LGPS Lump Sum Standard benefits vs maximum conversion

wingzero

Hello. My mum has asked me to make sense of her pension and I've proven a bit useless at understanding it so I'm here for help and advice 

The form begins with "A commutation form on which you elect to receive a reduced pension of £92.35 and a retirement grant of £615.55. However, after considering the compounding option, you may wish to change your mind"

The standard benefit annual pension can be compounded into a lump sum payment of £3148 and you will also receive a retirement grant of £85

Maximum conversion can be compounded into a lump sum payment of £2167 and a retirement grant of £615

I don't understand the difference between standard benefit and maximum conversion. The standard benefit is a lower amount than the maximum conversion and I don't understand why. 

The other question I have is is the reduced annual pension. Is that available in addition to the lump sum? Or it gets reduced because of the retirement grant? 

Thanks

AlanP_2

Assuming your Mum was an LGPS member pre-2008 she will be entitled to an annual pension plus an automatic tax free lump sum of 3* annual pension calculated using pre-2008 scheme rules.

Service from 2008 onward does not have an automatic lump sum associated with it.

There is also the option to "commute" some annual pension to "buy" more lump sum up to scheme and HMRC tax free limits.

It would be a lot easier if every amount wasn't £xx 

The commutation rate for a public sector scheme is £1 of annual pension given up for £12 of lump sum. This is very low compared to a typical private sector scheme which might offer say £30 for each £1 given up.

£12 of lump sum is the equivalent of 12 years income at £1 less whatever the annual pension increases by in the meantime e.g. CPI.

Does she need a higher lump sum (to pay off mortgage for example) or would a higher annual pension be better for her?

saucer

wingzero said:

Hello. My mum has asked me to make sense of her pension and I've proven a bit useless at understanding it so I'm here for help and advice 

The form begins with "A commutation form on which you elect to receive a reduced pension of £XX.xx and a retirement grant of £XXX.xx. However, after considering the compounding option, you may wish to change your mind"

The standard benefit annual pension can be compounded into a lump sum payment of £XXXX.xx and you will also receive a retirement grant of £XX.xx

Maximum conversion can be compounded into a lump sum payment of £XXXX.xx and a retirement grant of £XXX.xx

I don't understand the difference between standard benefit and maximum conversion. The standard benefit is a lower amount than the maximum conversion and I don't understand why. 

The other question I have is is the reduced annual pension. Is that available in addition to the lump sum? Or it gets reduced because of the retirement grant? 

Thanks

Leaving the retirement grant aside (I don't recognise that) what you are talking about is commutation of pension for a larger lump sum.  In the LGPS, and many other public sector pensions, this is based on a factor or 12:1.  That means that for every extra £1 of annual pension given up she would get £12 extra lump sum.  Leaving aside inflation, by which the annual pension increases each year, and the tax free basis of the lump sum, this means that she would be losing out after around 12 years. 

It is therefore generally a bad idea to increase the lump sum at the expense of a better annual pension.     

AlanP_2

@Silvertabby - Can you help the OP with this one??

saucer

AlanP_2 said:

Assuming your Mum was an LGPS member pre-2008 she will be entitled to an annual pension plus an automatic tax free lump sum of 3* annual pension calculated using pre-2008 scheme rules.

Service from 2008 onward does not have an automatic lump sum associated with it.

There is also the option to "commute" some annual pension to "buy" more lump sum up to scheme and HMRC tax free limits.

It would be a lot easier if every amount wasn't £xx 

The commutation rate for a public sector scheme is £1 of annual pension given up for £12 of lump sum. This is very low compared to a typical private sector scheme which might offer say £30 for each £1 given up.

£12 of lump sum is the equivalent of 12 years income at £1 less whatever the annual pension increases by in the meantime e.g. CPI.

Does she need a higher lump sum (to pay off mortgage for example) or would a higher annual pension be better for her?

Answered at the same time and I would argue more succintly by Alan

AlanP_2

I think Retirement Grant is the correct name for what I called the pre-2008 automatic lump sum but open to correction on that.

The fundamental point remains - what's the best / desired outcome? More annual pension or higher lump sum.

Silvertabby

Alan's covered it pretty well - but things would be clearer if OP posts the actual amounts, rather than £X, and dates of service.  Just whole years will be fine.

wingzero

Cheers for the request for amounts. I've edited the OP for it while i read everyone's replies 👍🏼. 

Her pension rules were post 2008 i believe and she'd like to take out her entire public sector pension as it's not a very big amount and she can rely on her private pension for a regular income. 

