LGPS benefits sanity check

nash0819

I'm looking for a kind soul to sanity check the findings of my research, below. Apologies for the lengthy post!

To underpin my investment decisions leading towards an early retirement, I need to fully understand the exact "defined benefits" of my LGPS scheme, and how the withdrawal date affects them. Oh, and the state pension.

• I have been contributing continuously to the LGPS defined benefit scheme with the same employer since mid-May 1995.
• No other pensions (yet) of any kind (APC/AVC/SIPP/etc.).
• Soon to be aged 52, I have been a high-rate taxpayer for about 10 years now. No Scottish tax rates involved.

Assuming no APC/AVC added before retirement and ignoring actual values for now (and any survival benefits and any implications of McCloud)… essentially I have three LGPS pension baskets with different withdrawal conditions attached to each.

Basket 1 - mid-May 1995 to March 2008

• Annual pension income (API) = (12.875 years div 80) x Final Salary Pensionable Pay (FSPP) = 16.09% of FSPP
• Automatic, mandatory Tax-Free Lump Sum (TFLS) of 3 times the above = 48.28% of FSPP
• Early retirement reductions may apply against both of the above
• Protected Normal Retirement Age for this basket = 60 : "rule of 85" applies if I continue contributing until mid-May 2024 (age 56 + years in scheme 29) - meaning no early retirement (actuarial?) reductions if drawn at or after age 60

Basket 2 - April 2008 to March 2014

• Annual pension income = (6 years div 60) x FSPP = 10% of FSPP
• Protected Normal Retirement Age for this basket = 65
• Early retirement reductions apply if taken before 65, e.g. If I take the pension at 60, I lose 22.2% of my annual income (as per the table at https://www.lgpsmember.org/more/reductions.php)

Basket 3 - April 2014 onwards - FSPP scheme ceased and Career Average Revalued Earnings (CARE) started

• Annual Pension income (starts at zero; year-on-year, add to API): 1/49th of pensionable salary plus annual revaluation against CPI (fully index linked, no cap)
• Normal Retirement Age for this basket = 67
• Early retirement reductions apply if taken before 67, e.g. If I take the pension at 60, I lose 29.0% of my annual income

Special case: If I lose my job because of redundancy or business efficiency, I can take full benefits from all pots from age 55 onwards with zero actuarial reductions [and "rule of 85" becomes redundant]. Obviously the CARE basket would be significantly less at age 55.

When I decide to take my pension, it has to be all 3 baskets at once, the benefits being:

• an annual pension income for life (the API from each basket added together) minus any actuarial reductions
• a one-off tax-free lump sum being the mandatory sum from basket 1 minus any actuarial reductions
• an additional elective (my choice) TFLS at a multiplier of £12 per £1 of total API forfeited (no actuarial reductions on this TFLS but factor them in when calculating total API)
• the combination of the two TFLS not to exceed 25% of the capital value of my benefits or my remaining LTA
• Annual revaluation of total API for CPI (fully index linked, no cap)

No flexibility at withdrawal (crystallisation?) beyond one-off TFLS choice. No future opportunities to take another TFLS.

None of the flexible options for defined contribution schemes - such as annuities, taking multiple cash sums, flexi-access drawdown, etc. - apply to me.

That said, I do have the option at any time (?) of transferring out of LGPS into a defined contribution pension (involving a CETV). Very unlikely to be beneficial even with an employer incentive but worth analysing should I need the flexibility.

As checked against Government Gateway, by end of tax year 2021-2022, I will qualify for the full state pension to be taken at age 67, despite being contracted out for some of my career. This is an extra £8.7k pa (in today's money) at 67.

Simples!

Silvertabby

Gosh, you've gone into this with some detail !

Basket 1

Agree you will meet R85 in respect of your pre 2008 benefits, as long as not taken before 60.

Despite the automatic lump sum of 3 x pension, you still have the option of further commuting (usual rate of 1:12) if you wish to take the full 25% tax free cash.

Basket 2

Ignore the 11.2% reduction for the tax free lump sum - that factor only applies to your pre 2008 lump sum. The calculation is to reduce your annual pension by the early reduction factor, and then calculate the commutation.

Basket 3

Same as basket 2 re the tax free lump sum commutation/reduction.

This may be handy - but remember to take off the early retirement reductions before inputting the figures:

How much lump sum would you like to take?


