Sense check needed - very rough estimates

MX5huggy

Silvertabby said:

MX5huggy said:

Same starting year for me looking forward to an extra 5 days off next year.

More options would be nice but we can’t have it all. I’ve looked at a pension of £14000 at 68. That would pay £9506 at 60 (32.1% reduced). So buy the time you’ve reached 68 you’ve received £85554 it then takes till 84 for the unreduced pension to catch-up and overtake the full pension after £238k. If you put inflation in at 2% then it moves to about 82 years. Obviously if you work till 68 the pension would grow by those additional 8 years. 

Hopefully the government will roll the COVID debt up into long term guilts and pay it off very slowly like World War debts. Or just keep printing money as they have been. The days of comparing the national debt to a credit card need to be over. 

Forgive me if I'm wrong - but I HAVE seen this mistake made before....

You say that your pension at 68 would be £14K, but £9506 if taken at 60 due to the early payment reduction.

So far so good - but where did you get the original £14K from?  If it's from your annual benefit statement, then that is based on the assumption that you will carry on working/contributing to the LGPS until 68.  If you retire at 60, then it's not only the early retirement reductions that you have to factor in to your calculations - it's also the fact that you won't have 8 years of pension accrual.

It was plucked out of thin air as an example, and I covered the 8 years of no additional accrual with “Obviously if you work till 68 the pension would grow by those 8 additional years”. 

But as the resident LGPS expert if you’re retiring early (say 60) is it generally better to take the reduced pension straight away as I think or wait? (presuming you have other money to live on and in both cases only standard rate tax will be paid.(for simple current scheme members). 

I don’t have it all planned out too much personally, who knows what’s round the corner,  I just trying to give myself a chance of stopping work at about 60. At 5 years LG is already my longest employer, and even then I’ve had 3 jobs in that 5 years. 

cfw1994

saucer said:

cfw1994 said:k

Some good tips here, especially from jamesd.
My advice to a younger me would always be to worry less about overpaying the mortgage and try harder to stuff more into S&S ISAs for easier access and options at 55.....

I wonder if you mean SIPPs if thinking about flexibility at 55. I was thinking along the same lines. We don’t pay anything off the capital of an albeit smaller mortgage and nearly all our spare money goes into occupational pensions  (including a LGPS avc) and SIPPs. Having said that we have the safety net of assured tax free lump sums that will cover it. 

No, I meant what I wrote.  
SIPPs and pensions are of course important, and should be taken advantage of......
......but for those able to also crank up ISA funds, they can give you additional ‘tax free’ money even before 55.
The growth over the long term for both Pension or S&S ISAs (assuming invested in equities) *should* far outweigh the mortgage rates paid, hence why I don’t think overpaying the mortgage makes sense.  Of course this is my opinion, not regulated financial advice!

Yes, the tax was paid up front...but it gives you some flexibility to top-up otherwise taxable funds, or indeed perhaps to help bridge a gap to your pension-access date.

Hope that clears up what I meant!

jamesd

MX5huggy said: if you’re retiring early (say 60) is it generally better to take the reduced pension straight away as I think or wait? (presuming you have other money to live on and in both cases only standard rate tax will be paid 

For all defined benefit Pensions it's normally best to wait until as close to the scheme normal pension age as you can afford. The degree of benefit depends on the specific scheme.

There are exceptions, including:
1. You want to be or are forced to be retired and haven't prepared, so taking the reduced pension is the only option.

2. Scheme rules like the rule of 85 remove the reduction or reduce it enough.

3. Managing potential lifetime allowance charge can often make taking it very early a good move to save lots of tax.

4. Income tax rates can reduce the penalty, like that change to higher rate tax that you referred to.

5. You just might not have any need beyond the reduced amount plus eventual state pension.

But in general, tossing as much money as possible into a personal pension or AVCs and living off that money while waiting to get closer to scheme normal pension age is the way to go.

Sometimes mortgage borrowing can work out to be a good deal, where you might find that you can repay a repayment mortgage with the extra income. So you live on borrowed mortgage money for a while and still retire earlier, but without starting the pension.

Nebulous2

jamesd said:

MX5huggy said: if you’re retiring early (say 60) is it generally better to take the reduced pension straight away as I think or wait? (presuming you have other money to live on and in both cases only standard rate tax will be paid 

For all defined benefit Pensions it's normally best to wait until as close to the scheme normal pension age as you can afford. The degree of benefit depends on the specific scheme.

There are exceptions, including:
1. You want to be or are forced to be retired and haven't prepared, so taking the reduced pension is the only option.

2. Scheme rules like the rule of 85 remove the reduction or reduce it enough.

3. Managing potential lifetime allowance charge can often make taking it very early a good move to save lots of tax.

4. Income tax rates can reduce the penalty, like that change to higher rate tax that you referred to.

5. You just might not have any need beyond the reduced amount plus eventual state pension.

But in general, tossing as much money as possible into a personal pension or AVCs and living off that money while waiting to get closer to scheme normal pension age is the way to go.