Silvertabby

wingzero said:

Hello. My mum has asked me to make sense of her pension and I've proven a bit useless at understanding it so I'm here for help and advice 

The form begins with "A commutation form on which you elect to receive a reduced pension of £92.35 and a retirement grant of £615.55. However, after considering the compounding option, you may wish to change your mind"

The standard benefit annual pension can be compounded into a lump sum payment of £3148 and you will also receive a retirement grant of £85

Maximum conversion can be compounded into a lump sum payment of £2167 and a retirement grant of £615

I don't understand the difference between standard benefit and maximum conversion. The standard benefit is a lower amount than the maximum conversion and I don't understand why. 

The other question I have is is the reduced annual pension. Is that available in addition to the lump sum? Or it gets reduced because of the retirement grant? 

Thanks

Thanks.  Putting the figures in makes more sense.

Based on the assumption that your mum joined the LGPS after 1 April 2008, there's an option missing - that of an annual index linked pension with no lump sum.  I make that in the region of £143.62 per year.  However, reading between the lines, it sounds like your mum has rejected this as she wants to take her benefits in one cash lump sum, hence the additional options offered. 

As the notional value of her benefits is under £10K, she is being offered trivial commutation under 'de minimas' rules - ie, her private pension is her only other pension and she has no other LGPS benefits, even from another Local Authority.

To clarify:

Option 1

Annual pension of £143.62 per year (no tax free lump sum/retirement grant

Option 2

Annual pension of £92.35 per year plus a one-off tax free lump sum /retirement grant of £615.55.

Now it gets a wee bit complicated.....

Option 3

De minimas trivial commutation based on the original standard pension of £143.62 per year.

ie, £143.62 X member trivial commutation factor plus £ spouse's pension X spouse's trivial commutation factor = £3,233, of which £85 is tax free and £3,148 is taxable.  

Option 4

De minimas trivial commutation based on the maxium commutation (giving up some of the annual pension for a tax free lump sum using a factor of 1:12). 

ie, £92.35 X member trivial commutation factor plus £ spouse's pension X spouse's trivial commutation factor = £2,167 taxable, plus commuted £615 tax free lum sum/retirement grant

So, at first glance Option 3 with its total of £3,233 seems better than Options 4's £2782 - but it depends on your mum's tax status.

If she won't be liable for any tax, then the figures are as stated.

20% tax payer.

Option 3

£3,148 - 20% = £2,518.40

£2,518.40 + £85 = £2,603.40

Option 4

£2,167- 20% = £1,733.60

£1,733.60 + £615 = £2,348.60

40% tax payer

Option 3

£3,148 - 40% = £1,888.80

£1,888.80 + £85 = £1,973.80

Option 4

£2,167 - £1,300.20

£1,300.20 + £615 = £1,915.20.

So, in your mum's case, regardless of her tax status, Option 3 will give her the best return.  I expect that her LGPS are covering all bases by offering Option 4, as someone out there on different figures may find that that gives a better result.

Note that when the trivial commutation is paid, her LGPS payroll won't have a tax code to work with and so will almost certainly be deducted too much tax as the default.  She will (should) be given the information she will need to claim the overpayment back from HMRC.

Another point to consider - is your mum retiring and taking her pension straight away, or did she leave the LGPS earlier this year and defer her benefits?  If it's the latter, then deferring payment until after 12 April 2023 means that her total benefits will be increased by the annual cost of living addition, which could be 10%. 

Hope this helps. 

 

ivormonee

I am in a similar situation, but it differs to above as my LGPS pension is pre 2008. Just received a letter asking whether I want to take standard pension benefits (ie. the 3/80ths lump sum plus 1/80th per year income) or whether I'd like to opt for a greater lump sum and lower income. Is there any meaningful way to make such a decision?

Silvertabby

ivormonee said:

I am in a similar situation, but it differs to above as my LGPS pension is pre 2008. Just received a letter asking whether I want to take standard pension benefits (ie. the 3/80ths lump sum plus 1/80th per year income) or whether I'd like to opt for a greater lump sum and lower income. Is there any meaningful way to make such a decision?

How old are you?  You may have R85 protections which only kick in from age 60, despite being able to access your benefits from age 55.

The LGPS commutation rate is 1:12, meaning you give up £1 of fully index linked annual pension in return for £12 one-off tax free cash.  Anyone on here, including me, will tell you that's a pretty p.poor deal.

Rule of thumb is that commutation has a 12 year break even point, meaning if you die within 12 years of starting to draw your pension then you may be better off with the bigger lump sum/smaller pension.  But the longer you live beyond 12 years, the better off you may be with the bigger pension.

I say 'may' because other personal factors may apply.  Everyone is different.