SIPPS ,the LGPS and other questions

Retire2021

Good morning,

I have a few questions about a possible retirement this year for myself and my wife - henceforth known as Mr and Mrs X.

Mr X: 

Age 55, Full-time employed, salary c.£50K 

LGPS DB pension which will pay around £30K at SPA, and about £12.5K if taken this summer (not going to even inquire about CETV)

LGPS AVC worth around £20K (plan to take as TFLS when taking pension)

SIPP worth around £35K

Will receive full SP at SPA, I have already paid 35+ years of full contributions

Total current annual pension contributions ~ £22K (used approx. £20Kpa in the last three years)

Mrs X :
Age 60, Full-time employed, salary c.£90K 

LGPS DB pension which will pay around £48K at SPA, and about £27K if taken this summer (not going to even inquire about CETV)

LGPS AVC worth around £44K (plan to take as TFLS when taking pension)

Will receive approx. 90% of SP at SPA is she continues to pay NI - 6 more years

Total current annual pension contributions ~ £38K (used approx. £40Kpa in the last three years)

Combined :

S&S ISA : £160K

Cash and equivalent : £100K (we are very conservative and quite risk adverse)

No mortgage

No dependant children

We would like as large an income as possible, and think that £40K after tax will be sufficient

My initial questions are as follows :

• If we retired in August 2021, would I be better to not take my LGPS pension and draw down the SIPP at a rate of £12.5K pa until it is exhausted (I am not sure how the tax free 25% works), then start to take the LGPS pension - thereby avoiding paying tax on the SIPP and also the LGPS DB would grow at around 4-5% due to the decrease in the actuarial reduction ?

• Should I stuff some of the cash into the SIPP prior to retiring to maximise the amount in there or would it be better to put it into the AVC ? 

• How best to fund the missing years for Mrs M's SP ?

Thanks in advance, and be prepared for many more questions soon 

tacpot12

You can withdraw from the SIPP at the rate of £16.6K pa. The first 25% is tax free, the remainder is taxed, but will be below your personal allowance. You should try to defer taking the two LGPS pensions for as long as possible, so after the SIPP money is gone, it will be time to draw on the S&S ISA, cash, or the AVCs. Unless you really need the TFLS lump sums for something, I would draw on the AVCs first in order to avoid drawing the LGPS pension early. The actuarial reductions for taking the pension early mean you are losing a lot of index-linked pension income (which is extremely valuable).   

If you want to maximise Mrs X's state pension, you will need to pay six years NI before she reaches her SPA. You will need to allocate c£5000 for this out of your cash (or S&S ISA) savings. She will have to wait until she has incomplete years within the last six years before she can pay any NI. If she is considering doing any part-time work once "retired", there are lower rates for NI if you are self-employed. 

I would suggest you only sell assets in the S&S ISA if you think the markets are ok or doing well, and use cash if the markets have crashed.  Set yourself a minimum amount of cash that you don't want to go below (after the NI has been paid), and ensure you ask for the LGPS pensions to be paid in good time before your cash gets down to that minimum level. 

The only choice between the S&S ISA and the AVCs is what you can invest in and the charges. 

Albermarle

We would like as large an income as possible, and think that £40K after tax will be sufficient

As a general point , whatever you do , or even if you make a couple of 'mistakes' ,you are sitting in an Very comfortable financial position . £40K after tax would seem to be a rather low estimation of what your income will be .

Using an approx value for the DB pensions then as a couple you are worth around £3million + your home .

If I was you , I would just enjoy it and not worry too much about paying a bit of extra tax here and there

jimi_man

When you say you have full State Pension, do you know that for definite or are you just going on the fact that you've paid 35 years of contributions? I say that because I'm 55, have been contracted out for all my career (pre 2016) bar a couple of years, have paid 39 years contributions and I am still accruing with another three years to go. I know everyone's circumstances are different but I'd do a check if you haven't already. The 35 years rule only applies to people starting work post 2016 - for everyone else it might be more or less years.

quirkydeptless

Retire2021 said:

Good morning,

I have a few questions about a possible retirement this year for myself and my wife - henceforth known as Mr and Mrs X.

