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

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.

@draiggoch - If I may ask when you read that you can take the whole of the LGPS AVC pot out before the main pension was taking this all out as tax free cash an option? 

I have read that you can take it all out before the LGPS pension and purchase an annuity/invest in a SIPP, etc (which I would not wish to do) but I'm wondering if the only way to take the LGPS AVC pot out as 100% tax free cash is if it is taken at the same time as taking the LGPS pension?   

draiggoch

SarahB16 said:

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.

@draiggoch - If I may ask when you read that you can take the whole of the LGPS AVC pot out before the main pension was taking this all out as tax free cash an option? 

I have read that you can take it all out before the LGPS pension and purchase an annuity/invest in a SIPP, etc (which I would not wish to do) but I'm wondering if the only way to take the LGPS AVC pot out as 100% tax free cash is if it is taken at the same time as taking the LGPS pension?   

I believe the only way for it to be tax free is if you take is at the same time as the main pension otherwise it just becomes a DC pension with its usual set of rules. ie 25% tax free with the rest taxable at your normal rate (obviously your personal allowance may be used to reduce tax if you have no other income).

SarahB16

Thank you to everyone who has taken the time to reply on this thread.  I have looked into this with the forecasts that I have from my LGPS pension provider’s portal based on my current salary.  Unfortunately all it appears to give is the retirement income if you leave work and then assumes you take your pension straightaway.  The best outcome for me appears to be by deferring my pension after retirement for c.12-18 months and I explain why later on.

The following appears to be the best option and again I genuinely have not set this in stone as I feel like I’m learning all the time about pensions and, of course, what is the most tax efficient way too.

For me it would appear to be the following:

Continue to make LGPS AVC contributions every month (as much as I can afford but bearing in mind I cannot access this until I take my LGPS pension due to wishing to take it as a 100% tax free pot of cash).  I have referred earlier in my thread to my Standard Life DC pot (pot of c.£12k) which I have not contributed to since 2009.  I do not intend to make any transfers or further contributions to this DC pot but intend to draw it down at a rate of £16,760 per annum via income drawdown.  (25% of the £16,760 will be tax free and the remaining £12,570 will be covered by my personal allowance). 

Now moving on to when to retire and how to draw the funds.  These tax years may change, i.e. leave work one year earlier and also retire one year earlier (but still with a c.12-18 month deferral of my LGPS pension) but this would appear to be what is currently best.

Tax year 2035/36

Leave current employment/retire before 31 March 2036 (age 63), i.e. so my salary does not use up any of my personal allowance in 2036/37.  2035/36 would seem sensible to be my last year of working.  I could possibly retire one year earlier but too many unknows from now until then.

Tax year 2036/37

Do not take my LGPS pension in the tax year 2036/37 (defer the LGPS pension for c.12-18 months).

In the tax year 2036/37 take £16,760 from my Standard Life DC pot (note it is currently c.£12k).  Anything in the DC pot in excess of £16,760 take in 2037/38.  This will ensure there is no tax to pay due to the 25% tax free amount and the remaining 75% being covered by my personal allowance.  I will need to use some personal savings in this year to live off. 

Tax year 2037/38

Take the remainder (if any) of the Standard Life DC pot plus in the year the £6k DB pension begins paying out (at the age of 65).  The £6k is, of course, per annum so I estimate a pro-rated amount in this tax year of c.£2k or possibly a little bit more. 

Check how much of my personal allowance is remaining and begin drawing my LGPS pension in the month of this tax year so that the LGPS pension and other DB pension and any remaining SL DC income will be covered by my personal allowance.

The LGPS AVC pot is also received tax free in this year. 

Tax year 2038/39

Income from the £6k DB pension and the LGPS pension are both now paying out in full (paying tax due to this being in excess of my personal allowance). 

Tax year 2039/40

£6k DB pension, LGPS pension and state pension (currently at age 67) begins paying.  When I calculated my net take home pay it is higher than I thought it would be.   Of course the only deduction is the basic rate of tax above my personal allowance.  There is no NI nor pension contributions being deducted.

