Taking 100% of AVC as a tax free lump sum and buying AVC pension query

Purplelady65

My OH is in a LGPS DB career average with no lump sum. I have been looking into AVCs which can only be taken out with the Pru. The information leaflet states: 

“You can take some or all of your AVCs as a tax free lump sum, provided that: 

The total tax-free lump sum is not more than 25 per cent of the overall value of the benefits you are taking. The total lump sum is any lump sum you take from your main LGPS benefits plus the AVC lump sum”. 

I can’t find anywhere in the leaflet where it says how the overall value of the benefits is calculated. My OH did email the local pension team but they just emailed the AVC leaflet that we already had. Does anyone know how it’s calculated? I’ve also read that to get the 100% tax free lump sum you have to take the AVCs at the same time as you take the pension benefits. Thank you. 

Drp8713

(Pension x 120) + (Lump Sum x 10) + (AVC x 10) x 0.25 / 7

Secret2ndAccount

Drp8713 said:

(Pension x 120) + (Lump Sum x 10) + (AVC x 10) x 0.25 / 7

Where do you get this from?
I thought it's
(   Pension x 20    +   Lump Sum   +   AVC   ) =   Lifetime value of pension, so 
(   Pension x 20    +   Lump Sum   +   AVC   ) x 0.25 =   Max lump sum

Silvertabby

Easier calculation (OP says no automatic lump sum in this case ) is:

(20 X annual pension) + (1 X AVC) X 25% = maximum tax free cash allowed by HMRC.

Note that if the answer is more than the AVC pot then the full 25% tax free cash may still be taken, but the difference has to be 'bought' by giving up some of the pension for life.  However, the commutation rate is a pretty poor 1:12.   This will then reduce the tax free lump sum, due to the overall reduction in the notional fund value as a result of the commutation.

On the other hand, if the AVC fund is more than 25%, then the excess can be used to buy additional LGPS pension at a very favourable rate.

Yes, the AVC fund has to be taken at the same time as the main scheme benefits.

Silvertabby

Drp8713 said:

(Pension x 120) + (Lump Sum x 10) + (AVC x 10) x 0.25 / 7

Wow - in my 20 years as a LGPS administrator, I've never seen a calc like that!  

Drp8713

Silvertabby said:

Drp8713 said:

(Pension x 120) + (Lump Sum x 10) + (AVC x 10) x 0.25 / 7

Wow - in my 20 years as a LGPS administrator, I've never seen a calc like that!  

It is the way the pension systems e.g. Altair does the calc behind the scenes, as that is what the GAD guidance says, example:

https://www.swanseapensionfund.org.uk/current-employees/retirement/commutation/ 

Secret2ndAccount

Drp8713 said:

(Pension x 120) + (Lump Sum x 10) + (AVC x 10) x 0.25 / 7

It is the way the pension systems e.g. Altair does the calc behind the scenes, as that is what the GAD guidance says, example:

https://www.swanseapensionfund.org.uk/current-employees/retirement/commutation/ 

There it is in black and white. Never seen this one before. Learn something every day.
So, OP needs to get in touch with their provider to see which calculation they are using. The ballpark concept is the same, but the exact numbers could differ by thousands.

Silvertabby

The LGPS I worked for sometimes over rode altair and did manual calculations because our powers-that-be didn't agree with the altair providers interpretation of LGPS regs.  

This must be one of those cases, because we certainly did manual calcs when dealing with AVCs

I've done a few number runs, and Drp's calc does give a different tax free lump sum than the calculation I used to use......

Purplelady65

Thank you very much for all this information - that’s really helpful, much appreciated. I would have only thought there could be one calculation! I’ll ask my OH to contact the LGPS provider again and ask them to provide the calculation they use. My OH also has a TPS pension which he accessed early some years ago. That was a DB final salary pension with a lump sum of 3x pensionable pay. Would this impact at all on the calculations for the lump sum for the LGPS? 

We are looking to retire in 3.5 years time when we are 60. I will have 29 years NHS pension from the 1995 scheme and also 3.75 years in the 2015 scheme plus a British Gas DB pension from 2 years service. My OH will have his TPS pension, 2 years in a BT DB pension and the LGPS pension. I was originally thinking of taking a reduction in my 2015 scheme to take it at 60 instead of 67 and the same for my OH’s LGPS scheme which is NPA of 67 as well. However on a previous post a OP helpfully pointed out that the pension will be index linked. I’d worked out the crossover point when the cumulative amount of taking it later overtakes the cumulative amount of taking it early so am now thinking it might be best to leave it for a few years and use the lump sum of £70k that I will get with my NHS pension for any extras from the age of 60 to say 64 or even wait until 67 if possible. We will be eligible for full state pensions at age 67 as well. 

Re the LGPS pension we could afford to pay £1k per month into it so in 3.5 years we could have paid in £42k. The LGPS my OH will be able to access at age 67 will be approx. £4,250 p.a. I haven’t done the calculation on what that would mean re the potential tax free amount. 

@Silvertabby - you said that the AVC can be used to buy extra pension at a reduced rate which hasn’t occurred to me until you pointed it out. I had originally looked at Additional Pension Contributions (APCs) but as there is no survivor’s pension and if you die while you’re contributing you lose your contributions plus the payout if you die after having accessed the pension for a short time is very low I’d ruled it out as an option. However in the LGPS AVC leaflet it says: 

“You can use some or all of your AVC plan to buy extra pension… if you take this option, your dependents will automatically get extra pension in the event of your death. This option is only available if you are still an active contributing member at the time of retirement.”

So I’m assuming this wouldn’t be an option if my OH retired at 60 but then didn’t take the pension until a few years later? I was wondering about taking the full tax free amount and then maybe using the rest to buy extra pension but not sure now. I also don’t know how much it would cost to buy extra pension via an AVC. Through the APC it would cost just under £12k gross to buy £1k of pension to access at age 67. 

Dazed_and_C0nfused

We will be eligible for full state pensions at age 67 as well

Is that based on having checked (in full) your State Pension forecast on gov.uk or is it an assumption?

With such a lot of DB years it's worth checking this to make sure.  With another 3 or 4 years work you likely will get to the standard £185.15/week but not necessarily guaranteed with that amount of contracted out years.

Purplelady65

Yes I’ve checked on the government website and in 3.5 years we will have reached the maximum. I’ve actually worked more years than I have years in the pensions as I’ve worked 0.8wte - 0.9wte for more than 15 or so years.