I can take a gov pension early but....

hyubh

MikMikandThriceMik said:

I am not at all sure I will make it to 67 myself 

Do you mean, you are seriously ill...? If you are, then consider applying for an ill health retirement (assuming this is the LGPS - I'm unclear whether this has been confirmed or not). If you aren't, why do you think you will be a statistical anomaly...? (https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2018to2020#life-expectancy-at-older-ages)

kassy64

Silvertabby said:

QrizB said:

MikMikandThriceMik said:

Silvertabby said:

Depending on when you left, and the actual scheme rules (NI regs sometimes differ) you may be able to realise a larger tax free lump sum by commuting (giving up) some of your annual pension.  But this would be at the pretty poor rate of 1:12 (permanently lose £1 of fully index linked pension for the rest of your life for each £12 of tax free cash).

Whichever option you go for, the lump sum is totally tax free.

That is exactly what I plan on doing. Thank you.

If I was to offer you a loan of £12000 and say your payments would be £1000 a year, increasing annually by CPI, for the rest of your life, you'd run a mile. But that's more-or-less what you're agreeing to with 12:1 commutation.

Exactly.  Yet 90% of LGPS retirees (probably other public sector pensioners as well) do go for maximum commutation.

And why not, it means they are able to retire early (I retired at 57 from the Civil Service after 41 years service) get a hefty lump sum (earning me well over £500 per month in interest) and still have a fairly decent annual pension (backed by inflation). You have to factor in that people want/need the extra funds in their 50s and 60s and enjoy a fantastic life whilst their young enough to enjoy it. The state pension kicks in at 67, so yes if you want to be rolling in cash in your 70s and 80s take the pension but personally I have no regrets about taking the max lump sum now and getting out, if I hadn't then I would probably still be working (shifts) which doesn't appeal thanks. It's not as simple as you make out.

Linton

kassy64 said:

Silvertabby said:

QrizB said:

MikMikandThriceMik said:

Silvertabby said:

Depending on when you left, and the actual scheme rules (NI regs sometimes differ) you may be able to realise a larger tax free lump sum by commuting (giving up) some of your annual pension.  But this would be at the pretty poor rate of 1:12 (permanently lose £1 of fully index linked pension for the rest of your life for each £12 of tax free cash).

Whichever option you go for, the lump sum is totally tax free.

That is exactly what I plan on doing. Thank you.

If I was to offer you a loan of £12000 and say your payments would be £1000 a year, increasing annually by CPI, for the rest of your life, you'd run a mile. But that's more-or-less what you're agreeing to with 12:1 commutation.

Exactly.  Yet 90% of LGPS retirees (probably other public sector pensioners as well) do go for maximum commutation.

And why not, it means they are able to retire early (I retired at 57 from the Civil Service after 41 years service) get a hefty lump sum (earning me well over £500 per month in interest) and still have a fairly decent annual pension (backed by inflation). You have to factor in that people want/need the extra funds in their 50s and 60s and enjoy a fantastic life whilst their young enough to enjoy it. The state pension kicks in at 67, so yes if you want to be rolling in cash in your 70s and 80s take the pension but personally I have no regrets about taking the max lump sum now and getting out, if I hadn't then I would probably still be working (shifts) which doesn't appeal thanks. It's not as simple as you make out.

What makes you think you wont be young enough to enjoy "a fantastic life" in your 70's and 80's.  These days many people are in good health well beyond state pension age.  Those who are not may want to pay for support/care at home. Your future self may seriously regret the money you squandered when young.

It seems a pity to partially lose out on the very good deal offered by a Civil Service pension because one wasnt prudent enough to have saved the money outside the pension to pay for early retirement.

kassy64

Linton said:

kassy64 said:

Silvertabby said:

QrizB said:

MikMikandThriceMik said:

Silvertabby said:

Depending on when you left, and the actual scheme rules (NI regs sometimes differ) you may be able to realise a larger tax free lump sum by commuting (giving up) some of your annual pension.  But this would be at the pretty poor rate of 1:12 (permanently lose £1 of fully index linked pension for the rest of your life for each £12 of tax free cash).

Whichever option you go for, the lump sum is totally tax free.

That is exactly what I plan on doing. Thank you.

If I was to offer you a loan of £12000 and say your payments would be £1000 a year, increasing annually by CPI, for the rest of your life, you'd run a mile. But that's more-or-less what you're agreeing to with 12:1 commutation.

Exactly.  Yet 90% of LGPS retirees (probably other public sector pensioners as well) do go for maximum commutation.

