having said that the CPI / RPI increases were better than the pay increases...

Re 81-84 - yep might be OK to count on that level but the parents have lived until late 80's - mid 90's

Silvertabby

cisamcgu wrote: »

Good morning everyone,

I have, hopefully, a simple question. I am in the LGPS and was looking at early retirement and the actuarial reductions that apply. They average about 5% per year if you take it before your normal retirement age (67 for me), but putting some numbers into a spreadsheet, and using the exact reductions that I got from LGPS it doesn't seem to matter when you take your pension.

What I mean is, say I took it at 57, I would get approx. 50% reduction, however, I would be paid for 10 years more, the break even point ranges from 81 years old to 84 years old, after which having taken it early you begin to lose out.

So, my question is, why do people defer taking their pensions when they retire early, since it doesn't seem to really matter if you take it straight away, or wait for a few years then take it - the outcome is the same, you break even at around 82 years old.
Thanks
Andrew

Andrew, you've hit the nail right on the head!

Similar argument applies to taking the maximum commutation, with a comparable break-even point. Only thing is, if you do both - ie, take the 50% reduction hit and maximum commutation, then that won't leave you much of a pension to live on.

When the rules changed in 2014, allowing access to LGPS benefits from age 55, my colleagues and I assumed that not many people would do both - but we were wrong. I would say that at least 85% of people who left the LGPS at 55+ took their benefits (with the 25% tax free lump sum) straight away.

Then of course you have the widow's/widower's pension 'quirk'. This is based on the pension member's full unreduced, uncommuted, pension, and so could be as much as 80% of the original.

bioboybill

I am in the LGPS and I'm coming up to 56 at the end of October. Similarly I want to retire early, but the actuarial reductions mean I wouldn't have enough to live on. However I am putting money into AVCs in the hope of retiring at 60. My State pension age is 67, but since the SPA only went up from 65 to 67 for me in 2014 does that mean that my service up to end March 2014 would only be reduced based on 5 years early rather than 7? I will have 85 Rule protection for my service up to March 2008, but that's a different matter.

cisamcgu

Flugelhorn wrote: »

OH and I both deferred taking pension, I was still working and would have paid ++ extra in tax and also would have had to arrange hours to <16 per week for a month (not easy without new contract). Having said that the CPI / RPI increases were better than the pay increases...

Re 81-84 - yep might be OK to count on that level but the parents have lived until late 80's - mid 90's

We don't plan on working once we have retired

Also, I would hope that by the time we are 85+ years old, our outgoings would be less (if very unlucky maybe even zero :A)

Andrew

cisamcgu

Silvertabby wrote: »

Andrew, you've hit the nail right on the head!

Similar argument applies to taking the maximum commutation, with a comparable break-even point. Only thing is, if you do both - ie, take the 50% reduction hit and maximum commutation, then that won't leave you much of a pension to live on.

When the rules changed in 2014, allowing access to LGPS benefits from age 55, my colleagues and I assumed that not many people would do both - but we were wrong. I would say that at least 85% of people who left the LGPS at 55+ took their benefits (with the 25% tax free lump sum) straight away.

Then of course you have the widow's/widower's pension 'quirk'. This is based on the pension member's full unreduced, uncommuted, pension, and so could be as much as 80% of the original.

Both my wife and I contribute to the Pru AVC scheme, so we will take the minimum lump sum from the LGPS, hopefully maximising the pension amount

Andrew

Silvertabby

bioboybill wrote: »

I am in the LGPS and I'm coming up to 56 at the end of October. Similarly I want to retire early, but the actuarial reductions mean I wouldn't have enough to live on. However I am putting money into AVCs in the hope of retiring at 60. My State pension age is 67, but since the SPA only went up from 65 to 67 for me in 2014 does that mean that my service up to end March 2014 would only be reduced based on 5 years early rather than 7? I will have 85 Rule protection for my service up to March 2008, but that's a different matter.

Your R85 protections in respect of your pre 2008 service only kick in in full from age 60 - so leaving at 56 would mean at least a 4 year early payment reduction.

Your 2008 to 2014 service is payable in full from age 65 so, yes, only a 5 year reduction would apply if you took your pension at 60.

Silvertabby

cisamcgu wrote: »

Both my wife and I contribute to the Pru AVC scheme, so we will take the minimum lump sum from the LGPS, hopefully maximising the pension amount

Andrew

You mean take the maximum tax free cash from your AVCs instead of commuting your pensions?

cisamcgu

Silvertabby wrote: »

You mean take the maximum tax free cash from your AVCs?

Exactly.

We hope to take the whole of the AVC as tax free and take the minimum from the LGPS, so maximising the amount we get in our annual pensions - I believe there is a minimum amount of lump sum you have to take from the LGPS ?

Thanks
Andrew

bioboybill

cisamcgu wrote: »

Exactly.

We hope to take the whole of the AVC as tax free and take the minimum from the LGPS, so maximising the amount we get in our annual pensions - I believe there is a minimum amount of lump sum you have to take from the LGPS ?

Thanks
Andrew

Yes, you can't take less than the minimum amount from the LGPS pension lump sum. I am planning to do the same as you in that respect. That is one of the biggest draws for me of the AVC scheme (so long as they don't change it). Otherwise I would have looked to open a SIPP and used that to get me through to 67.