Sometimes mortgage borrowing can work out to be a good deal, where you might find that you can repay a repayment mortgage with the extra income. So you live on borrowed mortgage money for a while and still retire earlier, but without starting the pension.

I received my figures for pension last week. They were extremely close to my calculations, but it was good to see it in print. I have decided to take my pension, but I fit into category 5, we have no need for more, which is pleasant after a lifetime as a moderate earner in a one income family. 

LGPS, unusually no lump sum, £22k now at 59 or deferred gives  £30k at 67.  Both of us on full state pensions so additional £18k at that point. 

There are psychological reasons for me to take it as well.  I left work in March and I've started work as a bank worker in the NHS. Despite having the capital to fund the gap,  I'm finding it hard to adjust to the lack of regular income. I'm picking up more bank shifts than I intended, because I don't know if availability will continue, and I don't want to draw down my capital until some things about potential needs become clearer. Having my pension would relieve the pressure of feeling I need to work, rather than want to. 

The plan was to swap 5 on and 2 off for 2 on and 5 off,  for a couple of years, as a phased retirement. I'm looking at my rota and see a 4 day week in mid- June, which was never the intention. 

Silvertabby

MX5huggy said:

Silvertabby said:

MX5huggy said:

Same starting year for me looking forward to an extra 5 days off next year.

More options would be nice but we can’t have it all. I’ve looked at a pension of £14000 at 68. That would pay £9506 at 60 (32.1% reduced). So buy the time you’ve reached 68 you’ve received £85554 it then takes till 84 for the unreduced pension to catch-up and overtake the full pension after £238k. If you put inflation in at 2% then it moves to about 82 years. Obviously if you work till 68 the pension would grow by those additional 8 years. 

Hopefully the government will roll the COVID debt up into long term guilts and pay it off very slowly like World War debts. Or just keep printing money as they have been. The days of comparing the national debt to a credit card need to be over. 

Forgive me if I'm wrong - but I HAVE seen this mistake made before....

You say that your pension at 68 would be £14K, but £9506 if taken at 60 due to the early payment reduction.

So far so good - but where did you get the original £14K from?  If it's from your annual benefit statement, then that is based on the assumption that you will carry on working/contributing to the LGPS until 68.  If you retire at 60, then it's not only the early retirement reductions that you have to factor in to your calculations - it's also the fact that you won't have 8 years of pension accrual.

It was plucked out of thin air as an example, and I covered the 8 years of no additional accrual with “Obviously if you work till 68 the pension would grow by those 8 additional years”. 

But as the resident LGPS expert if you’re retiring early (say 60) is it generally better to take the reduced pension straight away as I think or wait? (presuming you have other money to live on and in both cases only standard rate tax will be paid.(for simple current scheme members). 

I don’t have it all planned out too much personally, who knows what’s round the corner,  I just trying to give myself a chance of stopping work at about 60. At 5 years LG is already my longest employer, and even then I’ve had 3 jobs in that 5 years. 

There's no right or wrong answer, just what is right for you.  As you don't have any pre 2008 service you won't have an automatic lump sum.  However, you will be able to partially commute some of your already reduced pension for a one-off taxable lump sum.

The LGPS commutation rate is a not-so generous 1:12, so if you commuted the maximum (as most people do) then you will need to consider if your double-reduced pension (and the lump sum) will be enough to live on until your other pensions kick in.

I you want to do some number crunching, then you will need to factor in one vital piece of information.  Your date of death. 

Let's assume you retire at 60 but defer payment until 68 (option A) or retire and take reduced benefits at 60 (option B )  In both options, your date of death will be age 85.

Option A

Pension of £14K

or

Lump sum of £60K and pension of £9K

£14K X 17 years = £238K

or

£60K plus 17 X £9K = £213K

Option B

Pension of £10K

or Lump sum of £42,857 and pension of £6,428

£10K X 25 years = £250K

or £42,857 plus 25 X £6,428 = £203,557

On the face it it, if you were to forego commutation, then there's indeed not a huge difference between taking £14K at 68 and £10K at 60 - but these figures don't factor in the cost of living increases, which will cumultively be a lot more for a pension that started at £14K than for a pension that started at £10K.  Plus you may live to 100.

As I said, no right answer - but I hope this helps ! 

 

CloesUnc

Nebulous2 said:

jamesd said:

MX5huggy said: if you’re retiring early (say 60) is it generally better to take the reduced pension straight away as I think or wait? (presuming you have other money to live on and in both cases only standard rate tax will be paid 

For all defined benefit Pensions it's normally best to wait until as close to the scheme normal pension age as you can afford. The degree of benefit depends on the specific scheme.

