AVC and pension maximum lump sum

darich

I’ve been paying into my local government pension since I started working almost 34 years ago so I expect I’ll have a sizeable pot with a decent pension. I also started paying into an AVC fund about 7 years ago.

I know there’s a calculation to work out the capital size of my pension pot but I’ve seen a few variations. One being 16x annual pension plus auto lump sum.

So, using projected figures as a starting point I’m trying to calculate how much of a lump sum I can take.

Let’s say my annual pension projects as 24k and my auto lump sum is 30k. Using the calculation above, that gives a total value of 404k

If my AVC pot projects as 100k that would give me a total pension pot of 504k.

Am I right in saying then, that I could take my entire AVC as a lump sum, because it’s less than 25% of the 504k total?

And I’m guessing that the numbers reduce if I commute some of my pension to a lump sum because my annual pension would be lower in the above calculation? So reducing my annual pension to let’s say 16k the calculation becomes 286k. Adding my AVC 100k gives 386k.

In which case, my maximum AVC lump sum would be 25% of 386k

I believe there is a max lump sum of around 268k so my commuted pension plus AVC cannot exceed this.

Have I got most of this right? Or am I missing something?

I should add that this would be several years before my state pension age of 67 so I’m guessing it has no bearing on the calculations.

Thanks in advance

 

MallyGirl

25% tax free concept is really for DC pensions. Your scheme will have its own rules.

darich

MallyGirl said:

25% tax free concept is really for DC pensions. Your scheme will have its own rules.

So is there a different limit on max lump sum if I have a DB pension?

Silvertabby

Retired now, but during my time as a LGPS administrator the calculation (using your figures) was thus:

20 X £24.00 = £480.00

1 X £30,000

1 X £100,000

£480,000 + £30,000 + £100,000 = £610,000 X 25% = £152,500 maximum tax free cash.

If you wanted the maximum tax free cash, then you would have to commute some of your annual pension at the p. poor rate of 1:12.  Plus commuting reduces the overall value of your pension, so the calculation would have to be run again resulting in a lower 25% tax free figure in addition to a lower pension.

I'm aware that the LGPS now uses another calculation, but the overall result isn't much different.

NOTE:  To my knowledge, the LGPS is the only public sector pension fund that allows all of the AVC fund (within these limits) to be taken as tax free cash.  In the case of other public sector schemes, the DB parts and the AVC DC parts are calculated separately.

Secret2ndAccount

.MallyGirl said:

25% tax free concept is really for DC pensions. Your scheme will have its own rules.

Incorrect. 25% is the maximum tax free percentage of your pension's value permitted by HMRC. LGPS allows you to use your AVC to get your tax free lump sum up to the 25% maximum. It's only calculating the size of the notional pot that's tricky. Some DB's don't offer you any way to get yourself to 25%, but OP has correctly identified the path and is on the right track.

OldBeanz

Wife got hers a couple of months ago and the 20x calculation was accurate. She overshot and the additional purchase rate was good. She would happily overshoot again as this increases the lump sum as well.

daveyjp

OP.  With LGPS there is no pot.  There is a contractual relationship to pay an annual pension.

Mutton_Geoff

MallyGirl said:

25% tax free concept is really for DC pensions. Your scheme will have its own rules.

daveyjp said:

OP.  With LGPS there is no pot.  There is a contractual relationship to pay an annual pension.

Although there is no pot, HMRC use a multiplier to work out it's value (16x) for tax purposes.

I saved into AVCs alongside my DB pension specifically so the 25% tax free would be funded entirely by my AVCs to avoid commuting any of the DB for tax free cash.

darich

daveyjp said:

OP.  With LGPS there is no pot.  There is a contractual relationship to pay an annual pension.

I appreciate there's no pot...I was using the term as a reference to the calculated numbers as Mutton_Geoff said.
Thanks

darich

Secret2ndAccount said:

.MallyGirl said:

25% tax free concept is really for DC pensions. Your scheme will have its own rules.

Incorrect. 25% is the maximum tax free percentage of your pension's value permitted by HMRC. LGPS allows you to use your AVC to get your tax free lump sum up to the 25% maximum. It's only calculating the size of the notional pot that's tricky. Some DB's don't offer you any way to get yourself to 25%, but OP has correctly identified the path and is on the right track.

Thanks...when you say I'm on the right track, are my calculations and assumptions generally correct?

I'm aware there's no "pot" but I've used the term for the purposes of calculation since that's how it's worked out.
I'm a few years from retiring (aged 51) but I'd like to get an idea of roughly what I'm projected to receive so I have enough time to make any adjustments.

Secret2ndAccount

Yes, I'm saying you are right that you can use your AVC as TFLS, and right to be trying to max the AVC part so as to minimise commutation of the DB fund. In fact, if you can't get enough into your AVC, I would accept falling short of the 25% ceiling in order to preserve the DB fund. The commutation rate is bad.
I used to work on 20 x annual + TFLS +AVC as the size of the pot, but I am aware that there now seems to be a new calculation. It has been quoted on this forum but I can't think of a good search term to find it again.