Pension - Higher or lower lump sum

Phossy

On the other hand I met someone on a cruise who had taken the maximum lump sum, they had worked out that the reduced pension plus state pension was more than enough to live on.  They were then spending the lump sum on lots of expensive holidays including cruises while they still had the energy, front loading that higher expenditure. This doesn't seem daft to me.

..that is my plan! More seriously, front loading for me is also about helping our kids get established at a time when they can more benefit from that help. (I also think as you get older, the system starts to make it harder to pass money on).

poseidon1

finbaar said:

Good grief! What is wrong with people? If you are in the fortunate position, at any time of life, to be in the 40% (or 45%) income tax bracket then you are doing very well. Doing things to avoid this situation in mental.

Sadly,  we appear to be a very tiny minority that appreciate the merits of generating excess income beyond immediate needs. C'est le vie.

ali_bear

Worth pointing out that a commutation rate of 12:1 to get more PCLS looks like 15:1 when you are going to pay 20% tax on the income, and 20:1 when you are going to pay 40%. Probably not many are going to pay 40% tax on all of that income though. 

The ONS says that the OP (a 60 year old woman) has a 50% chance of living beyond 87 and a 25% chance of living beyond 95. 

Bigphil1474

OP, worth checking your employer rules, but some councils don't allow you to be better off after starting phased retirement. For example, If your annual salary is now £30k your new salary and monthly pension added together cannot add up to more than £30k per year (doesn't include lump sum). This is usually down to the particular council 's rules not LGPS rules, but you need agreement to do phased retirement so it can scupper plans. Bear in mind that in order to agree to phased retirement, the general rule is that whatever % of your job you stop doing has to be taken off the structure (in order for the employer to show a saving) so can't be done without their agreement.

In all the scenarios I've looked at on behalf of my members, the 'how long do you expect to live' approach has always been most useful. To put it bluntly, if you're on your last legs, max your lump sum, enjoy your final days, and get your affairs in order. If you are fit as a fiddle, then play the longer game with a lower lump sum and bigger pension. Obviously, that is still a bit of guesswork, but so long as your monthly pension covers your personal needs, anything on top is a bonus IMO.

Suzycoll

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 

Hi Roberts 12

I do not wish to comment on how much £ to take. There are some very good comments to your post.

I would just like to say to check if any dependants will get some of your pension if you die ( after fully retiring). 

The reason I mentioned this?

Regarding civil servants who are in receipt of their pension (when fully retired). If they are single when they die NO ONE will inherit their pension.

I'm not sure if this is the case with local government though?

Not trying to be maudlin but it may influence your decision

Wishing you a long happy retirement 🙂

wyadbb

Silvertabby said:

I'll say it before anyone else does - the LGPS commutation rate of 1:12 (give up £1 of fully index linked pension for the rest of your life in return for a one-off tax free £12) is a pretty p.poor rate.....

Unless you have an immediate and desperate need for the extra cash, or you have a life limiting illness, then the smaller lump sum/bigger pension should give you the overall better return.  But it's very much your choice - choose wisely and don't be influenced by 90%+ of your collegues urging you to take the bigger lump sum 'because it's what they will do'. 

P.S.  You will be re-joining the LGPS in respect of your reduced hours post, won't you?  Note that any R85 protections you may have had (in respect of any pre 2008 service) won't apply to your new record, but it's still well worth having. 

It is more complicated than that!

If you were to take the lump sum and put it into equity distribution ISAs (over a few years if >£20k) then you could get a tax free income stream from the money potential equal or greater than the loss in pension (1:12 is equivalent to a 8% return). 
The downside is the income stream wouldn't be inflation proofed unless you only took the real yield of the pot, not the cash yield (e.g. 6% vs. 8%). You would also retain the pot with its real terms value


I have run the numbers and it is sensitive to the expected return and tax you pay.
High risk equities and 8% return would beat the higher pension, and you would keep the lump sum.
6% return and the higher pension wins.
10% return and you are much better off with the lump sum.
Once you get your state pension, the whole of your pension is taxable which reduces the value of it and it swings further towards the tax free income stream from the lump sum option. 