Have you considered in-house AVCs? As long as you don't go too daft (and the rules don't change) you may be able to take the whole lot as tax free cash when you retire (tax relief in, tax free out) thus removing the need to commute your actual pension at the no-so-generous rate of 1:12.

Yes, you do have the right to transfer your benefits to a private/draw down scheme - but think long and hard about this. Apart from the problem of finding an amenable IFA (financial advise -at your expense - would be compulsary) the LGPS transfer factors are set by GAD and would be nowhere near the 30x or 40x figures sometimes mentioned on these boards. The calculation is complex, but let's just say I've seen CETVs of just 16 times the annual pension given up......

Also consider death and serious ill health benefits, which would be forfeit if you were to opt out in order to transfer your benefits out.


HTH.

nash0819

Silvertabby. many thanks for your fulsome reply. Yes, I have tried to go through my situation with a fine tooth comb. It's taken me - a relatively intelligent guy if I may be so assuming - two or three iterations of research to get here. What annoyed me the most was any link anywhere blatantly stating that annuities (and other flexible options) only apply to DC schemes and not DB ones. That's the logical inference but can you easily find it confirmed anywhere? No.

Looking again at the LGPS reductions calculator, I can see that yes, only my pre-2008 basket woud see early retirement reductions on the TFLS and my other two baskets would have no reductions on the TFLS. I will edit the OP tomorrow to reflect this. Best not to do it after a glass or two or rose.

I take your words of caution on transference and CETV seriously. I will have another look at AVC's. I don't have an interest (right now) in death benefits but my circumstances could easily change.

hyubh

nash0819 wrote: »

What annoyed me the most was any link anywhere blatantly stating that annuities (and other flexible options) only apply to DC schemes and not DB ones.

An annuity (in respect of pensions) is effectively a purchased DB pension. So if a DB member had an DC AVC, and the rules of the scheme said the AVC value on retiring could be used to buy additional pension with the main scheme, it might be called a 'scheme annuity'.

As it happens, the LGPS is one such scheme, though where the term 'scheme annuity' isn't normally used nowadays - it was in the past however. (If you dig around, you'll find it used in relation to AVCs taken out before 2001, however outside the LGPS bubble the distinction with the additional pension you can buy with a CARE scheme AVC is pretty academic.)

Silvertabby

nash0819 wrote: »

Silvertabby. many thanks for your fulsome reply. Yes, I have tried to go through my situation with a fine tooth comb. It's taken me - a relatively intelligent guy if I may be so assuming - two or three iterations of research to get here. What annoyed me the most was any link anywhere blatantly stating that annuities (and other flexible options) only apply to DC schemes and not DB ones. That's the logical inference but can you easily find it confirmed anywhere? No.

Looking again at the LGPS reductions calculator, I can see that yes, only my pre-2008 basket woud see early retirement reductions on the TFLS and my other two baskets would have no reductions on the TFLS. I will edit the OP tomorrow to reflect this. Best not to do it after a glass or two or rose.

I take your words of caution on transference and CETV seriously. I will have another look at AVC's. I don't have an interest (right now) in death benefits but my circumstances could easily change.

You're welcome.

Just to clarify, if you commute then the TFLS is reduced for early payment, because the pre commution pension has already been reduced.

For example:

Pension of £10K no reductions.
Maximum commutation would give £6,248.57 pension and £42,857.14 tax free lump sum.

Pension of £10K minus 25% early payment reduction = £7,500
Maximum commutation would give £4831.43 pension and £32,142.86 tax free lump sum.

Another point to ponder, is that if you take the double whammy of an early retirement reduction and commutation then you may end up with a lot less than you think.

Using the above figures:

£10K pension. No early retirement reduction, no commutation. After 20 years of retirement you would have received £200K plus cost of living increases.

£10K pension with early retirement reduction and maximum commutation = £4,831.43 pension plus £32,142.86 tax free lump sum.

After 20 years (and remember that the inflationary increases would be on £4,831.43, not £10K) you would have received 20 x £4831.43 plus 1 x £32.142.86 = just £128,771.46.

The fact that the vast majority of LGPS members go for early payment and commutation is one of the reasons why this pension remains 'affordable'.

atush

nash0819 wrote: »

Silvertabby. many thanks for your fulsome reply. Yes, I have tried to go through my situation with a fine tooth comb. It's taken me - a relatively intelligent guy if I may be so assuming - two or three iterations of research to get here. What annoyed me the most was any link anywhere blatantly stating that annuities (and other flexible options) only apply to DC schemes and not DB ones. That's the logical inference but can you easily find it confirmed anywhere? No.

