LGPS Ill-health Pension - 25% tax free ??

JMU-95

I’ve been going through the process of Ill health retirement and have been granted early access to my pension (tier 1). It’ll still take another 6 weeks to process everything. I’m 50. I get a lump sum and £15,000 per annum.

I know zilch - nada - nothing about pensions so I know I need to look for an IFA. however I do know I can take 25% tax free. My question is: is this 25% of £15k or 25% of the total fund value, and how do I calculate the total find value?

Thanks

xylophone

so I know I need to look for an IFA.

Why? Do you need help with investing a lump sum?

https://www.lgpsmember.org/tol/thinking-leaving-illhealth.php

Tier 1 - if you are unlikely to be capable of gainful employment before your Normal Pension Age, ill health benefits are based on the pension you have already built up in your pension account at your date of leaving the scheme plus the pension you would have built up, calculated on assumed pensionable pay, had you been in the main section of the scheme until you reached your Normal Pension Age.

Does your LA not produce a fact sheet like this one?

https://m.oxfordshire.gov.uk/cms/sites/default/files/folders/documents/pensions/membersguide/leaflets/Guidetoillhealthretirementmembernotes.pdf

Silvertabby

Were you given 2 options to choose from? Option 1 being standard pension and standard lump sum (which would be nil if you don't have any pre 2008 service) and Option 2 being the commuted/reduced pension and maximum tax free lump sum.

Your decisions will be limited to which option to choose and then what to do with your tax free cash. As zylophone says, do you really need to pay an IFA for help with these decisions?

Yes, before anyone pipes up, the LGPS still offers transfers out to private draw down schemes - but your CETV (the transfer value) will only be based on the benefits you have actually accrued, and won't include the 17 year service enhancement for your Tier 1 award.

JMU-95

xylophone wrote: »

Why? Do you need help with investing a lump sum?

https://www.lgpsmember.org/tol/thinking-leaving-illhealth.php

Does your LA not produce a fact sheet like this one?

https://m.oxfordshire.gov.uk/cms/sites/default/files/folders/documents/pensions/membersguide/leaflets/Guidetoillhealthretirementmembernotes.pdf

Possibly. It’s more that I assume a IFA can explain pensions to me and advise me on why option to choose.

They do. However it doesn’t answer my question.

Silvertabby wrote: »

Were you given 2 options to choose from? Option 1 being standard pension and standard lump sum (which would be nil if you don't have any pre 2008 service) and Option 2 being the commuted/reduced pension and maximum tax free lump sum.

Your decisions will be limited to which option to choose and then what to do with your tax free cash. As zylophone says, do you really need to pay an IFA for help with these decisions?

Yes, before anyone pipes up, the LGPS still offers transfers out to private draw down schemes - but your CETV (the transfer value) will only be based on the benefits you have actually accrued, and won't include the 17 year service enhancement for your Tier 1 award.

No, I haven’t been given any options yet as I haven’t gotten to that stage yet. I do have pre 1995 service. I read somewhere you can take 25% of your pension tax free so I want to figure out if the 25% I can take is from my annual allowance of £15,000. So for instance is the maximum I can take tax free = £3750 ??

Silvertabby

JMU-95 wrote: »

No, I haven’t been given any options yet as I haven’t gotten to that stage yet. I do have pre 1995 service. I read somewhere you can take 25% of your pension tax free so I want to figure out if the 25% I can take is from my annual allowance of £15,000. So for instance is the maximum I can take tax free = £3750 ??

Gosh, no, it'll be a lot more than that - the maximum under HMRC regs is 25% of the total of 20 x your standard pension plus 1 x your standard lump sum. But then there would be adjustments in accordance with the commutation rate (in the case of the LGPS 1:12).

Where did you get £15K from ? You'll not be able to work out your own Tier 1 pension on the member website, as that won't give you the enhancement to SPA.

JMU-95

Silvertabby wrote: »

Gosh, no, it'll be a lot more than that - the maximum under HMRC regs is 25% of the total of 20 x your standard pension plus 1 x your standard lump sum. But then there would be adjustments in accordance with the commutation rate (in the case of the LGPS 1:12).

Where did you get £15K from ? You'll not be able to work out your own Tier 1 pension on the member website, as that won't give you the enhancement to SPA.

Ah! Thank you this is what I needed clarified.

We get a statement of benefits every 2 years and one of the columns shoes your age 65 estimated benefit.

May I ask can you explain what you mean when you say “adjustments in accordance with the commutation rate (in the case of the LGPS 1:12)”? I don’t know what this is.

AnotherJoe

You are highly unlikely to need an IFA.
You are most likely going to be given a simple choice that irrespective of "not understanding pensions" you should be able to choose between.

For example, and totally making numbers up would you rather have £100k lump sum plus £20k a year, or £50k lump sum and £24k a year ? Again, to stress, those numbers are made up i have no idea what you'll actually be offered.
The 12:1 commutation rate means that for every extra £1k a year pension, your lump sum decreases by £12k, and vice versa. And its always possible you might get a sliding scale where by between say £100k and £50k lump sum you can alter it and choose the annual pension.



Unless the lump sum is half a million pounds and you'd like an IFA to manage it this should be a decision you can make yourself.

JMU-95

AnotherJoe wrote: »

You are highly unlikely to need an IFA.
You are most likely going to be given a simple choice that irrespective of "not understanding pensions" you should be able to choose between.

For example, and totally making numbers up would you rather have £100k lump sum plus £20k a year, or £50k lump sum and £24k a year ? Again, to stress, those numbers are made up i have no idea what you'll actually be offered.
The 12:1 commutation rate means that for every extra £1k a year pension, your lump sum decreases by £12k, and vice versa. And its always possible you might get a sliding scale where by between say £100k and £50k lump sum you can alter it and choose the annual pension.



Unless the lump sum is half a million pounds and you'd like an IFA to manage it this should be a decision you can make yourself.

Yes. After reading this thread I presume so. Thanks for the explanation above which clarified some things.

Silvertabby

JMU-95 wrote: »

Ah! Thank you this is what I needed clarified.

We get a statement of benefits every 2 years and one of the columns shoes your age 65 estimated benefit.

May I ask can you explain what you mean when you say “adjustments in accordance with the commutation rate (in the case of the LGPS 1:12)”? I don’t know what this is.

For a very rough idea, take the SPA standard pension and lump sum figure from your annual benefit statement, drop them into the calculator below, and select 25% tax free lump sum.

A commutation rate of 1:12 means that you give up £1 of your annual pension for £12 tax free lump sum. 1:12 isn't a generous rate, but it all depends on what you intend to do with the lump sum.

How much lump sum would you like to take?