LGPS and AVC query

snookered1

Hi first time poster, and hoping someone can throw some light on a general pension planning query I've been mulling, as part of our larger plan, but cant quite find an answer on.
Currently we are early to mid 50's and have been building up my wife's AVC's in conjunction with her LGPS pension in recent years, and predict (AVC performance dependent) somewhere around age 57-ish she will likely be approaching or hitting the 25% mark on this. We are planning on my wife taking early retirement at 60, and with pension reductions is unlikely to exceed circa £5K PA in todays money for the LGPS pension.  The query is what happens to the built up AVC should that exceed the 25% threshold, I understand that it can either be added as extra pension, or can be taken taxed at the same time as the pension, now more specifically  if its taken as taxed, I presume it is just the excess that is taxed over the income tax threshold in that year i.e. above the £12.5k income tax threshold for example if it was taken this year, we could potentially utilise a further circa £7.5k that would in effect not be taxed upto the income tax threshold, in addition to the tax free lump sum, giving us some additional wriggle room over the 25%, which is potentially a good percentage of the AVC that we could potentially safely overshoot before incurring income tax.
e.g.  £5k pension, *20 = £100000 nominal pension equivalent value, AVC  £43333,  Total 143333
£143333/4=Tax free AVC £35833, Excess potentially taxed AVC £7500
£5000+£7500=£12500 tax free
Is my thinking correct with this in that, assuming no other income that tax year, its just the AVC above the income tax threshold that is taxed, or is everything above the tax free lump sum taxed regardless of income tax threshold.

ElephantBoy57

snookered1 said:

We are planning on my wife taking early retirement at 60, and with pension reductions is unlikely to exceed circa £5K PA in todays money for the LGPS pension. 

I understood that my LGPS allows early retirement from age 55, without reduction?

Silvertabby

ElephantBoy57 said:

snookered1 said:

We are planning on my wife taking early retirement at 60, and with pension reductions is unlikely to exceed circa £5K PA in todays money for the LGPS pension. 

I understood that my LGPS allows early retirement from age 55, without reduction?

Only in the case of redundancy, or if the employer agrees to pay costs (the latter being as rare as hen's teeth).

Even if you have R85 protections in respect of any pre 2008 benefits, they are still linked to a minimum retirement age of 60.

Taking voluntary retirement at 55 would incur substantial reductions for early payment.

Silvertabby

snookered1 said:

Hi first time poster, and hoping someone can throw some light on a general pension planning query I've been mulling, as part of our larger plan, but cant quite find an answer on.
Currently we are early to mid 50's and have been building up my wife's AVC's in conjunction with her LGPS pension in recent years, and predict (AVC performance dependent) somewhere around age 57-ish she will likely be approaching or hitting the 25% mark on this. We are planning on my wife taking early retirement at 60, and with pension reductions is unlikely to exceed circa £5K PA in todays money for the LGPS pension.  The query is what happens to the built up AVC should that exceed the 25% threshold, I understand that it can either be added as extra pension, or can be taken taxed at the same time as the pension, now more specifically  if its taken as taxed, I presume it is just the excess that is taxed over the income tax threshold in that year i.e. above the £12.5k income tax threshold for example if it was taken this year, we could potentially utilise a further circa £7.5k that would in effect not be taxed upto the income tax threshold, in addition to the tax free lump sum, giving us some additional wriggle room over the 25%, which is potentially a good percentage of the AVC that we could potentially safely overshoot before incurring income tax.
e.g.  £5k pension, *20 = £100000 nominal pension equivalent value, AVC  £43333,  Total 143333
£143333/4=Tax free AVC £35833, Excess potentially taxed AVC £7500
£5000+£7500=£12500 tax free
Is my thinking correct with this in that, assuming no other income that tax year, its just the AVC above the income tax threshold that is taxed, or is everything above the tax free lump sum taxed regardless of income tax threshold.

