Pension - Higher or lower lump sum

katejo

Cobbler_tone said:

Single, no dependents, no mortgage. Even in London, on £29k per year and a tidy lump sum I’d be retiring!

I am in a similar position though my pension scheme offers 3 choices so my lump sum is low, medium or high. I won't be going for the high but haven't decided between low and medium. 

FIREDreamer

MeteredOut said:

LHW99 said:

But, with an ongoing income of £30K, you'd need to consider the 40% tax implications if you take the lower TFLS and higher pension (and also take state pension into account for when you get there).

Although you could always add more than the minimum to the new work pension, to avoid the 40% tax bracket, which could make up for losing the part time income in due course.

I did consider adding that, but wasn't sure whether the MPAA would come into play when the OP chose either option. But, even if so, I guess £10K contribution would help on an £59K income until state pension age.

MPAA does not apply when taking a DB pension.

katejo

Roberts12 said:

I am a 60 year old women. I plan to draw on my local government pension and reduce my working hours via flexible retirement. 

I am single with no dependents and no mortgage. Do I take the higher lump sum or the lower one? 

Higher is £140.000 tax free lump sum and £ 21, 000 annual pension 

or

Lower is £48,000 tax free lump sum and £29,000 annual pension. 

I will continue to have an income when I reduce my hours of roughly £30.000 a year. 

Thank you 

I am 61 and have already reduced my hours but don't plan to take my pension until I fully retire (maybe next year). Taking it early just didn't cross my mind at all until I heard from 2 colleagues who had done so or were planning to. My thoughts were that I had to adjust to a lower income so I might as well practise now. 

Albermarle

Silvertabby said:

Albermarle said:

It is a pity that with such a poor commutation rate, that there is not an option to not take any lump sum at all and get an even bigger pension.

LGPS inverse commutation was phased out many moons ago.  Too expensive. 

As I've said before, over 90% of LGPS retirees go for the maximum commuted tax free cash, despite the poor rate.  Helps keep the scheme affordable, I suppose! 

ADD:  A tiny number of very old deferred records still have reserved rights to inverse commutation.  Even in my time, the cost of adding software that would hardly be used was deemed to be an unneccessary expense, so the calculation had to be done manually,  Our policy was that initial pension quotes would be based on normal/maximum tax free cash options, but we would add that an entitlement to convert automatic lump sums to extra pension existed, and to ask us for the figures.  Again, over 90% of these went for the maximum tax free cash. 

I have learnt something today. I have never heard of inverse commutation before!
I just assumed the baseline for any DB pension, was maximum pension and no lump sum.
Like you say I suppose forcing you to take some lump sum at a poor commutation rate saves some money, although it sounds like very few people would take a maximum pension option anyway.

MX5huggy

katejo said:

Cobbler_tone said:

Single, no dependents, no mortgage. Even in London, on £29k per year and a tidy lump sum I’d be retiring!

I am in a similar position though my pension scheme offers 3 choices so my lump sum is low, medium or high. I won't be going for the high but haven't decided between low and medium. 

The LGPS is completely flexible on lump sum size you can have it any size you want between the 2 figures. 

Nebulous2

Albermarle said:

Silvertabby said:

Albermarle said:

It is a pity that with such a poor commutation rate, that there is not an option to not take any lump sum at all and get an even bigger pension.

LGPS inverse commutation was phased out many moons ago.  Too expensive. 

As I've said before, over 90% of LGPS retirees go for the maximum commuted tax free cash, despite the poor rate.  Helps keep the scheme affordable, I suppose! 

ADD:  A tiny number of very old deferred records still have reserved rights to inverse commutation.  Even in my time, the cost of adding software that would hardly be used was deemed to be an unneccessary expense, so the calculation had to be done manually,  Our policy was that initial pension quotes would be based on normal/maximum tax free cash options, but we would add that an entitlement to convert automatic lump sums to extra pension existed, and to ask us for the figures.  Again, over 90% of these went for the maximum tax free cash. 

I have learnt something today. I have never heard of inverse commutation before!
I just assumed the baseline for any DB pension, was maximum pension and no lump sum.
Like you say I suppose forcing you to take some lump sum at a poor commutation rate saves some money, although it sounds like very few people would take a maximum pension option anyway.

Prior to 2008 the LGPS had an automatic lump sum. It was 1/80th of final salary pension per year of service with a lump sum of 3x pension.  That still applies for people retiring for service prior to 2008.  

Jim777

Ok, I’m no expert at this, but I’ve been playing around with some figures.

I’m in the LGPS. I can increase my lump sum by £100,000 and lose £8333 pension per year which mean 12 years of pension. However, the £8,333 is taxable giving £6,667 which now equates to 15 years pension.

If though I invest the £100,000, I can expect to earn around 5% interest. If this is compounded over 20 years, after tax on the interest, my lump sum becomes equivalent to close to 40 years pension.

This would suggest to me that the taking the lump sum makes more sense. Am I missing something in my calculation or have I got this wrong? 

QrizB

Jim777 said:

Ok, I’m no expert at this, but I’ve been playing around with some figures.

I’m in the LGPS. I can increase my lump sum by £100,000 and lose £8333 pension per year which mean 12 years of pension. However, the £8,333 is taxable giving £6,667 which now equates to 15 years pension.

If though I invest the £100,000, I can expect to earn around 5% interest. If this is compounded over 20 years, after tax on the interest, my lump sum becomes equivalent to close to 40 years pension.

This would suggest to me that the taking the lump sum makes more sense. Am I missing something in my calculation or have I got this wrong? 

Your investment returns assume that you're not going to spend it.

If you plan to spend it at a steady rate, your effective investment return is about half that (like a regular saver, but in reverse).

Also, the LGPS pension increases annually with uncapped CPI, which the gilts markets seem to expect to average round 3.7% for the next 20 years. That reduces your investment return by the same abount, in real terms.

NoMore

@Jim777 Your not taking it account the inflation increase of the pension, if you can beat inflation by 5% consistently  then your maths works out, however that seems unlikely.

Sarahspangles

Jim777 said:

Ok, I’m no expert at this, but I’ve been playing around with some figures.

I’m in the LGPS. I can increase my lump sum by £100,000 and lose £8333 pension per year which mean 12 years of pension. However, the £8,333 is taxable giving £6,667 which now equates to 15 years pension.

If though I invest the £100,000, I can expect to earn around 5% interest. If this is compounded over 20 years, after tax on the interest, my lump sum becomes equivalent to close to 40 years pension.

This would suggest to me that the taking the lump sum makes more sense. Am I missing something in my calculation or have I got this wrong? 

The LGPS commutation rate is among the lowest at 1:12

You haven’t factored in that your £8,333 payment is also index linked. You mention investing, but then refer to 5% interest and paying tax on the interest. 5% interest rates on larger sums are becoming harder to find, the current situation where it’s possible to match or beat inflation with savings interest rates is likely to be short lived. Investments may beat inflation but returns aren’t guaranteed, unlike your £8,333.