And why not, it means they are able to retire early (I retired at 57 from the Civil Service after 41 years service) get a hefty lump sum (earning me well over £500 per month in interest) and still have a fairly decent annual pension (backed by inflation). You have to factor in that people want/need the extra funds in their 50s and 60s and enjoy a fantastic life whilst their young enough to enjoy it. The state pension kicks in at 67, so yes if you want to be rolling in cash in your 70s and 80s take the pension but personally I have no regrets about taking the max lump sum now and getting out, if I hadn't then I would probably still be working (shifts) which doesn't appeal thanks. It's not as simple as you make out.

What makes you think you wont be young enough to enjoy "a fantastic life" in your 70's and 80's.  These days many people are in good health well beyond state pension age.  Those who are not may want to pay for support/care at home. Your future self may seriously regret the money you squandered when young.

It seems a pity to partially lose out on the very good deal offered by a Civil Service pension because one wasnt prudent enough to have saved the money outside the pension to pay for early retirement.

Sorry I don't agree with you, and you really shouldn't be commenting on how 'prudent' I am without knowing my full circumstances. You've hit the nail on the head there, PARTIALLY, I still have a very good annual pension linked to inflation and I'm now retired. Yes it's slightly less than had I not commuted the full amount. Your missing the point, by taking the additional lump sum enables many civil servants to retire early, for me it was a decision to take the extra lump sum and retire or carry on working for 2+ more years (well worth a few extra pounds per month). After working shifts for 41 years it was a no brainer and I stand by my decision as I am now far more healthier and happier. I have over £1m in equity in my property as a fallback should the civil service pension scheme collapse (which isn't going to happen). Thanks for your thoughts though.
Ps - That many Civil Servants cant all be wrong. They tend to be sensible PRUDENT people!

michaels

kassy64 said:

Silvertabby said:

QrizB said:

MikMikandThriceMik said:

Silvertabby said:

Depending on when you left, and the actual scheme rules (NI regs sometimes differ) you may be able to realise a larger tax free lump sum by commuting (giving up) some of your annual pension.  But this would be at the pretty poor rate of 1:12 (permanently lose £1 of fully index linked pension for the rest of your life for each £12 of tax free cash).

Whichever option you go for, the lump sum is totally tax free.

That is exactly what I plan on doing. Thank you.

If I was to offer you a loan of £12000 and say your payments would be £1000 a year, increasing annually by CPI, for the rest of your life, you'd run a mile. But that's more-or-less what you're agreeing to with 12:1 commutation.

Exactly.  Yet 90% of LGPS retirees (probably other public sector pensioners as well) do go for maximum commutation.

And why not, it means they are able to retire early (I retired at 57 from the Civil Service after 41 years service) get a hefty lump sum (earning me well over £500 per month in interest) and still have a fairly decent annual pension (backed by inflation). You have to factor in that people want/need the extra funds in their 50s and 60s and enjoy a fantastic life whilst their young enough to enjoy it. The state pension kicks in at 67, so yes if you want to be rolling in cash in your 70s and 80s take the pension but personally I have no regrets about taking the max lump sum now and getting out, if I hadn't then I would probably still be working (shifts) which doesn't appeal thanks. It's not as simple as you make out.

If you own a property it would be much cheaper for you to borrow against the property and pay back out of the full pension than to get a lump sum and then have a reduced pension.  As I say as a taxpayer financial illiteracy amongst those entitled to a govt pension is a win but it is sad for the individuals.

kassy64

michaels said:

kassy64 said:

Silvertabby said:

QrizB said:

MikMikandThriceMik said:

Silvertabby said:

Depending on when you left, and the actual scheme rules (NI regs sometimes differ) you may be able to realise a larger tax free lump sum by commuting (giving up) some of your annual pension.  But this would be at the pretty poor rate of 1:12 (permanently lose £1 of fully index linked pension for the rest of your life for each £12 of tax free cash).

Whichever option you go for, the lump sum is totally tax free.

That is exactly what I plan on doing. Thank you.

If I was to offer you a loan of £12000 and say your payments would be £1000 a year, increasing annually by CPI, for the rest of your life, you'd run a mile. But that's more-or-less what you're agreeing to with 12:1 commutation.

Exactly.  Yet 90% of LGPS retirees (probably other public sector pensioners as well) do go for maximum commutation.

