Taking reduced early pension. What are my best options ?

yotmon

 I have a question regarding my partner who had just retired. She is aged 58 and has paid into a local government pension scheme for 39 years. As she is taking early retirement  there are significant deductions on her pension, which she accepts. The two options she has been offered are (1. To take an annual pension of £12,039.97 and a cash lump sum of £25,591.49, or (2. Take a lower annual pension of £9,110.96 and a maximum lump sum of £60,739.61. We believe that there is some flexibility in this by taking something in between.  An example could be to take £11,000 annual pension and approximately £40,000 lump sum. For every £1 commuted, the cash lump sum would only increase by £12.
 The questions is, with the pension being so close to the income tax threshold, would it be beneficial to accept a lower annual pension and commute more to the lump sum as a way of avoiding paying income tax ?  She has thought of dropping the annual pension payment to £11,000 which would keep her pension 'tax free' for a few years more. This is of course relying on the CPI and the tax threshold remaining the same or continuing to increase. We are not in need of the lump sum as we have other savings, plus we are mortgage free.  The current situation in the Country due to Covid19 gives rise to concern over tax allowances being lowered as a way of bringing in revenue. Taking this into account, can you advise on the best cousrse of action please?  

Marcon

yotmon said:

 I have a question regarding my partner who had just retired. She is aged 58 and has paid into a local government pension scheme for 39 years. As she is taking early retirement  there are significant deductions on her pension, which she accepts. The two options she has been offered are (1. To take an annual pension of £12,039.97 and a cash lump sum of £25,591.49, or (2. Take a lower annual pension of £9,110.96 and a maximum lump sum of £60,739.61. We believe that there is some flexibility in this by taking something in between.  An example could be to take £11,000 annual pension and approximately £40,000 lump sum. For every £1 commuted, the cash lump sum would only increase by £12.
 The questions is, with the pension being so close to the income tax threshold, would it be beneficial to accept a lower annual pension and commute more to the lump sum as a way of avoiding paying income tax ?  She has thought of dropping the annual pension payment to £11,000 which would keep her pension 'tax free' for a few years more. This is of course relying on the CPI and the tax threshold remaining the same or continuing to increase. We are not in need of the lump sum as we have other savings, plus we are mortgage free.  The current situation in the Country due to Covid19 gives rise to concern over tax allowances being lowered as a way of bringing in revenue. Taking this into account, can you advise on the best cousrse of action please?  

Nobody here has any special insight; it's pure guesswork in respect of tax allowances.

You seem to be so focussed on tax that you are overlooking other issues. If you don't need the lump sum, what will you do with it when you get it? Indeed, why is she taking the pension now if you have other savings and are mortgage free - might it be better to wait?

yotmon

Marcon said:

Indeed, why is she taking the pension now if you have other savings and are mortgage free - might it be better to wait?
You have now raised another question - could she be allowed to defer her pension until the age of 60 and by doing so, avoid a 9.9% penalty on the main part of her pension ? The pension itself is split into 3 parts. The first and main part is from 1980 -2008 which is penalised by approx' 9.9% - but she believes that this part of the pension would mature at 60, therefore not attracting a penalty. The 2nd part is from 2008 - 2014 which carries a 29% reduction, maturing at 65. The third part is from 2014 - present date. This carries a 35% reduction. This part of the pension is no longer 'final salary' and is 'career average'. So would be beneficial to defer the pension to age 60 if this removed the first penalty ? Thanks again.

barnstar2077

Assuming she does need to take the pension now, the difference between the two lump sums would take your wife about eleven to twelve years to get back through her pension.  If you invest the lump sum you may well make some money on it, but these are interesting times for investing.  Personally I would take the higher annual pension if you have no real use for the larger lump sum.