Silvertabby

wyadbb said:

Silvertabby said:

I'll say it before anyone else does - the LGPS commutation rate of 1:12 (give up £1 of fully index linked pension for the rest of your life in return for a one-off tax free £12) is a pretty p.poor rate.....

Unless you have an immediate and desperate need for the extra cash, or you have a life limiting illness, then the smaller lump sum/bigger pension should give you the overall better return.  But it's very much your choice - choose wisely and don't be influenced by 90%+ of your collegues urging you to take the bigger lump sum 'because it's what they will do'. 

P.S.  You will be re-joining the LGPS in respect of your reduced hours post, won't you?  Note that any R85 protections you may have had (in respect of any pre 2008 service) won't apply to your new record, but it's still well worth having. 

It is more complicated than that!

If you were to take the lump sum and put it into equity distribution ISAs (over a few years if >£20k) then you could get a tax free income stream from the money potential equal or greater than the loss in pension (1:12 is equivalent to a 8% return). 
The downside is the income stream wouldn't be inflation proofed unless you only took the real yield of the pot, not the cash yield (e.g. 6% vs. 8%). You would also retain the pot with its real terms value


I have run the numbers and it is sensitive to the expected return and tax you pay.
High risk equities and 8% return would beat the higher pension, and you would keep the lump sum.
6% return and the higher pension wins.
10% return and you are much better off with the lump sum.
Once you get your state pension, the whole of your pension is taxable which reduces the value of it and it swings further towards the tax free income stream from the lump sum option. 

True, but in my 20 years of experience, I can't say that a single LGPS pensioner has told me that they are commuting with a view to investing it in the way you describe.

I can relate many tales, however, of new cars/kitchens/family holidays/weddings etc.  

Cobbler_tone

I usually read commutation rates quoted as a static whole number on here. I am sure that many, many schemes are no dissimilar to mine, in that 'it depends', maybe more in the private sector. Always check your specific scheme rules.

What is my commutation rate?



 

QrizB

wyadbb said:

High risk equities and 8% return would beat the higher pension, and you would keep the lump sum.
6% return and the higher pension wins.
10% return and you are much better off with the lump sum.

Most of the regulars on this forum would agree that the UK 30-year safe withdrawal rate for a 65yo retiree is around 3.5%. that's a lot less than 8%.

With an 8% withdrawal rate I'd imagine you would be more likely than not to run out of money before reaching your investment horizon.

phlebas192

spaniel101 said:

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.

The Railway pension scheme (RPS - funded) has inverse commutation via Brass contribution (AVC).   Partial Brass fund value @ NRA forms your lump sum (as opposed to reducing your annual pension), any 'excess' Brass can be inversely commuted @ 12:1 to increase annual pension.

I realise this is rather tangential to the thread, but the RPS is a perfect example of what DB pensions could have been if employers had been prepared to look beyond the short term. The Network Rail section of the RPS shows a clear surplus and has done for many years and it has been able to continue to offer such attractive terms as the one you indicate (and, indeed, which I took advantage of - using my AVC funds to buy what is in effect an inflation increasing annuity at a 8.3% rate in 2021 was the easiest financial decision I've ever made). And pretty much any long standing DB scheme should have been able to offer similar terms if they had remained open to new entrants and had been run with the long term in mind.

OTOH, I have friends in a part of the old Britsh Railways which was sequentially taken over to the point that the (closed to new entrants) pension scheme was so fragmented and underfunded that they wanted to impose something like a 80% employee contribution rate even though the privatisation bill was supposed to maintain pension rights. Obviously they couldn't push that through but the resultant bad will meant that really good employees said "sod it" and took early retirement.

Future historians will look back on the DB pension years and be amazed how it ended purely as a result of economically illiterate short term decisions. Good pensions promoted loyalty from employees at minimal cost to the employers but the former were too often seduced by charlatans and the latter by the next 6 month reporting cycle.