The LGPS pension will increase by CPI each year and I did wonder if there is a month when it is best to take it so that it has had the CPI uplift applied or does this not really matter?  I’m currently basing my decision as to when to begin drawing my LGPS pension so that my income in the tax year 2037/38 is covered by my personal allowance. 

To summarise the above assumes I will retire at the age of 63 however depending upon how big I can grow my LGPS AVC pot to I may possibly be able to retire a year earlier.  I am staggering my drawdowns at the beginning of my retirement so that in the years 2036/37 and 2037/38 my income is covered by my personal allowance in both of those years. 

I am definitely open to hearing opinions on the above.  

DT2001

I do not know the ins and outs of the LGPS AVC’s so my thoughts maybe off track and if so I apologise. Would you be better building up your SL DC pot to a figure to allow you to potentially retire at 62 and utilise your full personal allowance from 62 to 65? You say there are too many unknowns, at the moment, however if all goes well it would be good to have that option open to you. I assume you could delay funding the SL DC, at the expense of the AVC’s, for a few years (not sure how much you save) by which time your ‘unknowns’ might be more certain.

SarahB16

DT2001 said:

I do not know the ins and outs of the LGPS AVC’s so my thoughts maybe off track and if so I apologise. Would you be better building up your SL DC pot to a figure to allow you to potentially retire at 62 and utilise your full personal allowance from 62 to 65? You say there are too many unknowns, at the moment, however if all goes well it would be good to have that option open to you. I assume you could delay funding the SL DC, at the expense of the AVC’s, for a few years (not sure how much you save) by which time your ‘unknowns’ might be more certain.

That is definitely something to consider and thank you for that suggestion.  I suppose it would depend on how much lower my annual LGPS pension would be (due to working for one year less (due to retiring at 62 instead of 63) but the LGPS pension being deferred for c.24-30 months) compared to working for that extra year but only deferring the LGPS pension by c.12-18 months.  It would be an additional year that I would need to live off my savings due to only receiving pension income of £16,760 from the SL DC pot.  Saying that if the LGPS AVC pot was large enough it could replenish the savings I've had to use to live off in the first few years of retirement.    

I could make SL DC contributions so that my SL DC pot is worth £33,520 and taken out over two years (not paying tax due to it being covered by the 25% tax free and my personal allowance) if I wanted to retire at 62 and then live off the £16,760 SL DC pension income in that year plus savings.  The SL DC pot is probably something to contribute to at the age of 58-60 if I were to do this as I would have more accurate pension forecast figures and I would know what I would need to live off a year, i.e. would the £6k DB pension plus the LGPS pension plus state pension (at 67) be sufficient if I stopped working at 62.  How much lower would my LGPS pension be due to retiring at 62 based on the above.      

Leaving the LGPS pension income amount to one side for the moment it appears the flexibility I have is that when I decide to draw the LGPS pension, i.e. the later in the tax year the lower the annual pension income will be and I can ensure in the first year of drawing the LGPS pension my income for that year is covered by my personal allowance.  

What I don't know is that whilst I can see what my LGPS pension is forecast to be per annum I don't know how much it would increase by per annum by deferring it for one year or two years. 

Using a very simple example:

Retire at 62 with a pension income at 62 of £20,000.   (Assume CPI is 10% every year in this example) 

Don't take the pension at 62 but defer by two years (due to using personal allowances for my SL DC income over either one or two years) what would the £20,000 LGPS annual pension be by not drawing it in those two years?  

Draw at 62:  £20,000

63: £22,000 (10% CPI uplift)

64: £24,200 (10% CPI uplift)  

What would the pension be at 64 if the LGPS pension was deferred for two years?  How would this compare to the £24,200 when the £20,000 pension was drawn at 62.     

cloud_dog

Hi @SarahB16, I have been reading your thread because I (we) are in a similar boat (DB from 65 for me) and we have been maximising the availability of SS for AVC in my main DB scheme.  I have an advantage insofar as I can periodically transfer out my AVC pot of money in to my SIPP.  I previously looked in to keeping the money in the AVC and taking it within the DB scheme (early) but at the time I decided against it.  So my simplistic idea is to build up a couple of SIPPs purely for the early retirement / pre-DB stage and to draw the majority / all of these pots in early retirement.  The consideration of taking the DB early is not off the table completely but this is where I am at currently.

