Can I check that my understanding of my pension options are correct?

EpsomOldie

Hello
I'm 62, retiring next week, and I only got my Local Government Pension Scheme (LGPS) info and options at the weekend. I'm lucky enough to - I think - have a reasonable amount to live on provided I live modestly.

It's such an important decision and I'm finding Martin's pension info booklet invaluable, but I need to be sure that my understanding of the basic calculations is correct, so I wonder if I can run things past the knowledgeable people here?

It's a bit of a long one, but here goes.

I've read the info I've been sent re the amount I'm entitled to and my options. I understand most of it, but had some queries around...

1. how the value of my total pension scheme benefits is calculated
2. how my AVCs impact on the tax-free lump sum I can receive.

...so I rang the (outsourced) pension office today to enquire. However I didn't find the people I spoke to that good at explaining things.

To avoid drip-feeding, here are the figures that are relevant:
LGPS
Option 1: Standard Benefits
Annual Pension £26,337.61
Lump sum £51,941.44

Option 2: Maximum Lump Sum
Reduced Annual Pension £19,713.90
Maximum Lump Sum £131,425.96

In Option 2, the annual pension is reduced by £6,623.71 and the lump sum is increased by £79,484.52

I understand these options are the two extremes, and the annual pension can be converted to a lump sum at a conversion rate of £12 of lump sum (tax free) for every £1 of pension given up.

AVCs
I have an AVC fund of £77,315.05.
I've been told:

• I can take some or all of this as a tax-free lump sum, provided the lump sum benefits from the LGPS plus any AVC funds do not exceed 25% of my total pension benefits.
• I can take all of it as a tax-free lump sum but this will reduce the amount of the annual LGPS pension I can convert to a lump sum.
• Also, that I can buy an annuity or defer payment.

Back to my queries.

First - the "total value of pension benefits" keeps getting mentioned in regard to the tax-free lump sum (25% max), but this amount is not stated anywhere and I can't find out any info on what the value is or how it's calculated.

When I rang my pension provider's helpline, the young man I spoke to didn't appear to know. He suggested that I simply multiply the max lump sum (mentioned in Option 2) by four. I understand what he was getting at, i.e. max lump sum = 25% of total pension benefits, so four times the max lump sum = 100%, et voila - the total pension value. He didn't sound terribly convincing - even to himself! Is this correct?

Second - the impact of my AVCs on tax-free lump sum.
I had the naïve notion that I could get my AVC fund as a tax-free lump sum PLUS the max lump sum mentioned at Option 2 and skip off into the sunset. I now understand that this is not so.

I have been told - and this is the bit that I don't understand and the more I try to understand, the more my brain goes to mush - that if I were to take the AVCs as a lump sum it would be deducted from the £79.484.52 at Option 2. The remaining £2169.47 would then be divided by 12 = £180.79 and thus converted back to the annual pension.

As I said at the beginning, I've only had these figures since Saturday and I'm reading up to decide the wisest way forward. But before doing that, I desperately need to understand and trust the basic info I'm being given. Unfortunately the pensions provider is outsourced and they in turn appear to run their so-called helpline from a call centre. Any clarification anyone can offer will be gratefully received.

Thank you.

kidmugsy

Have you tried this?
https://www.lgpsmember.org/more/lump-sum-calculator.php

NoMore

https://forums.moneysavingexpert.com/discussion/5646898/prudential-lgps-avc

may help, silvertabby has some good examples

cloud_dog

EpsomO

I know this may take you off at a slight tangent but I think it will greatly help you understand what is in your best interests going forward.

1. Do you know how much you would like (need) to live on after retirement?
2. Do you think you will live more than 12 years after retirement (this relates to the lump sum consideration but, see Q1)

EpsomOldie

@NoMore
Thankyou. That looks very helpful.

@Cloud_Dog
Thank you for replying. To answer your questions:

1. I have no dependents to consider. I also live quite modestly so I've worked out I can live comfortably on c£20,000 pa. And probably save a bit too, especially when the State Pension kicks in in 3 and a bit years.

I'd like to use a substantial amount of the lump sum to:

a) pay off the mortgage (£41,000) and car (£6,000)

b) do some work on the house to deal with essentials (like a rewire), and also make it enjoyable for me to live in - new kitchen and proper roof on the extension, and practical for me as I get older, e.g. a downstairs shower room. It'll also add value, though my own enjoyment of the house and garden is the primary consideration.