It's unlikely that your LGPS systems will allow you to take the residual AVC fund of £7,500 as taxable cash with your LGPS benefits.

Instead, you would have to transfer this sum to another policy with your AVC provider or another provider.  They wouldn't have a tax code to work with, and so would have to apply 'emergency' tax, leaving you to recover any over payment from HMRC.

Or you could use this £7,500 to buy additional index linked pension in the LGPS.  

From experience, buying additional pension is the far simpler option.

ElephantBoy57

Silvertabby said:

Only in the case of redundancy, or if the employer agrees to pay costs (the latter being as rare as hen's teeth).  Even if you have R85 protections in respect of any pre 2008 benefits, they are still linked to a minimum retirement age of 60.

Taking voluntary retirement at 55 would incur substantial reductions for early payment.

 

According to my pension fund - I can retire and take my pension any time between age 55 and 75

If I take your pension benefits before your normal pension age they will normally be reduced because you’re getting them paid earlier. But you would expect that, its not a penalty for retiring early.

Silvertabby

ElephantBoy57 said:

Silvertabby said:

Only in the case of redundancy, or if the employer agrees to pay costs (the latter being as rare as hen's teeth).  Even if you have R85 protections in respect of any pre 2008 benefits, they are still linked to a minimum retirement age of 60.

Taking voluntary retirement at 55 would incur substantial reductions for early payment.

 

According to my pension fund - I can retire and take my pension any time between age 55 and 75

If I take your pension benefits before your normal pension age they will normally be reduced because you’re getting them paid earlier. But you would expect that, its not a penalty for retiring early.

Yes, quite.  But in your first post you did say that  ' I understood that my LGPS allows early retirement, from 55, without reduction'.

ElephantBoy57

Silvertabby said:

Yes, quite.  But in your first post you did say that  ' I understood that my LGPS allows early retirement, from 55, without reduction'.

That might be the word used, but I would call it a recalculation, it's not being reduced as a penalty.

Silvertabby

ElephantBoy57 said:

Silvertabby said:

Yes, quite.  But in your first post you did say that  ' I understood that my LGPS allows early retirement, from 55, without reduction'.

That might be the word used, but I would call it a recalculation, it's not being reduced as a penalty.

As a retired LGPS administrator, 'without reduction' means exactly that.

I know where you are coming from - that taking early payment would be cost neutral, because you are taking less for a longer period, but that's only an overall scheme average.

The break even point is something like 14 years, so the longer a 55 year old retiree lives beyond 69 the greater the difference.  

ElephantBoy57

Silvertabby said:

As a retired LGPS administrator, 'without reduction' means exactly that.

I know where you are coming from - that taking early payment would be cost neutral, because you are taking less for a longer period, but that's only an overall scheme average.
The break even point is something like 14 years, so the longer a 55 year old retiree lives beyond 69 the greater the difference.  

My yearly pension statement gives a pension sum to retire now, to retire at 60, at 65 ect. So to say there is a reduction is misleading. There is a calculation for retiring at 60 and there is no reduction on that figure if I do retire at 60. I would get the figure that they quoted.

AlanP_2

This is getting overly pedantic, Silvertabby is correct as in pension scheme rules / admin the lower value pension you get if you commence it before Scheme Retirement Age is reduced by the factors as defined here for the LGPS - https://www.lgpsmember.org/more/reductions.php (if you look at the title it is Early retirement reductions.

Your pension admin people have, by the sounds of it, applied those reduction factors to give values for retiring now, 60 and 65 for you. My statements are entirely different and show what has been accrued to date with an estimate for Age 66 based on no salary increase and working until my 66th birthday so I would need to manually apply the reduction factors to get a "retire now" or Age 65 value (there is an online calculator that does this for me that I can use).

SonOfPearl

When pensions are taken early, the amount paid is normally reduced to reflect the early payment. This is called - by everyone - a reduction. This is not misleading.