Mr X: 

Age 55, Full-time employed, salary c.£50K 

LGPS DB pension which will pay around £30K at SPA, and about £12.5K if taken this summer (not going to even inquire about CETV)

LGPS AVC worth around £20K (plan to take as TFLS when taking pension)

SIPP worth around £35K

Will receive full SP at SPA, I have already paid 35+ years of full contributions

Total current annual pension contributions ~ £22K (used approx. £20Kpa in the last three years)

Some background music for reading this thread...
https://www.youtube.com/watch?v=_u6dtcjQSNI

Retire2021

tacpot12 said:

You can withdraw from the SIPP at the rate of £16.6K pa. The first 25% is tax free, the remainder is taxed, but will be below your personal allowance. You should try to defer taking the two LGPS pensions for as long as possible, so after the SIPP money is gone, it will be time to draw on the S&S ISA, cash, or the AVCs. Unless you really need the TFLS lump sums for something, I would draw on the AVCs first in order to avoid drawing the LGPS pension early. The actuarial reductions for taking the pension early mean you are losing a lot of index-linked pension income (which is extremely valuable).   

If you want to maximise Mrs X's state pension, you will need to pay six years NI before she reaches her SPA. You will need to allocate c£5000 for this out of your cash (or S&S ISA) savings. She will have to wait until she has incomplete years within the last six years before she can pay any NI. If she is considering doing any part-time work once "retired", there are lower rates for NI if you are self-employed. 

I would suggest you only sell assets in the S&S ISA if you think the markets are ok or doing well, and use cash if the markets have crashed.  Set yourself a minimum amount of cash that you don't want to go below (after the NI has been paid), and ensure you ask for the LGPS pensions to be paid in good time before your cash gets down to that minimum level. 

The only choice between the S&S ISA and the AVCs is what you can invest in and the charges. 

Thank you for this very helpful reply. I have a couple of follow up questions :
With a rough calculation it doesn't seem to matter much about the actuarial reduction, the break even point seems to be around age 82-84, if you live longer than this you begin to lose out. Am I missing something -  you said "losing a lot of index-linked pension income", so should we be trying to delay the LGPS for as long as possible rather than taking it immediately ? As I said, my quick calculations lead me to think it makes little difference and indeed is better until the age of around 83. Is the index linking important ?

Also, is it possible to draw the AVC cash (within the £16.6K you mentioned above - thanks for that) without actually taking the LGPS pension, I was under the assumption that the two are inextricably linked ?

Many thanks
Mr X.

Retire2021

Albermarle said:

We would like as large an income as possible, and think that £40K after tax will be sufficient

As a general point , whatever you do , or even if you make a couple of 'mistakes' ,you are sitting in an Very comfortable financial position . £40K after tax would seem to be a rather low estimation of what your income will be .

Using an approx value for the DB pensions then as a couple you are worth around £3million + your home .

If I was you , I would just enjoy it and not worry too much about paying a bit of extra tax here and there

Thanks for that, it is very useful, although I am not sure your calculations are correct. 
Very approximately.
Cash ~ £260K
AVCs + SIPP ~ £100K
DB Pensions ~ £40Kpa (LGPS commutation factor is about 16, so value ~ £700K)

Total of a bit over a million ?
Or am I missing something 

Retire2021

jimi_man said:

When you say you have full State Pension, do you know that for definite or are you just going on the fact that you've paid 35 years of contributions? I say that because I'm 55, have been contracted out for all my career (pre 2016) bar a couple of years, have paid 39 years contributions and I am still accruing with another three years to go. I know everyone's circumstances are different but I'd do a check if you haven't already. The 35 years rule only applies to people starting work post 2016 - for everyone else it might be more or less years.

