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

Silvertabby

michaels said:

Perhaps one for a new thread, but is it worth thinking about how the TFLS commutation at 1:12 vs a higher pension works out when we look at taxed income?

Ie 12k TFLS = £1k pa less gross pension but £800 pa less net pension for most.  The direct impact impact is thus rather than 12 years for the higher pension to win it is actually 15 years but of course there is then index linking to think about.

Different schemes, different needs, different personal circumstances.

I didn't commute my LGPS pension largely because of the poor 1:12 rate - but we both maximum term commuted our RAF pensions, despite that rate also being 1:12.

The difference being that the amounts we commuted paid off our mortgage 16 years early, saving us £Ks in interest.  Plus, of course, at ages 55 our pensions were restored to their pre-commuted levels before being fully index linked from our date of leaving.

AlanP_2

hugheskevi said:

I recently took my local gov pension and didn't commute anything as I thought the commutation rate was terrible.

Everyone is different I know and will arrive at a decision that suits them, but I'm intrigued - how does taking the additional lump sum enable early retirement?

I can see it might if you had a mortgage or something to clear but if there is no defined need for it but if not how does it help?

Taking the lump sum moves pension income from later in life to earlier in life by replacing an ongoing income with a one-off lump sum. Using the lump sum can be convenient to smooth income over the full course of retirement, as the additional resources can be used early in retirement and then the State Pension starts at a later age. Without doing this,  the public sector pension alone may be insufficient to enable early retirement.

However, the 12:1 commutation rate is bad enough at Normal Retirement Age, and it just gets worse the earlier you commence the pension.

Fortunately, the pension freedoms of 2015 were a perfect solution - those with big DB pensions are ideally placed to bear the risk of a DC pension, and can then use that in the part of their retirement before State Pension age to smooth their income over their whole of their retirement whilst also benefitting from tax relief on the DC contributions and the 25% tax free lump sum - this is especially attractive for LGPS members due to the ability to take a higher DC lump sum due to the rules of the scheme. LISAs might also have a role to play for basic rate taxpayers, but with low contribution limits and inability to contribute after age 50 it is likely to be of limited use. 

However, I come across very few public sector workers who are making voluntary DC contributions. The Child Benefit taper is probably the biggest prompt for them to do so.

Thanks, smoothing makes sense as a possible motivation, although as per the examples in this thread borrowing against house equity for a period might well be more financially astute.

LGPS - Can't take a higher DC lump as such, but all of the AVC fund can be taken tax free within overall HMRC limits. That's what I did and what my OH will do when she eventually decides to retire.