Civil service- Premium Alpha pension advice for my Dad!

RobinRedBreast1999

I turned 65 in March of this year. I work full time in the Civil Service. I joined in 2022. Classic pension was accrued in the late 1970's which is a small amount. I would like to take partial retirement in March 2026. State pension plus Alpha and classic will provide an annual income of £16.787.00. My current gross income is just over £40.000. I hope to reduce my work days to 3 from 5. I will cease to pay NI once 66. My plan is to take the max lump sum available which is projected at £37.530.00. in order to do house repairs and invest the balance left. Mortgage free and no outstanding loans or credit cards. Car bought outright a few years ago. Not used daily. OH  is self employed, but currently recovering from hospital op. (My income supports the household, so I am not including my OH's pension etc for the moment.)Same age as me. A  20% reduction in salary or hours worked is a requirement, however, I wish to drop my hours by 14 from 35 to 21. However, my plan is to continue working until 67, health and motivation being a determining factor. I am struggling to decide if I am understanding how to calculate what my eventual monthly income from employment will be. Any help shall be greatly appreciated. Plus, anything that I should consider whilst making this decision? Thank you in advance! 

QrizB

Most people would be better off not taking any more than them minimum lump sum from a CS pension. You're unlikely to earn more from investment than the value of the pension you're giving up.

Suzycoll

hugheskevi said:

hdot94 said:

hugheskevi said:

To take a lump sum requires commutation of Premium or alpha pension at the rate of £1 of annual pension for £12 of tax free lump sum. Ignoring inflation uplifts and investment returns, a basic rate taxpayer would need to survive for 15 years from commencing pension to be better off from choosing pension instead of lump sum..

I came to the same conclusion that taking this was beneficial and will opt to take the full tax-free 25% on partial retirement. 

A 65 year old male in the Civil Service pension scheme is expected to live to age 86-87 (slide 22 ). So about 21 years of pension receipt.

For such an individual, taking no lump sum would likely be the best financial choice. After 20% income tax, they should get inflation-linked annual pension equal to about 17 times the gross annual pension (21 years * 80% post tax income) compared to 12 years if commuted into lump sum.

I think there are other considerations such as if you don't take the lump sump initially and pass away then that money is effectively lost. Yes, your dependents will get a spousal pension but this would be a lot lower.

Also, it doesn't take into account that you the lump sum would grow if you for example invested it.

Spousal pension is unaffected by choice of whether or not to take a lump sum. There is also a 5 year guarantee which means a minimum of 5 years of pension will be paid in the event of dying shortly after commencing pension. The people inheriting the estate would still be worse off than if the member had taken a lump sum, but the risk is somewhat mitigated by the guarantee.

The longevity risk is symmetrical, ie, there is a risk of dying early which would favour lump sum, but there is also a risk of living longer which favours the pension.

A 65 year old male would need investment returns net of fees of slightly over 4% above inflation for the lump sum to generate more than taking the pension and investing the pension received each year over a period of 21 years (assuming basic rate taxpayer in all future years, 2% inflation, and investments are free of tax, eg, invested in ISA). That is not implausible, but it will require a decent amount of investment risk.

Nonetheless, commutation of pension into lump sum is popular, with about 80% of total possible commutation across the whole scheme being selected by members (typically maximum commutation by the majority, and no commutation by a minority).

May I please jump on this post to ask about the 'spousal ' pension mentioned

I am single & will remain single. Apparently I will get something back when I finally retire from CS ? (called widows??)

However CS pension are unable to tell me how much this would be !
Does anyone know how this 'refund' is calculated & if it will be added to lump sum or pension ? 

Thanks

hugheskevi

Suzycoll said:

hugheskevi said:

hdot94 said:

hugheskevi said:

To take a lump sum requires commutation of Premium or alpha pension at the rate of £1 of annual pension for £12 of tax free lump sum. Ignoring inflation uplifts and investment returns, a basic rate taxpayer would need to survive for 15 years from commencing pension to be better off from choosing pension instead of lump sum..

I came to the same conclusion that taking this was beneficial and will opt to take the full tax-free 25% on partial retirement. 

A 65 year old male in the Civil Service pension scheme is expected to live to age 86-87 (slide 22 ). So about 21 years of pension receipt.

For such an individual, taking no lump sum would likely be the best financial choice. After 20% income tax, they should get inflation-linked annual pension equal to about 17 times the gross annual pension (21 years * 80% post tax income) compared to 12 years if commuted into lump sum.

I think there are other considerations such as if you don't take the lump sump initially and pass away then that money is effectively lost. Yes, your dependents will get a spousal pension but this would be a lot lower.