Thanks for this, you are right, I was being lazy with my checking.
Mr X.

Estimate based on your National Insurance record up to 5 April 2020

£160.36 a week

Forecast if you contribute another 3 years before 5 April 2032

£175.20 a week

£175.20 is the most you can get

Mrs X.

Estimate based on your National Insurance record up to 5 April 2020

£124.86 a week

Forecast if you contribute until 5 April 2027

£159.90 a week

£159.90 is the most you can get

So, I will need to contribute 3 more years, and the lovely Mrs X will need to fund 7 years.

Thanks for making me recheck !

Dazed_and_C0nfused

If Mrs X fancies starting a small business after she finishes work (and registers this with HMRC and competes Self Assessment returns) she will become eligible to pay voluntary Class 2 NIC at a rate of c£160/year rather than voluntary Class 3 at c£800/year.

She will almost certainly add two years through employment in this tax year and next (high earnings help when stopping work part way through the tax year) but that leaves her 5 years short of her maximum.

AlanP_2

Retire2021 said:

tacpot12 said:

You can withdraw from the SIPP at the rate of £16.6K pa. The first 25% is tax free, the remainder is taxed, but will be below your personal allowance. You should try to defer taking the two LGPS pensions for as long as possible, so after the SIPP money is gone, it will be time to draw on the S&S ISA, cash, or the AVCs. Unless you really need the TFLS lump sums for something, I would draw on the AVCs first in order to avoid drawing the LGPS pension early. The actuarial reductions for taking the pension early mean you are losing a lot of index-linked pension income (which is extremely valuable).   

If you want to maximise Mrs X's state pension, you will need to pay six years NI before she reaches her SPA. You will need to allocate c£5000 for this out of your cash (or S&S ISA) savings. She will have to wait until she has incomplete years within the last six years before she can pay any NI. If she is considering doing any part-time work once "retired", there are lower rates for NI if you are self-employed. 

I would suggest you only sell assets in the S&S ISA if you think the markets are ok or doing well, and use cash if the markets have crashed.  Set yourself a minimum amount of cash that you don't want to go below (after the NI has been paid), and ensure you ask for the LGPS pensions to be paid in good time before your cash gets down to that minimum level. 

The only choice between the S&S ISA and the AVCs is what you can invest in and the charges. 

Also, is it possible to draw the AVC cash (within the £16.6K you mentioned above - thanks for that) without actually taking the LGPS pension, I was under the assumption that the two are inextricably linked ?

Many thanks
Mr X.

You can transfer the LGPS AVC out to a personal pension / SIPP and access it that way (25% tax freee, remainder taxed) or more sensibly, and as you were thinking, leave it linked to the maion LGPS benefits and take it all tax free at the same time as main benefits.

AlanP_2

Retire2021 said:

Albermarle said:

We would like as large an income as possible, and think that £40K after tax will be sufficient

As a general point , whatever you do , or even if you make a couple of 'mistakes' ,you are sitting in an Very comfortable financial position . £40K after tax would seem to be a rather low estimation of what your income will be .

Using an approx value for the DB pensions then as a couple you are worth around £3million + your home .

If I was you , I would just enjoy it and not worry too much about paying a bit of extra tax here and there

Thanks for that, it is very useful, although I am not sure your calculations are correct. 
Very approximately.
Cash ~ £260K
AVCs + SIPP ~ £100K
DB Pensions ~ £40Kpa (LGPS commutation factor is about 16, so value ~ £700K)

Total of a bit over a million ?
Or am I missing something 

I would think Albermarle is refering to the "private sector" equivalent in a DC scheme where using a 3-4% withdrawal rate a £40k a year income = £1m to £1.33m pot value at a minimum.

The notional 16* used by DB schemes for Annual Allowance calculations doesn't reflect the "market value" really (spoken as someone with an LGPS pension and OH with the same).