And why not, it means they are able to retire early (I retired at 57 from the Civil Service after 41 years service) get a hefty lump sum (earning me well over £500 per month in interest) and still have a fairly decent annual pension (backed by inflation). You have to factor in that people want/need the extra funds in their 50s and 60s and enjoy a fantastic life whilst their young enough to enjoy it. The state pension kicks in at 67, so yes if you want to be rolling in cash in your 70s and 80s take the pension but personally I have no regrets about taking the max lump sum now and getting out, if I hadn't then I would probably still be working (shifts) which doesn't appeal thanks. It's not as simple as you make out.

If you own a property it would be much cheaper for you to borrow against the property and pay back out of the full pension than to get a lump sum and then have a reduced pension.  As I say as a taxpayer financial illiteracy amongst those entitled to a govt pension is a win but it is sad for the individuals.

Why on earth would I want to borrow against my property at an extortionate rate of interest, for what purpose? And as for financial illiteracy - I’m doing just fine thanks !!!

Universidad

kassy64 said:

Why on earth would I want to borrow against my property at an extortionate rate of interest, for what purpose? And as for financial illiteracy - I’m doing just fine thanks !!!

Let's say you've got a DB pension worth 10,000 per year, with no automatic lump sum, but an optional lump sum is available at a commutation rate available of 1:12.

You decide that you need 24,000 up front, in order to retire early.

You therefore take this as a lump sum, and will recieve an annual pension of 8000, rather than 10,000 from there on.

If you live for 20 years in retirement, the commutation means you will draw 2000 x 20, less pension, which is 40000, and that is without accounting for the inflationary increases you would have had - which over 20 years could be substational.

(Many folks got a 10% increase in the value of their pension this year alone.)

Let's say you borrow against your house instead. You borrow 24,000. Assuming you're below the income tax threshold, if you repay 2000 per year you are no worse off each year, and it takes 17 years to pay off, at a total cost of 34,000, at a 4.5% interest rate.

You're then 6000 pounds better off over your lifetime borrowing money against the house than commuting your pension before you start to consider the considerable effect that inflation has.

In the case of borrowing money, inflation generally reduces the debt in real terms. In the case of commuting future pension, inflation means you lose out. The difference between these two options is therefore substantial.

In virtually all circumstances it is better value for money to borrow against your property than to commute your pension at a rate as low as 1:12.

I'm not sure you will be convinced by this, but then again, most people aren't. It doesn't make it not true.

QrizB

kassy64 said:

michaels said:

If you own a property it would be much cheaper for you to borrow against the property and pay back out of the full pension than to get a lump sum and then have a reduced pension.  As I say as a taxpayer financial illiteracy amongst those entitled to a govt pension is a win but it is sad for the individuals.

Why on earth would I want to borrow against my property at an extortionate rate of interest, for what purpose? And as for financial illiteracy - I’m doing just fine thanks !!!

Let's assume that, instead of commuting £6k of pension (£500 per month) as 12:1 to get £72k of cash, you instead borrow £72k secured against your house, over a 17 year term (you retired at 57, so payments will run until you're 74).

A quick search at moneyfacts.co.uk shows that, even today, you could get a Halifax mortgage fixed at 4.25% for 10 years, with a monthly payment of £497. (You could have got a much lower rate a year ago.)

• During the first year, your extra £500 of pension will cover the payments with £3pm spare. Whoop-de-do, you say.
• After a year, your £500 of pension will increase by CPI(?). Let's say that's 4%, so an extra £20 a month. But your mortgage payments remain the same.
• Your £500 is now £520, and you're £23 a month better off than having commuted.
• Another year and maybe (just maybe) the BoE have got CPI back down to 2%. £520 becomes £530 and you're £33 a month better off.
• By the end of the 17-year term, even if CPI remains 2%, your £500 will have grown to more than £700 a month, you'll have enjoyed your £72k, paid off the mortgage and still be receiving an extra £700 a month of pension for the rest of your life.

(Income tax complicates this calculation but I don't know enough about your personal situation to calculate that.)

kassy64

Are you taking into account the £500 per month (£6,000 pa) interest I currently recieve from the lump sum total I currently have. Admittedly this will reduce a tad over the next few years. Your also not factoring the security/peace of mind £200k in the bank gives you. I’m sure your facts are correct and £ for £ is probably the right thing to do if I wanted to accumulate as much as possible to pass on to my children, but not everything is black and white and we all have our reasons for doing things the way we do. I stick by my decision. 

Kim1965

If a gov employee has a known very limited lifespan (and no spouse), might that be a viable reason to commute their pension at retirement? I am struggling to think of scenarios where it makes financial sense.