Also, it doesn't take into account that you the lump sum would grow if you for example invested it.

Spousal pension is unaffected by choice of whether or not to take a lump sum. There is also a 5 year guarantee which means a minimum of 5 years of pension will be paid in the event of dying shortly after commencing pension. The people inheriting the estate would still be worse off than if the member had taken a lump sum, but the risk is somewhat mitigated by the guarantee.

The longevity risk is symmetrical, ie, there is a risk of dying early which would favour lump sum, but there is also a risk of living longer which favours the pension.

A 65 year old male would need investment returns net of fees of slightly over 4% above inflation for the lump sum to generate more than taking the pension and investing the pension received each year over a period of 21 years (assuming basic rate taxpayer in all future years, 2% inflation, and investments are free of tax, eg, invested in ISA). That is not implausible, but it will require a decent amount of investment risk.

Nonetheless, commutation of pension into lump sum is popular, with about 80% of total possible commutation across the whole scheme being selected by members (typically maximum commutation by the majority, and no commutation by a minority).

May I please jump on this post to ask about the 'spousal ' pension mentioned

I am single & will remain single. Apparently I will get something back when I finally retire from CS ? (called widows??)

However CS pension are unable to tell me how much this would be !
Does anyone know how this 'refund' is calculated & if it will be added to lump sum or pension ? 

Thanks

This only applies to the classic and classic plus pension schemes.

Members of these schemes receive a refund of the 1.5% Widows Pensions Scheme (WPS) contributions they made throughout their career. A deduction is made to account for the potential of a post retirement marriage, and interest is paid (the dedection and interest often broadly cancel out).

The refund forms part of the Pension Commencement Lump Sum, so it is tax-free as long as it is paid within 12 months of the pension coming into payment.

You can read about it at this link.

Suzycoll

hugheskevi said:

Suzycoll said:

hugheskevi said:

hdot94 said:

hugheskevi said:

To take a lump sum requires commutation of Premium or alpha pension at the rate of £1 of annual pension for £12 of tax free lump sum. Ignoring inflation uplifts and investment returns, a basic rate taxpayer would need to survive for 15 years from commencing pension to be better off from choosing pension instead of lump sum..

I came to the same conclusion that taking this was beneficial and will opt to take the full tax-free 25% on partial retirement. 

A 65 year old male in the Civil Service pension scheme is expected to live to age 86-87 (slide 22 ). So about 21 years of pension receipt.

For such an individual, taking no lump sum would likely be the best financial choice. After 20% income tax, they should get inflation-linked annual pension equal to about 17 times the gross annual pension (21 years * 80% post tax income) compared to 12 years if commuted into lump sum.

I think there are other considerations such as if you don't take the lump sump initially and pass away then that money is effectively lost. Yes, your dependents will get a spousal pension but this would be a lot lower.

Also, it doesn't take into account that you the lump sum would grow if you for example invested it.

Spousal pension is unaffected by choice of whether or not to take a lump sum. There is also a 5 year guarantee which means a minimum of 5 years of pension will be paid in the event of dying shortly after commencing pension. The people inheriting the estate would still be worse off than if the member had taken a lump sum, but the risk is somewhat mitigated by the guarantee.

The longevity risk is symmetrical, ie, there is a risk of dying early which would favour lump sum, but there is also a risk of living longer which favours the pension.

A 65 year old male would need investment returns net of fees of slightly over 4% above inflation for the lump sum to generate more than taking the pension and investing the pension received each year over a period of 21 years (assuming basic rate taxpayer in all future years, 2% inflation, and investments are free of tax, eg, invested in ISA). That is not implausible, but it will require a decent amount of investment risk.

Nonetheless, commutation of pension into lump sum is popular, with about 80% of total possible commutation across the whole scheme being selected by members (typically maximum commutation by the majority, and no commutation by a minority).

May I please jump on this post to ask about the 'spousal ' pension mentioned

I am single & will remain single. Apparently I will get something back when I finally retire from CS ? (called widows??)

However CS pension are unable to tell me how much this would be !
Does anyone know how this 'refund' is calculated & if it will be added to lump sum or pension ? 

Thanks

This only applies to the classic and classic plus pension schemes.

Members of these schemes receive a refund of the 1.5% Widows Pensions Scheme (WPS) contributions they made throughout their career. A deduction is made to account for the potential of a post retirement marriage, and interest is paid (the dedection and interest often broadly cancel out).

The refund forms part of the Pension Commencement Lump Sum, so it is tax-free as long as it is paid within 12 months of the pension coming into payment.

You can read about it at this link.

Thank you very 😊