Benefits of Local Gov Pension Scheme vs Private Pensions

Secret2ndAccount

Silvertabby said:

sevenhills said:

An actua[ria]l reduction is not a penalty for taking the pension early. You incur this reduction when your pension is paid earlier than normal and, therefore, potentially will be in payment for longer.

True, but it depends on how long you live for.

Break even point is 12 to 14 years - so, die early and you are in pocket.  Live to 100, however, and not so much.

12 -14 yrs, really?!    Are you confusing it with lump sum commutation?  I thought the actuarial reduction rate was in the 5% area. That would mean more like a 20yr break even. Please correct me if I'm wrong.
For many people, the money is needed now, and won't be needed after they get state pension or when they are 85 years old. This is a case where a bird in the hand can be good, because it's roughly equivalent to one bird in the bush. I would contrast that with a lump sum with a commutation rate of 12:1 which is often not needed, and is a bird in the hand vs two in the bush.

jamesd

Higher income can potentially be exchanged for higher capital via borrowing. Could be quite attractive at current mortgage rates.

Consider a person who takes it five years early with a 25% actuarial reduction. They could increase their eventual income by 33% by waiting for the five years instead (100 / 75 = 1.33 recurring). They still need to fund the living expenses during the five years and the repayments for those five years from the borrowing, then use some of the extra income in repayments and this requires quite long terms to end up with a positive result.

jamesd

sevenhills said:

jamesd said:

A disadvantage of defined benefit pensions like LGPS is the age at which you can take the pension without an actuarial reduction for taking it early.

An actual reduction is not a penalty for taking the pension early. You incur this reduction when your pension is paid earlier than normal and, therefore, potentially will be in payment for longer.

I didn't describe it as a penalty, I described it as an actuarial reduction and yes, that phrase means what you wrote.

The reduction tends to be greater than the cost of covering the delay with DC money and the normal pension age is now quite often unpalatably high, such that normal pension age may be ceasing to greatly resemble common pension taking age.

The potentially for longer bit that others wondered about is of course because life expectancy for an individual is not used and often not knowable, so there's a chance that a particular individual will die before they exceed the original duration. Often not knowable because sometimes it is knowable when the end is fairly near.

sevenhills

jamesd said:

I didn't describe it as a penalty, I described it as an actuarial reduction and yes, that phrase means what you wrote.

You described it as a disadvantage.

nigelbb

sevenhills said:

OldBeanz said:

I apologise in advance for being pedantic but some times you have to scratch an itch. You say "potentially will be in payment for longer" - in what circumstances would it no be for longer?

I actually copied that from the BMA, but people that carry on working are thought to live longer, so there may be instances where retiring early will lead to an earlier death.

It's more likely that those with poorer health opt for early retirement.

Rustin

Apologies for jumping on this thread but it has been an interesting read. 

I have been assuming that the projected figures for my LGPS pension are based on me earning my current salary until the dates below and then receiving the amounts below. So for example I will receive the amount below when I am 55 only if i continue to earn my current salary and contribute to my pension for another 6 years?

What if I retire on my 55th birthday? This is what you'd get if you finish work on 15/02/2027 and take your benefits from 16/02/2027: Pension £6,272.35 Pension £4,032.23 Standard benefits Lump sum £0.00 OR Maximum lump sum, by giving up pension Lump sum £26,881.44

What if I retire on my 60th birthday? This is what you'd get if you finish work on 15/02/2032 and take your benefits from 16/02/2032: Pension £10,375.17 Pension £6,669.76 Standard benefits Lump sum £0.00 OR Maximum lump sum, by giving up pension Lump sum £44,464.92

What if I retire on my 65th birthday? This is what you'd get if you finish work on 15/02/2037 and take your benefits from 16/02/2037: Pension £16,298.58 Pension £10,477.66 Standard benefits Lump sum £0.00 OR Maximum lump sum, by giving up pension Lump sum £69,851.04

What if I retire on my state pension date? This is what you'd get if you finish work on 15/02/2039 and take your benefits from 16/02/2039: Pension £19,391.50 Pension £12,465.97 Standard benefits Lump sum £0.00 OR Maximum lump sum, by giving up pension Lump sum £83,106.36  

MX5huggy

Yes your projected figures are based on working to each date. 

The options is doesn’t illustrate is stopping work but not taking the pension till a later date.

Retireinten

Secret2ndAccount said:

Silvertabby said:

sevenhills said:

An actua[ria]l reduction is not a penalty for taking the pension early. You incur this reduction when your pension is paid earlier than normal and, therefore, potentially will be in payment for longer.

True, but it depends on how long you live for.

Break even point is 12 to 14 years - so, die early and you are in pocket.  Live to 100, however, and not so much.

12 -14 yrs, really?!    Are you confusing it with lump sum commutation?  I thought the actuarial reduction rate was in the 5% area. That would mean more like a 20yr break even. Please correct me if I'm wrong.
For many people, the money is needed now, and won't be needed after they get state pension or when they are 85 years old. This is a case where a bird in the hand can be good, because it's roughly equivalent to one bird in the bush. I would contrast that with a lump sum with a commutation rate of 12:1 which is often not needed, and is a bird in the hand vs two in the bush.

It depends on when you take it and whether you have any protection (R85 rule) but this no longer applies to new members anyway.

I've been in the scheme a good few years (25+) and on a decent salary for Local Government (upper end of basic rate tax band) and with around 11 years R85 protection.  As an example I have accrued pension to April 2021 of £17,450 at 67(ish) or £14,500 at 60 or £10,340 at 55.  I would have to be in receipt of the highest pension amount for 34 years (so live to age 101) to recoup the lost pension I would receive from 60 at £14,500 per annum (7 years extra pension).  The 'payback' drops to 20 years if you compare my pension income at 67 and 55.  The payback period is 14 years between the pension amounts at 55 and 60 (if you take into consideration tax- it's 12 without).  

But this shouldn't be just about value for money.  I currently plan to retire at 55 but take my pension at 60 because this provides the income I want in retirement and paying into other pensions/ISAs to fund ages 55-60 is also affordable.  But I also track my pension value at age 55 as this may eventually give me what I want as a pension income whilst reducing the amount I need to save elsewhere (or allow me to retire a year or so earlier). I wouldn't consider taking my pension later than 60 partly because of the value for money aspect but also because I don't need the bigger income when I receive my state pension and it would not be affordable for me to fund retirement through other means into my 60's.

OP, in a roundabout way, I am trying to say that when deciding whether to transfer or not definitely consider the value for money aspect but now is a good time to think about how and when you want to retire.  I suspect your transfer value will make it worth transferring, but the good thing is you can start your own private pension and save alongside your LGPS, to fund any years prior to drawing your pension

jamesd

sevenhills said:

jamesd said:

I didn't describe it as a penalty, I described it as an actuarial reduction and yes, that phrase means what you wrote.

You described it as a disadvantage.

That's because it is a disadvantage.

hyubh

Secret2ndAccount said:

Silvertabby said:

sevenhills said:

An actua[ria]l reduction is not a penalty for taking the pension early. You incur this reduction when your pension is paid earlier than normal and, therefore, potentially will be in payment for longer.

True, but it depends on how long you live for.

Break even point is 12 to 14 years - so, die early and you are in pocket.  Live to 100, however, and not so much.

12 -14 yrs, really?!    Are you confusing it with lump sum commutation?  I thought the actuarial reduction rate was in the 5% area.

Reduction percentages are here - it's not a straight line: https://www.lgpsmember.org/more/reductions.php