The way I am working this phase is that I have calculated the income I (we) require during this early retirement phase ("Our Number"), and my little spreadsheet tracks actuals against the plan, and therefore when we can call it a day.  We have been a year ahead of our schedule but the market turmoil during 2022 have knocked that back a little.

I suppose what my elongated post is showing is that we will stop when the finances tell us we can stop; it is driven from the amount required based on the annual income required for X number of years and when we are there, we are gone (so to speak), so we do not have definite dates/ages but there is a schedule time and an actual current value time to stop.

SarahB16

cloud_dog said:

Hi @SarahB16, I have been reading your thread because I (we) are in a similar boat (DB from 65 for me) and we have been maximising the availability of SS for AVC in my main DB scheme.  I have an advantage insofar as I can periodically transfer out my AVC pot of money in to my SIPP.  I previously looked in to keeping the money in the AVC and taking it within the DB scheme (early) but at the time I decided against it.  So my simplistic idea is to build up a couple of SIPPs purely for the early retirement / pre-DB stage and to draw the majority / all of these pots in early retirement.  The consideration of taking the DB early is not off the table completely but this is where I am at currently.

The way I am working this phase is that I have calculated the income I (we) require during this early retirement phase ("Our Number"), and my little spreadsheet tracks actuals against the plan, and therefore when we can call it a day.  We have been a year ahead of our schedule but the market turmoil during 2022 have knocked that back a little.

I suppose what my elongated post is showing is that we will stop when the finances tell us we can stop; it is driven from the amount required based on the annual income required for X number of years and when we are there, we are gone (so to speak), so we do not have definite dates/ages but there is a schedule time and an actual current value time to stop.

Thank you for your post.  What you are doing is what I thought I would do (my very first post in this thread) and I now realise I came across too strongly as though I had made my mind up that I would do what you are thinking of doing i.e. that I would live off my SL DC pot in the first five years of retirement (with the £6k DB pension from the age of 65 too) so that I only drew down on my LGPS pension when I reached state pension age at 67. 

I have still not yet decided what I will do and this is because I do not have the figures so I’m unable to crunch the numbers.

What I don’t know is what would my LGPS pension be if I’ve worked to the age of 62 and took it at 62 compared to working to the age of 62 and taking the pension at say 64 or 67?  How much greater would my pension be?  How much greater than the CPI uplift would the pension be due to waiting two or five years before drawing the pension?  

As a fellow poster has very helpfully said taking the LGPS pension at 62 would mean additional years of using my personal allowance (however I already have my SL DC pot that will use my personal allowance for one or possibly two years already so that needs to be factored in too).  However, there would still probably be three years before I’m 67 where my personal allowance could be used against some of my LGPS pension.    

I hope you don't mind me highlighting @cloud_dog but if you were to take your DB early then you would probably be taxed on all of it if you have used your personal allowance against your SIPP.  This is my reason for not, at this stage, wishing to add to my SL DC pot.  For anybody that does not have a SIPP and takes the DB pension say 5 years before the state pension age that is 5 years of receiving an extra £2,514 per annum (£12,570 x 20%).     

I really think the only way for me to do this comparison is when I have a more accurate forecast of what the various pension amounts will be.  I refer to my £6k DB pension but at this stage that is also just a forecast, the LGPS pension amount taken at different ages is another unknown too.  I am reluctant though at this stage to add to my SL DC pot as the drawing down of it would use my personal allowance which could have been used for my LGPS pension if taken before the age of 67.

The only way for me to decide I think is nearer the time looking at the various scenarios, crunching the numbers looking at the net pay from the different scenarios.