LGPS AVC

Lozz

Apologies for crashing your thread OP however my husband's situation is almost identical to yours and I have a couple of questions if anyone can help. 
OH is going to retire at 60, however we're hoping to fund his AVC to £20k and use that plus savings and my SIPP to live off for 2 years and defer his LGPS for 2 years to reduce the reduction in pension payments, is he able to take his AVC in full at 60 while deferring his main scheme benefits until he's 62, and if he is, will the AVC be taxed in any way? He won't be going over the 25% lump sum overall as his guaranteed lump sum is £32k and he won't be increasing that at 62.

Many thanks. 

OldBeanz

Lozz said:

Apologies for crashing your thread OP however my husband's situation is almost identical to yours and I have a couple of questions if anyone can help. 
OH is going to retire at 60, however we're hoping to fund his AVC to £20k and use that plus savings and my SIPP to live off for 2 years and defer his LGPS for 2 years to reduce the reduction in pension payments, is he able to take his AVC in full at 60 while deferring his main scheme benefits until he's 62, and if he is, will the AVC be taxed in any way? He won't be going over the 25% lump sum overall as his guaranteed lump sum is £32k and he won't be increasing that at 62.

Many thanks. 

If relying on only pension income then he can withdraw his tax allowance plus 25% tax free each year which is presently £16.666. So you could target £33k and still not pay tax over 2 years i.e. pay savings into the AVC via salary or into a SIPP to reach £33k and benefit from the tax uplift. You would have to be careful with end of salary and start of LGPS pension to maximise the tax free drawdown.
The main advantage as talked of earlier is the ability to draw the funds tax free but only at the same time as the main pension but your situation works as well.

Silvertabby

Lozz said:

Apologies for crashing your thread OP however my husband's situation is almost identical to yours and I have a couple of questions if anyone can help. 
OH is going to retire at 60, however we're hoping to fund his AVC to £20k and use that plus savings and my SIPP to live off for 2 years and defer his LGPS for 2 years to reduce the reduction in pension payments, is he able to take his AVC in full at 60 while deferring his main scheme benefits until he's 62, and if he is, will the AVC be taxed in any way? He won't be going over the 25% lump sum overall as his guaranteed lump sum is £32k and he won't be increasing that at 62.

Many thanks. 

While it is possible to defer the main LGPS pension and transfer the AVC fund into a drawdown friendly pension scheme, doing so would break the link between the LGPS and the AVC, meaning that your husband would lose the benefit of being able to take all of the AVC as tax free cash.

Instead, he would only be able to take 25% of the AVC tax free with the remainder being classed as taxable income (although, if taken as OldBeanz suggests, it may be within his personal tax allowance).

Then, when he takes his deferred benefits at 62, he would only be able to increase his tax free lump sum by commutation.  Which, as you no doubt know, is set at a not so generous rate of 1:12 ( ie, give up £1 of lifetime index linked pension in return for a one-off tax lump sum of £12).

Pipkin1812

Silvertabby said:

Then, when he takes his deferred benefits at 62, he would only be able to increase his tax free lump sum by commutation.  Which, as you no doubt know, is set at a not so generous rate of 1:12 ( ie, give up £1 of lifetime index linked pension in return for a one-off tax lump sum of £12).

I am a bit confused, not difficult for me!  Can you expand on what is meant by not so generous rate of 1:12.   Thanks

Dazed_and_C0nfused

It's not generous because after 12 years the scheme is generally the winner.
They give you say £12,000 on day 1.  And avoid having to pay you £1,000 of your pension forever. 
If you die in the first 12 years you have benefitted more than the scheme has.
If your still alive after 12 years the scheme is benefitting more than you because they are still avoiding paying you that £1,000 but you have only had £12,000 in return.
Live to 100 and you have had £12,000 instead of £38,000.
The consensus on here seems to be people who don't have a great understanding of pensions and get the carrot of a big lump sum tend to take it simply because they can whereas those who do understand them normally wouldn't take 12:1 unless there is some really pressing reason to.
But if the factor was 20+ it may be a trickier choice.
Public sector schemes often have a 12:1 rate.

Pipkin1812

Thank you that’s made that clearer. It’s a choice between short term gain of uplifted lump sum versus dependable steady pension. Can one choose to do a mix of both?

Dazed_and_C0nfused

Normally there is a maximum lump sum that can be taken, specific to your scheme rules but if the scheme rules have a factor of 12:1 it's still going to be 12:1 whether you take an extra £5 lump sum of £5,000.

Silvertabby

Pipkin1812 said:

Thank you that’s made that clearer. It’s a choice between short term gain of uplifted lump sum versus dependable steady pension. Can one choose to do a mix of both?

Yes. With the LGPS you can choose a lump sum anywhere between the minimum (if you have pre 2008 service) and the maximum.  

From experience, the vast majority of LGPS retirees do take the maximum possible tax free lump sum - but that doesn't mean that it is the right thing for the pensioner to do.

That said, my understanding is that other public sector pensioners also lean towards the maximum cash option, despite the 1:12 rate.  The scheme number crunchers take this into account when assessing the viability of the schemes and setting the employer and employee contribution rates.  I suspect that if the majority of public sector pensioners suddenly opted to forego the commuted cash, then contribution rates would have to be increased and the tax payers would have to dig deeper into their pockets !

Lozz

Thank you OldBeanz and Silvertabby that has made things a lot clearer. I was planning to open a SIPP for him anyway for the 2 non earning tax years so we will transfer the AVC to that to draw down within his tax allowance for both years. We will also fund his AVC from savings to the maximum he can draw down within his tax allowance for those 2 years. I agree the 12:1 commutation factor is awful, basically he's hoping to achieve £24k per annum pension, his forecast at 60 is currently £21.5k so hopefully with the 2 years deferment he will get there. He is only planning on taking his £32k guaranteed lump sum and the rest as pension. 
Many thanks for all your help. 

jamjar92

I agree the 12:1 commutation factor is awful also, but remember to factor in the state pension will be added on later. Depending on your plans you might want to spend more now (from a bigger lump sum).