There are exceptions, including:
1. You want to be or are forced to be retired and haven't prepared, so taking the reduced pension is the only option.

2. Scheme rules like the rule of 85 remove the reduction or reduce it enough.

3. Managing potential lifetime allowance charge can often make taking it very early a good move to save lots of tax.

4. Income tax rates can reduce the penalty, like that change to higher rate tax that you referred to.

5. You just might not have any need beyond the reduced amount plus eventual state pension.

But in general, tossing as much money as possible into a personal pension or AVCs and living off that money while waiting to get closer to scheme normal pension age is the way to go.

Sometimes mortgage borrowing can work out to be a good deal, where you might find that you can repay a repayment mortgage with the extra income. So you live on borrowed mortgage money for a while and still retire earlier, but without starting the pension.

I received my figures for pension last week. They were extremely close to my calculations, but it was good to see it in print. I have decided to take my pension, but I fit into category 5, we have no need for more, which is pleasant after a lifetime as a moderate earner in a one income family. 

LGPS, unusually no lump sum, £22k now at 59 or deferred gives  £30k at 67.  Both of us on full state pensions so additional £18k at that point. 

There are psychological reasons for me to take it as well.  I left work in March and I've started work as a bank worker in the NHS. Despite having the capital to fund the gap,  I'm finding it hard to adjust to the lack of regular income. I'm picking up more bank shifts than I intended, because I don't know if availability will continue, and I don't want to draw down my capital until some things about potential needs become clearer. Having my pension would relieve the pressure of feeling I need to work, rather than want to. 

The plan was to swap 5 on and 2 off for 2 on and 5 off,  for a couple of years, as a phased retirement. I'm looking at my rota and see a 4 day week in mid- June, which was never the intention. 

I think Im in group 5 too. I aim to take one of my DBs early at 55, (£5.2k) as part of my early retirement plan. That way I can preserve my ISA and keep investing in it, because my partner and I might want to move house 5 to 10 years later. There is something comforting about having "new money" coming into the home.

Also if it turns out I need more money I would have the option of boosting my income from 55 by drawing 1 % to 2 % from the ISA on top of the DB. so there is extra flexibility.

MX5huggy

Thanks @Silvertabby,
You’ve shown the same as I had worked out, I looked at inflation at 2% and 3% and that dragged the break even point back to 82 or 83 years old. Is the inflation figure used the same for both a deferred pension and one in payment?
The commutation I plan to avoid, hopefully by using up the vast majority of the 25% tax free on taking £250k AVC pot which I need, I believe, £12500 of annual pension to cover. 

The live to 100 is the hardest bit but I expect by 84 I would have a simple cheap life unless in care. My dad I think took all the lump sums from his 40 years in the public sector at 60 which unfortunately proved to be right thing to do as he was unexpectedly 6ft under before 62. 

Silvertabby

MX5huggy said:

Thanks @Silvertabby,
You’ve shown the same as I had worked out, I looked at inflation at 2% and 3% and that dragged the break even point back to 82 or 83 years old. Is the inflation figure used the same for both a deferred pension and one in payment?
The commutation I plan to avoid, hopefully by using up the vast majority of the 25% tax free on taking £250k AVC pot which I need, I believe, £12500 of annual pension to cover. 

The live to 100 is the hardest bit but I expect by 84 I would have a simple cheap life unless in care. My dad I think took all the lump sums from his 40 years in the public sector at 60 which unfortunately proved to be right thing to do as he was unexpectedly 6ft under before 62. 

Yes - both deferred and in payment increase by CPI each April (The level of CPI being as at the previous September). 

Using AVCs for cash is a good plan - tax relief in, tax free (subject to HMRC limits) out.  And if your AVC fund does exceed the 25% max, you can use the excess to buy extra LGPS benefits at a very favourable rate. 

Sorry to hear about your dad, but there are indeed many LGPS (and other public sector) pensioners still going strong at 90+. 

AlanP_2

MX5huggy said:

Thanks @Silvertabby,
You’ve shown the same as I had worked out, I looked at inflation at 2% and 3% and that dragged the break even point back to 82 or 83 years old. Is the inflation figure used the same for both a deferred pension and one in payment?
The commutation I plan to avoid, hopefully by using up the vast majority of the 25% tax free on taking £250k AVC pot which I need, I believe, £12500 of annual pension to cover. 

The live to 100 is the hardest bit but I expect by 84 I would have a simple cheap life unless in care. My dad I think took all the lump sums from his 40 years in the public sector at 60 which unfortunately proved to be right thing to do as he was unexpectedly 6ft under before 62. 

£12,500 annual won't be enough to get a £250k AVC out tax free.

20 * 12,500 = £250,000 plus £250,000 AVC = £500,000 and 25% of that is £125k

MX5huggy

Pooh sticks! Thanks @AlanP_2 that’s wrecked everything!