civil service pension - classic scheme - inverse commutation - tax: recycling

RetSol

I am a member of the civil service pension scheme (classic section) and am in the process of claiming my pension on an actuarially reduced basis - I am 55. 
I am planning to semi-retire. I am not working at present although I will look for part-time work in the near future so may make some additional modest contributions to a pension scheme. I also have a small existing dc pot from which I took the TFLS last Autumn. 
I want to take the option of inversely commuting the £57,000 lump sum, ie surrendering it for increased annual pension.  I want to return the paperwork to CSP this week but I am having an attack of the collywobbles as I complete the forms because of the dire warnings which they contain about "recycling" of lump sums. I had convinced myself that there is no need to be concerned on this front as the surrender of lump sum for additional pension is not aimed "to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax relieved, contribution to a registered pension scheme." (to quote the HMRC manual) .
I would be extremely grateful if someone is able to shed any light on whether this is the correct approach?

RetSol

On reflection, it's not clear to me that recycling is an issue here at all because I am simply deciding to take my benefits in a particular way, not making a "contribution" to the scheme.  But, then, I am not a tax accountant! 

swindiff

This is not recycling

Mr_Countdown

Hi Retsol. Really interested in your post. I’m about 4 years from retiring early from the civil service and never knew about ‘inversely commuting’. I was in the classic scheme for about 25 years and then was made to move to Alpha in 2015 (this May reverse after the MacCloud judgement). 

I’m 52 years old now. Is this something I would be able to Is it something only people who remained in Classic can do? I’ve done all the playing about on the Early Retirement facultative on the civil service pension website and can choose to increase my lump sum and lower my pension but not the other way round. Hoping someone can help. Thanks. 

RetSol

Interesting question, Mr Countdown.  I think that you need to ask MyCSP for the answer.  And then treat it with scepticism and do your own research.  Good luck.  I call MyCSP "The Masters of Disaster". 

I applied to MyCSP to take my preserved pension benefits in August 2019.  It's taken 8 months for me to get an accurate quotation of my pension benefits out of them.  The statement of preserved benefits which I received when I left the civil service on voluntary severance in 2010 was inaccurate as was every subsequent benefit statement which I received between 2011 and 2018. 

I left the civil service with preserved benefits in the classic scheme only..  I did not move into any other scheme.  If you want to take early retirement in 4 years, I suggest that you start now to bottom out your entitlement as your position may be more complex than mine. 

hugheskevi

Mr_Countdown said:

I’m 52 years old now. Is this something I would be able to Is it something only people who remained in Classic can do?

Anyone with a Classic pension can do it, regardless of whether they moved to alpha or continued in Classic.

Note the inverse commutation rate is much higher than the commutation rate used to exchange pension into more lump sum (12:1) - you are probably looking at an inverse commutation rate closer to 20:1, ie, exchanging getting on for £20 of tax free lump sum to increase pension by £1.

RetSol

hugheskevi said:

Mr_Countdown said:

I’m 52 years old now. Is this something I would be able to Is it something only people who remained in Classic can do?

Anyone with a Classic pension can do it, regardless of whether they moved to alpha or continued in Classic.

Note the inverse commutation rate is much higher than the commutation rate used to exchange pension into more lump sum (12:1) - you are probably looking at an inverse commutation rate closer to 20:1, ie, exchanging getting on for £20 of tax free lump sum to increase pension by £1.

The commutation rate for me is 4.51.  Google "government actuary factors and guidance for classic section" and you will find the GAD guidance which contains a table setting out the factors in an Annex. 

hugheskevi

RetSol said:
The commutation rate for me is 4.51.  Google "government actuary factors and guidance for classic section" and you will find the GAD guidance which contains a table setting out the factors in an Annex. 

The factors are at this link.

To clarify, the 4.51 figure is the amount of extra index-linked (CPI) pension with no survivor benefits a person aged just under 56 would receive in return for each £100 reduction of lump sum, giving a commutation rate of 22:1 to exchange lump sum into pension. For comparison, if you wanted to reduce pension to increase lump sum the scheme would provide £12 of lump sum in return for each £1 pension reduction, a commutation rate of 12:1 to exchange pension for lump sum. 

When considering whether it is attractive, it is important to take into account that the lump sum is tax-free, whereas the pension is taxable.