Planning ahead: How to fund income gap from retiring at 62 to drawing DB and state pension at 68

SarahB16

bostin said:

OP - what's to stop you continuing to build up your LGPS AVC then, at age 62, transfer this to a SIPP and draw it down outside of LGPS i.e. to leave your defined benefit element untouched until aged 68?

You benefit from salary sacrificing your income (i.e. tax plus NI savings) in a way that you can't do into a SIPP directly. It's something that I'm giving serious thought to in bridging the gap between stopping work and drawing LGPS. A recent seminar at the Council I work for also suggested this as an option to consider.
 

What you said @bostin has really got me thinking and as you quite rightly say, the AVC benefits from the NI savings too (which a SIPP or the Standard Life DC pension in my case wouldn't).

It wouldn't make sense though to simply transfer the whole of the LGPS AVC pot into a SIPP as the pot may exceed x.  (x being the number of years before 68 that you decide to retire multiplied by £16,760). The £16,760 being £4,190 (the 25% tax free amount) plus the £12,570 personal allowance.  Transferring x would mean there would be no income tax to pay.  

As I have a DB pension that will begin paying when I am 65 I will of course need to take that into account when calculating how much of the AVC pot to transfer to my Standard Life DC pot and as I already have c.£12k in the DC pot that too will need to be factored in as well.  

I'm writing this out to help future me in terms of how much I need to transfer to my DC pot from my AVC pot. 

• Assuming retire from LGPS at 62. 

• Years 62 to 65: Require from the LGPS AVC pot £16,760 = £50,280

• Years 65 to 68: Require from the LGPS AVC pot: £16,760 less DB pension scheme of c.£6k = c.£32,280

Total to transfer from the LGPS AVC pot to Standard Life DC:  £82,560 less whatever is in the DC pot (December 2022: £12k). 

Therefore based on December 2022 calculations (using personal allowances in 2022/23): £70,560. 

This assumes there is no growth nor loss in the DC pot over the years from when I'm 62 to 68. 

The rest in the LGPS AVC pot (if there is any) to be saved or invested as I wish. 

My brain hurts after this as I'm definitely not a pensions expert!   

bostin

@SarahB16 - sounds like a plan. I still struggle to get my head around it all too.

For many years, I thought that the AVC pension pot could only be accessed at the time of drawing the LGPS itself. Your point re only transferring sufficient monies to cover your needs until accessing the LGPS is a good one.

As someone with various LGPS dating back to the turn of the century, it's all a little too complicated for my liking. I've recently changed jobs again (still within local gov't) which has opened up another window to perhaps consolidate some of the different LGPS pensions accrued....

draiggoch

Somebody may correct me but I don’t think you can take part of the LGPS AVC out. I think it’s an all or nothing situation.
you can take it before the main pension but only if you empty the whole pot.
That’s the way I read it anyway as I had thought of doing something similar to your idea above.

SarahB16

draiggoch said:

Somebody may correct me but I don’t think you can take part of the LGPS AVC out. I think it’s an all or nothing situation.
you can take it before the main pension but only if you empty the whole pot.
That’s the way I read it anyway as I had thought of doing something similar to your idea above.

My plan is to empty the whole LGPS AVC pot at 62 (leaving the LGPS pension to be taken at 68).  My apologies if I wasn't clear.  The intention is to take the whole of the LGPS AVC out in one go but I wouldn't wish to have to invest it all in my Standard Life DC pension.  I would only wish to put c.£71k in the DC pot and keep the rest as cash for me to save/invest as I wish (and will also need this to live off). 

Ideally in years 62 to 68 that I refer to above I would live off a combination of the pensions that I have begun drawing and some of the cash from the AVC pot (but I'm not sure if I'm allowed to split/use my AVC pot in this way).   

However, there are a couple of areas that I'm unsure about: 

1.) Can I just transfer a proportion of the LGPS AVC pot (c.£71k to my Standard Life DC pension) and take the rest as cash?

2.) Will there be any tax implications due to not taking the AVC pot at the same time as the LGPS pension?  

If I will be subject to tax on my LGPS AVC pot (despite being under the 25% of the total LGPS pension + LGPS AVC pot limit) due to taking them at different times then it would seem to be better for me to contribute to my Standard Life DC pension scheme instead. 

Cowster

I am interested in this thread as I am also in the LGPS and due to start AVC payments so will have the same dilemma.

When I read your post I can see from 68 you will have approx 16k in index linked pensions (6k from another DB pension at 65 and state pension at 68)

Once the LGPS pension is in payment from 68 it would all be subject to tax at 20% tax as your  personal allowance will be taken up by what is already in payment. 

If you took the LGPS at 62 then you will have 6 years where you are using your personal allowance from the reduced LGPS pension and topping up with the AVC pot as and when required.    I think I would rather have the 100% tax free AVC at 62 and enjoy the money than at 68 but that is just me.

I would calculate in net terms the total of how much you would expect to receive from your LGPS pension in your lifetime from taking it early and using 6 years of personal allowance from 62 or waiting until 68 and being taxed on the higher amount.     At what age is the total amount of taking it early less that deferring payment?  I think you may be in your late eighties by the time this happens even with inflation increases.

I know a few people have said to crunch the numbers but I'm not sure you actually have from the responses.   Do you know how much money you require at each stage/age of retirement?   This should make the decision easier.  

