Early retirement-funding the gap

michaels

You also can't sal sac (and I assume AVC) to lower than national minimum wage so 12.5k may not be possible anyway.

Secret2ndAccount

michaels said:

You also can't sal sac (and I assume AVC) to lower than national minimum wage so 12.5k may not be possible anyway.

Agreed, and pointed out by Bobziz earlier. OP is only working part time, so I don't think she will be run into this limit. However, some workplaces set a lesser limit for AVC's, perhaps so that they can steer clear of minimum wage issues without having to monitor too precisely.

Secret2ndAccount

Also, as pointed out by Chiefie, when you come to retire, you can (should) use the AVC's to pay for your lump sum, all the way up to 25% of your pension's value. That could be a bigger tax free sum than you would otherwise have been offered, and could result in a smaller dent in your monthly pension. Check the numbers closer to retirement.

Redsox64

Secret2ndAccount said:

Also, as pointed out by Chiefie, when you come to retire, you can (should) use the AVC's to pay for your lump sum, all the way up to 25% of your pension's value. That could be a bigger tax free sum than you would otherwise have been offered, and could result in a smaller dent in your monthly pension. Check the numbers closer to retirement.

Sorry I’m being a bit dim but can you explain this a bit more, are you saying take AVC as lump sum and not convert any of pension? Thanks 

Secret2ndAccount

First think about a SIPP. You likely know that you can take out 25% of the money tax free. The rest gets treated as income, so you might pay some tax on it. It's pretty easy to figure out what 25% is because you have your own personal pot, and can probably log in to your account and look at the total.

Now think of your DB pension. There is one giant pot for everyone. You don't have your own pot. So how much is 25%? It's not so easy to calculate. Nonetheless, there are methods which are used to assign an overall value to your lifetime pension. HMRC says you can have up to 25% of this number tax free. However, the lump sum you are offered by your scheme is calculated according to your scheme's rules. It might be (probably is) less than that 25% upper limit. Your scheme rules let you take money out from your AVC contriubtions to increase your lump sum all the way up to your 25% limit. Since it's tax free, it's often wise to do this, even if you don't immediately need the money.

So AVC's allow you to get a bigger lump sum. Further, the reduction in annual pension may be less if you use the AVC's to pay for the lump sum than if you use the main part of your pension. Maybe. I'm getting sketchy on the details here because you need to get at the particular figures for you and your scheme: Your 25% lump sum limit; your total of AVC's; your options for how to commute pension to lump sum.

I would start trying to get hold of those numbers a year before you plan to retire.

Redsox64

Thank you Secret2ndAccount. I intend to ask for an estimate a few years before I’m thinking of retiring because my personal situation make it very difficult to work things out for myself and then annually until I take retirement so hopefully will have the necessary figures going forward. 

AlanP_2

Your annual LGPS statement will probably show you what pension and what pension plus max lump sum is at the statement date. 

Our LGPS will give 1 quote 6 months before you plan to retire as working it all out exactly is complex and time-consuming. This will be made worse with the recent announcements on implementation of the McCloud judgement as there will be 2 calculations to be done now. What I am saying is I think you will be very fortunate to get annual quotes. Our LGPS offers an online quote service but it is not 100% accurate but good enough for most people's purposes ahead of retirement year. 

AlanP_2

Redsox64 said:

Secret2ndAccount said:

Also, as pointed out by Chiefie, when you come to retire, you can (should) use the AVC's to pay for your lump sum, all the way up to 25% of your pension's value. That could be a bigger tax free sum than you would otherwise have been offered, and could result in a smaller dent in your monthly pension. Check the numbers closer to retirement.

Sorry I’m being a bit dim but can you explain this a bit more, are you saying take AVC as lump sum and not convert any of pension? Thanks 

That is what most people with an LGPS do I would think unless they have a real need for even more cash on day 1 of retirement. 

Redsox64

AlanP_2 said:

Your annual LGPS statement will probably show you what pension and what pension plus max lump sum is at the statement date. 

Our LGPS will give 1 quote 6 months before you plan to retire as working it all out exactly is complex and time-consuming. This will be made worse with the recent announcements on implementation of the McCloud judgement as there will be 2 calculations to be done now. What I am saying is I think you will be very fortunate to get annual quotes. Our LGPS offers an online quote service but it is not 100% accurate but good enough for most people's purposes ahead of retirement year. 

Many thanks. Sadly my LGPS scheme have no opportunity for quotes other than writing which is pretty unhelpful as even a ball-park figure goes some way to helping future planning. Incidentally do you think the McCloud judgement is relevant to decisions made on early retirement and protected NPA when it comes to early reduction figures? Also are part time workers more likely to have the biggest implications from the decision?

AlanP_2

Before the online estimator was there I just used Excel to work out what our expected pensions would be.

You know your years / days service in each of the pre-2008, 2008 and 2014 schemes; you know the accrual rates and you know your salary. Putting that lot together in Excel will give you a pretty good indication of pension benefits. Increase salary by likely payrise (I use 1%) going forwards for as many years as you want. Update with actual once payrises confirmed and annual statements received.

It won't work out lump sum commutation options.

No idea on McCloud, I just know it it has happened and the suggested remedy is for schemes to do 2 calculations just ahead of retirement so you can see which is better.