Brynsam

yotmon said:

You have now raised another question - could she be allowed to defer her pension until the age of 60 and by doing so, avoid a 9.9% penalty on the main part of her pension ? The pension itself is split into 3 parts. The first and main part is from 1980 -2008 which is penalised by approx' 9.9% - but she believes that this part of the pension would mature at 60, therefore not attracting a penalty. The 2nd part is from 2008 - 2014 which carries a 29% reduction, maturing at 65. The third part is from 2014 - present date. This carries a 35% reduction. This part of the pension is no longer 'final salary' and is 'career average'. So would be beneficial to defer the pension to age 60 if this removed the first penalty ? Thanks again.

Simply 'believing' something isn't sufficient.  She needs to check with the scheme what would happen to the main part in terms of any reduction factor - but nobody can be forced to take their pension early. 

Silvertabby

Brynsam said:

yotmon said:

You have now raised another question - could she be allowed to defer her pension until the age of 60 and by doing so, avoid a 9.9% penalty on the main part of her pension ? The pension itself is split into 3 parts. The first and main part is from 1980 -2008 which is penalised by approx' 9.9% - but she believes that this part of the pension would mature at 60, therefore not attracting a penalty. The 2nd part is from 2008 - 2014 which carries a 29% reduction, maturing at 65. The third part is from 2014 - present date. This carries a 35% reduction. This part of the pension is no longer 'final salary' and is 'career average'. So would be beneficial to defer the pension to age 60 if this removed the first penalty ? Thanks again.

Simply 'believing' something isn't sufficient.  She needs to check with the scheme what would happen to the main part in terms of any reduction factor - but nobody can be forced to take their pension early. 

Correct.  Rule of 85 protections in respect of pre 2008 service is still linked to age 60.  Deferring payment until 60 will mean no reductions to pre 2008 benefits, and lesser reductions to later accruals.  
With this much pre 2008 service it would be worth doing.  

yotmon

The deferring of the pension until 60 hadn't been thought of as an option until we started this thread - it was never mentioned by her Pension provider - only the amount of penalties incurred by taking the pension early. What was mentioned was deferring until aged 67 (retirement age), but that is not an option she wishes to take. This raises another dilemma - if she took her pension now instead of deferring until 60, she would have received £24,000 in pension payments, plus had access to the lump sum. Seeing as she has stopped paying into the scheme, would it continue to rise and give her a better payment other than just the cancellation of the penalty ? . It does sound as it would be more beneficial to use our savings to live on if we can rid her of the 9.9% penalty which cover almost 80% of her pension.
Thanks for taking the time to answer.

Brynsam

yotmon said:

This raises another dilemma - if she took her pension now instead of deferring until 60, she would have received £24,000 in pension payments, plus had access to the lump sum. Seeing as she has stopped paying into the scheme, would it continue to rise and give her a better payment other than just the cancellation of the penalty ? . It does sound as it would be more beneficial to use our savings to live on if we can rid her of the 9.9% penalty which cover almost 80% of her pension.
Thanks for taking the time to answer.

These aren't 'dilemmas'; they are valid choices. Yes, her pension would continue to rise on an annual basis between the time she left the scheme and the time she starts to draw her benefits from the scheme.

You refer to a 'penalty' for taking her pension early. It isn't a penalty, just a means of trying to ensure that by the time an early retiree dies they will have received the same total benefit they would have received if they'd waited until normal retirement age. Drawing it sooner means it is payable for longer, so quite logical really....although needless to say, never an accurate science!

yotmon

Thanks everyone for answering.  We have narrowed it down to either taking the £12,039, plus £25K+ lump sum, or defer drawing the pension for 2 yrs until she reaches the age of 60. This would completely remove the penalty on the largest part of her pension and slightly reduce other penalties, plus increase pension payment by over 8 -10% per year.  Now this is the part that causes confusion.  To gain the increase, she would have to forfeit receiving £24,000+ in pension payments over the two year period. Plus, spending £24,000 of her savings to cover living costs. So, how is the deferment beneficial, as it seems that the period of time would be too great to recoup the lost revenue ? Thanks.

barnstar2077

Work out how long it would take you to recoup the 24k once you have the pension with no penalties and decide if you are happy with the answer. 

AnotherJoe

And when you do those maths, take into account the income tax she'll pay, especially once SP kicks in. That will alter the crossover time