I was planning to save/invest the rest, and use it as a cushion for emergencies, and also to treat myself from time to time, e.g. a new little car every 3 years because I love driving, and occasional driving holidays.

2. I don't have any major health probs that I'm aware of, and reasonably good genes, so will probably go on for a bit. Who knows though? I don't fancy getting very old and very infirm so a one way ticket to Switzerland might be on the cards unless legalised euthanasia is introduced in the UK.

Silvertabby

Wow, they really aren't being very helpful, are they? In my day, we gave other options in the letter, which included the AVC fund.

I would calculate your maximum tax free cash option this way:

Using the figures from option 1 (your standard pension and lump sum..

20 x £26,337.61= £526,752.20

1 x lump sum = £51,941.44

1 x AVC = £77,315.05

Total = £656,008.69

25% of £656,008.69 = £164,002.17. This is your maximum tax free cash available.


Now, add your standard lump sum to your AVC and we have a total of £129,256.49. This is less than the maximum you may take, so you now have a new option:

Pension £26,337.61
Tax free cash £129,256.49

or - if you want to give up some of your pension in return for the maximum tax free cash -

Pension £23,442,14
Tax free cash £164,002.17
(where £164,002 - 129,256.49 = £34,745.68 / 12 = £2895.47 annual pension given up)


The LGPS commutation rate of 1:12 isn't particularly generous, so no doubt there will be those on here who will pop up to say 'don't do it' - but it really depends on your need for the immediate cash.

I have been told - and this is the bit that I don't understand and the more I try to understand, the more my brain goes to mush - that if I were to take the AVCs as a lump sum it would be deducted from the £79.484.52 at Option 2. The remaining £2169.47 would then be divided by 12 = £180.79 and thus converted back to the annual pension.

My thoughts on this. One, it's a load of cobblers or Two, the young lad you spoke to got a bit confused, or Three your LGPS have introduced a really convoluted way of calculating benefits with AVCs that I've never heard of ! I would ring back - and this time ask to speak to someone more senior rather than the junior (and they are always the juniors!) that had been dumped onto help-line duty for the day.

How you can use your AVC

The different ways you may be able to use your AVC plan when you retire are:

• Take up to 100% of your AVC plan as tax free cash If you take your AVC at the same time you take your main scheme benefits you can take up to 100% of your AVC plan as tax free cash (as long as your total lump sums from the LGPS do not exceed 25% of the combined value of your benefits including your AVC plan, or 25% of the lifetime allowance (£257,500 for the year 2018/19), or 25% of your remaining lifetime allowance if you have previously taken payment of any pension benefits).

LGPS regs

EpsomOldie

@SilverTabbye
Thank you so much for this. You've made it so clear! What can I say apart from a big thank you!

atush

Now, add your standard lump sum to your AVC and we have a total of £129,256.49. This is less than the maximum you may take, so you now have a new option:

Pension £26,337.61
Tax free cash £129,256.49

This sounds attractive to me, would 129K be enough cash for all your plans plus a cash emergency/replacement fund? what other savings and investments do you have outside the pension?

westv

"Modest" is a relative term though.

EpsomOldie

Hello Atush

No other savings etc apart from a couple of grand. In the past year or so when I knew retirement was imminent, I've thrown all my savings and a huge part of my salary at overpaying on the mortgage and buying AVCs - that's how I know I can manage on c20k pa. The AVCs have been very tax efficient, and although the 'having no savings' thing sounds reckless, I knew that I could 'claw back' the mortgage o'payments at any time if needed.

EpsomOldie

@Father Abraham
Keep your hair on!

I know I'm fortunate - very fortunate indeed. People my age have had the best education, the best of the NHS, have never experienced real poverty and so on. It's not been a cakewalk though - not going into details as it's irrelevant.

I agree modest is a relative term, and I suppose I mean things like I don't smoke, go out boozing, go abroad for holidays, buy expensive clothes, have a fancy car, or tech stuff etc. OTOH, I'm, I think, generous in money and time to my friends and people in need, and I don't take for granted the fact that I can turn on the tap and clean water comes out whereas most people in the world can't.

Anyway, thanks for reading and taking the time to reply.