Re the AVC transfer to to a SIPP I understand once the AVC is transferred then it becomes just like any DC Pension.   You have relinquished the 100% tax free option but are able to take 25% tax free with the flexibility of any DC pension - drawdown, UFPLS etc..

SarahB16

Cowster said:

I think I would rather have the 100% tax free AVC at 62 and enjoy the money than at 68 but that is just me.

My current thinking is to take the whole of the LGPS AVC pot at 62 apart from c.£71k which I would transfer to my Standard Life DC pot.  I am not intending to wait to take the AVC at 68.  It is the LGPS pension that I am thinking would be better to take at 68 rather than earlier (at a reduced amount). 

However, I have a question which if anybody could answer I would be very grateful.  I know I need to take the whole of the LGPS AVC pot in one go (which I intend to do at 62) but would there be any tax to pay from transferring c.£71k to my DC pot and taking the rest as cash (and not taking my LGPS pension until I am 68)?    

Cowster said:

I would calculate in net terms the total of how much you would expect to receive from your LGPS pension in your lifetime from taking it early and using 6 years of personal allowance from 62 or waiting until 68 and being taxed on the higher amount.     At what age is the total amount of taking it early less that deferring payment?  I think you may be in your late eighties by the time this happens even with inflation increases.

I know a few people have said to crunch the numbers but I'm not sure you actually have from the responses.   Do you know how much money you require at each stage/age of retirement?   This should make the decision easier.  

I am not basing my decision on how much I am likely to draw from my LGPS pension over my lifetime.  Earlier on in this thread you can see that I say my clear preference is for my LGPS pension (a DB pension that increases with CPI) to be as high as possible and that will be achieved by not drawing it until I am 68.  A couple of other posters (GunJack and NedS) completely get where I am coming from so you may wish to read their replies.  

Cowster said: 

Re the AVC transfer to to a SIPP I understand once the AVC is transferred then it becomes just like any DC Pension.   You have relinquished the 100% tax free option but are able to take 25% tax free with the flexibility of any DC pension - drawdown, UFPLS etc..

Again, I understand that but that was not my question.  My question was regarding transferring c.£71k from the LGPS AVC pot into the Standard Life DC pot and taking the rest of the pot as cash at 62 and if there would be any tax to pay from doing this. 

Grumpy_chap

SarahB16 said:

state pension (currently at 68 but who knows as to whether this will rise).  By way of background I am 50 years old.   

A little bit of good news for you.
If you are 50 yo now, you can start drawing your state pension at age 67 (based on current rules).

Cowster

Once you transfer the AVC to a SIPP then it would work exactly the same as your SL DC Pot  regardless if some of the pot is transferred or some remains as cash in the SIPP.     25% is tax free unless you take it via your personal income tax allowance where you can get more out tax free.        
  
That is one of the reasons  why I think taking the 100% tax free AVC option at 62 along with a reduced (index linked) LGPS pension is a consideration but you have obviously made your mind up on taking it later so won't go down that road again.

I wish I had your confidence that I would live long enough to make it worthwhile delaying taking my LGPS until 68!

SarahB16

Cowster said:

Once you transfer the AVC to a SIPP then it would work exactly the same as your SL DC Pot  regardless if some of the pot is transferred or some remains as cash in the SIPP.     25% is tax free unless you take it via your personal income tax allowance where you can get more out tax free.        
  

That was not my question. 

If you wish you can see what my question is by reading earlier posts of mine in this thread but very simply I am checking what the tax implications are (if any) of taking my LGPS AVC pot at a different time to my LGPS pension.  Based on my current calculations only c.£71k is going into the SL DC pot.  I need to check if there would be any tax to pay on the rest of the AVC pot which would be taken as cash (noting this is at a different time to the LGPS pension).    

Cowster said:        

  
That is one of the reasons  why I think taking the 100% tax free AVC option at 62 along with a reduced (index linked) LGPS pension is a consideration but you have obviously made your mind up on taking it later so won't go down that road again.

Yes, at the moment I think taking the AVC at 62 is best but I'm unsure if it will be 100% tax free but I am hoping somebody may come along with the answer to that.   

No, I haven't definitely made up my mind.  As my thread says it is planning ahead.  I am considering my options and the tax implications of these options but based on my current thinking yes it is leaning towards taking my LGPS pension at my state pension age (67/68). 

What I don't want to do is reach the age of 62 and think if only I had done this or that at the age of 55 or earlier hence why I am checking the tax rules etc now and of course the tax rules may change in the future.  


 Cowster said:

I wish I had your confidence that I would live long enough to make it worthwhile delaying taking my LGPS until 68!

No confidence at all just simply weighing up my options. 

As others have said a DB pension is like an insurance policy in case you live a long life.  Nobody knows what the future holds but I don't want to be poor.  Perhaps read GunJack's reply which includes, 'What's the point in having some reduced income for an extra 2-3 years (or however many) years, if that income is not enough to live on?'   

There will be some retirees who definitely didn't anticipate the increase in energy prices and the wider increase in the cost of living that we are currently experiencing.  I am trying my best to ensure that I have more than enough for those eventualities whatever they may be in the future.   

Cowster

SarahB16 said:

That was not my question.  
Yes, at the moment I think taking the AVC at 62 is best but I'm unsure if it will be 100% tax free but I am hoping somebody may come along with the answer to that.   

The answer is no - it will not be 100% tax free for the reason I gave in my previous post.

Hopefully somebody else will come along to answer better than I have.