Looking again at the LGPS reductions calculator, I can see that yes, only my pre-2008 basket woud see early retirement reductions on the TFLS and my other two baskets would have no reductions on the TFLS. I will edit the OP tomorrow to reflect this. Best not to do it after a glass or two or rose.

I take your words of caution on transference and CETV seriously. I will have another look at AVC's. I don't have an interest (right now) in death benefits but my circumstances could easily change.

If you pay 40% tax, even after the current pension contribs, i'd be opening an AVC and contributing hard. To provide the 25% TFLS on the 2 tranches of pension that are not automatic. 100 there will cost you 60.

Once this is done, and assuming you have other assets like Cash and S&S isas, i'd look at a Sipp or PP for any further pension contribs.

nash0819

Thanks all. Depending on circumstance at (expected early) retirement, I am planning to take as little TFLS as possible. Ideally 0% on top of the mandatory sum.

I had kind of dismissed AVC's after reading these were "dead in the water" but maybe they make sense for me in LGPS because I can take 100% out as tax-free.

I'm in the Barnet LGPS scheme so I think I'm locked into Prudential for an AVC. I can choose up to 10 different funds (of theirs) to invest in, most of which seem to have a 0.65% annual charge.

OK I'm stuck with Pru funds but the tax benefits of +66% at payin and -0% at payout, if taken as a TFLS, far outweigh the benefits of choosing (what I hope to be) higher performing non-Prudential funds within a SIPP.

In one year, I can invest up to 40K (annual pension allowance) into the AVC (minus my current pension contributions). And also invest what is left of the previous three years allowances. But doing the sums to make sure I don't breach the 25% limits at withdrawal.

I think that's right?

Silvertabby

nash0819 wrote: »

Thanks all. Depending on circumstance at (expected early) retirement, I am planning to take as little TFLS as possible. Ideally 0% on top of the mandatory sum.

I had kind of dismissed AVC's after reading these were "dead in the water" but maybe they make sense for me in LGPS because I can take 100% out as tax-free.

I'm in the Barnet LGPS scheme so I think I'm locked into Prudential for an AVC. I can choose up to 10 different funds (of theirs) to invest in, most of which seem to have a 0.65% annual charge.

OK I'm stuck with Pru funds but the tax benefits of +66% at payin and -0% at payout, if taken as a TFLS, far outweigh the benefits of choosing (what I hope to be) higher performing non-Prudential funds within a SIPP.

In one year, I can invest up to 40K (annual pension allowance) into the AVC (minus my current pension contributions). And also invest what is left of the previous three years allowances. But doing the sums to make sure I don't breach the 25% limits at withdrawal.

I think that's right?

If your salary is high enough to put you into AA danger ground, check with your LGPS provider. They should have at least one senior pensions advisor who specialises in AA and LTA.

The max tax free cash calculation is:

20 x total annual (after early retirement reduction) pension
plus
1 x automatic lump sum from pre 2008 service
plus
1x AVC fund

= £? x 25%.

If that 25 % figure is more than your AVC fund, then you can take all of your AVC as tax free cash.

If the figure is more, however, then you should be able to use the excess (the 'residual') to buy LGPS pension benefits.

nash0819

So let's say for the sake of argument that's:

20x 30K API (incl. retirememt reduction) = 600K
plus 1x 28K TFLS from pre-2008 (and no additional elective TFLS)
plus 1x 100K AVC fund
= 728K
x25% = 182K

That 25% figure is more than my 100K of AVC so I could take all 100K of the AVC as tax-free cash?

Dazed_and_confused

In one year, I can invest up to 40K (annual pension allowance) into the AVC (minus my current pension contributions). And also invest what is left of the previous three years allowances.

That depends on whether you have sufficient earnings in the current tax year.

And don't forget you cannot get higher rate tax relief on all your contributions just because you are currently paying some higher rate tax.

Depending on the type of contribution (net pay or relief at source) and how much you pay on comparison to your taxable income for the tax year you may not get any tax relief at all on some contributions.

Silvertabby

nash0819 wrote: »

So let's say for the sake of argument that's:

20x 30K API (incl. retirememt reduction) = 600K
plus 1x 28K TFLS from pre-2008 (and no additional elective TFLS)
plus 1x 100K AVC fund
= 728K
x25% = 182K

That 25% figure is more than my 100K of AVC so I could take all 100K of the AVC as tax-free cash?

Yes. As the rules stand at the moment.