Defined benefit pension and redundancy

Silvertabby

Albermarle said:

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

LGPS ( and some other public sector pensions) have these poor commutation rates. Apparently most still take the lump sum though. They can not resist the cash !

In my day over 90% of LGPS pensioners took the maximum lump sum.  

Helps to keep the scheme affordable.

Lemon_dr1zzle

Silvertabby said:

Albermarle said:

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

LGPS ( and some other public sector pensions) have these poor commutation rates. Apparently most still take the lump sum though. They can not resist the cash !

In my day over 90% of LGPS pensioners took the maximum lump sum.  

Helps to keep the scheme affordable.

Still the same. Most members would never have received a large pay increase, let alone a bonus, having access to large amounts of tax free cash is extremely attractive.  This board is not the norm, people want the money now, to go on holidays, pay off the mortgage etc. they aren’t working out that by their 85th birthday they might be 25p better off if they didn’t commute. 

Kernowshep

artyboy said:

Wilson64 said:

Pat38493 said:

Wilson64 said:

Hi

I just want to run my situation past the people on this forum, so as to get your feedback and comments.

I will be made redundant on 31 May, after 20 years with the same employer.
This means I will be getting the maximum statutory redundancy pay, plus three months pay in lieu of notice. This comes to a total amount of about £25k after tax.

I will also be taking my pension (I am nearly 60). Since this has come about through redundancy, I will be able to take the pension unreduced at its current level. I have about 27 years worth of a local government defined benefit pension.

In terms of the actual figures, I could take anything from a maximum lump sum of 65k with a reduced pension of £9,811, to a minimum lump sum of £12,899 with a maximum yearly pension of 14k. (The commutation factor is 1 x 12).

Having thought long and hard about this, my preferred option at the moment is a halfway house approach, in which I take 15% of the lump sum (39k) with an annual pension of 12k. This would seem to combine the best of both worlds, in which I get a reasonable lump sum but without eating into too much of my pension. And I would avoid paying any tax as it falls under the personal allowance tax threshold.

If I were to go for this option, adding the 39k lump sum to the redundancy payment of £25k makes a total of 64k. I then plan to pay off my mortgage (which is only 34K), thus leaving me mortgage free with 30k left, together with a 12k pension.

Is my reasoning sound? Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

First £30K of severance payments is normally tax free, so can you clarify what you mean by "after tax"?

Yes, it's just the pay in lieu of notice that I was referring to as being taxable. The rest is not taxed.    

Is there any opportunity to put some/all of your PILON into your pension to increase the payout there? If you don't need that money now, it could be a worthwhile investment...

+1 re this especially if you can get it into a linked AVC ideally via salary sacrifice (it can be taken as a tax free lump sum if taken at the same time as the rest and will have had the tax benefits on the way in).

zagubov

IIRC, in the Teachers Pension you could increase your lump sum but there wasn't an obvious easy way to reduce it. Everybody I knew just took the basic lump sum (like I did). Very few increased it; most seemed aware you could be around for along time after retirement.

Wilson64

Pat38493 said:

Wilson64 said:

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

Thanks for your comment. Could you explain a bit more how I would be better off taking the higher pension and paying the mortgage off over its normal term? I'm paying £400.17 a month at a fixed rate of 1.78%, but this mortgage deal ends next April. I'll then revert to the SVR. I'm finding it hard to get my head round this...

The commutation factor of 1 to 12 basically means you only have to live 12 years more before you are better off, which presumably is pretty likely for you?  Further, it is probably even less than 12 years once you take into account the inflation protection on the pension which is usually very good on public sector pension schemes i.e you get full uncapped increases so when inflation is 10% like in 2022, you get the full increase.  Generally public sector schemes have a 1:12 factor which is a lot worse than most other DB schemes where it's more like 20 or above.  This is presumably because public sector schemes don't have an obligation to make sure that you are being treated fairly when you take a lump sum because there is no pot of money sitting behind that has to be fairly managed for all members by trustees.  That said, I've heard that most public sector employees still take the lump sum anyway....  it's just that financially speaking it's not a good deal.

Regarding the mortgage - you don't have to stay on the SVR you could take out a new mortgage deal.  There is a reasonable chance that by next April interest rates will have started to come down and mortgage deals will be available at lower rates.  

You won't get a 1.78% rate, but if you get a rate less than 4%, you can probably beat that rate by investing the money instead.  So if there are good rates available next April you could take out maybe another 2 year fix?  Fundamentally if your investment return exceeds your mortgage rate, then in theory you are better off by not paying off the mortgage.  On the other hand, there is also the psychological comfort of feeling mortgage free, which some people see as more important than the pure math of the finance side.

How long does your mortgage have left to run?

That's the simple explanation - in reality it may be a bit more complex because you may or may not pay more or less tax by using the different scenarios and this could swing it the other way - e.g. if the annual mortgage payments pushed you into the next tax bracket the extra tax might cancel out whatever you gain on returns.

It's always a bit of a gamble though because you could end up with a negative year on investments, but on average you would be better off over longer periods.

Thanks for your comments, very useful. 

To answer your question, I have about 7 years left to run on my mortgage.

Wilson64

Silvertabby said:

Albermarle said:

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

LGPS ( and some other public sector pensions) have these poor commutation rates. Apparently most still take the lump sum though. They can not resist the cash !

In my day over 90% of LGPS pensioners took the maximum lump sum.  

Helps to keep the scheme affordable.

Hi, could you explain how taking the maximum lump sum makes the scheme affordable? 

AlanP_2

Wilson64 said:

Silvertabby said:

Albermarle said:

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

LGPS ( and some other public sector pensions) have these poor commutation rates. Apparently most still take the lump sum though. They can not resist the cash !

In my day over 90% of LGPS pensioners took the maximum lump sum.  

Helps to keep the scheme affordable.

Hi, could you explain how taking the maximum lump sum makes the scheme affordable? 

Because most people will be worse of over a reasonable retirement period if they take the lump sum at a 1:12 rate the scheme is better off hence contribution rates are held down.

Andy_L

zagubov said:

IIRC, in the Teachers Pension you could increase your lump sum but there wasn't an obvious easy way to reduce it. Everybody I knew just took the basic lump sum (like I did). Very few increased it; most seemed aware you could be around for along time after retirement.

That was about 2 schemes ago, when it came with a lower pension (based on 1/80ths salary) but an automatic 3x lump sum.
It then changed to a 1/60ths salary based scheme but without a lump sum. The option to commute pension for lump sum at 1:12 gave you almost the same result as as the older 1/80ths 3x lump sum scheme if you take the max lump sum which, I suspect, is why the ratio was chosen.