Taking reduced early pension. What are my best options ?

OldBeanz

Most LGPS schemes allow access to an online calculator. My wife can input a retirement date and it will calculate the amount to that date allowing her to play with a notional inflation rate and pay increases.
If you do not consider the decrease in pension as a penalty but an actuarial neutral calculation for the pension fund then drawing more without incurring tax logically should be better.
You have made no mention of AVCs, is your partner able to contribute to one before she retires as that should (again most LGPS schemes allow this but they vary by authority) give her a significant increase in lump sum value.

yotmon

OldBeanz said:

Most LGPS schemes allow access to an online calculator. My wife can input a retirement date and it will calculate the amount to that date allowing her to play with a notional inflation rate and pay increases.

Unfortunately, her pension scheme doesn't provide a online calculator - she was allowed 1 free calculation estimate per year, then a £100 fee was expected for any further calculations. She has no AVC's and has in fact started her retirement. 
With the annual pension being £12,039, it gives a slight breathing space below the tax threshold which is advantageous. Hopefully the tax allowance will continue to rise, keeping the pension payments tax free. If CPI increases at a similar rate as it has done previously, then she should be free from tax for at least 3 - 4 years. 
Thanks.

Gary1984

I wouldn't get too hung up on ensuring the pension is completely tax free. If the pension were to increase by 10% with indexation over the next few years and the personal allowance frozen for all that time then it would still only be about £12 a month in tax. Consider it a worthwhile contribution to society. 

ROY47

I was in a similar situation 2 yrs ago

retiring at 58 + few months  had full 40 years paid in 

take lower lump sum less than 25% tax free and higher monthly pension maybe pay more tax

take higher lump sum 25% of pension pot tax free   lower monthly pension  possibly pay less tax

wife doesn't work and only has a very small pension payable in a few years from old job

I went for biggest lump sum  purely because if I die wife gets half my monthly pension

which would barely cover monthly bills etc

but she still  has most of the lump sum I had  left to live off as well  

we both decided We would rather her have more money in the " bank"  if the worst happens

and god forbid we both die at the same time our kids will share the money saved away

monthly pension payout disappears if we both die  

It's your choice in the end

jeelz

yotmon said:

 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. 

You appear to be double counting the £24,000.
Supposing she has £24,000 in savings at age 58 and uses it all deferring the pension till 60. She will have £0 at that point (but a bigger pension).
If instead she takes the pension at 58 she will spend her £24,000 pension  payments in living costs till 60 but will still have her £24,000 savings (but a smaller pension). 

yotmon

Thanks for all the above replies. We have contacted the pension provider and received an estimate of the pension if deferred to the age of 60. The amount per year would rise from £12,039 to £13,290 and the cash free lump sum would increase from £25,591 to £26,816. That's a difference of £1,251 p.a. pension and £1,225 lump sum. This equals to over a 10% rise in received pension. Although this does seem advantageous, the downside would be waiting another 23 months for the pension to be paid at the age of 60. This would involve the foregoing of any pension payments (24 months x £1,003) plus any CPI yearly increases and living off her savings. Can you advise on which sounds the best option.
Thanks in advance.

jamesd

Assuming normal life expectancy, waiting, because that's almost 30 years from age 60.