Max TFLS with LGPS/AVC

Knowhere

Hi,

I’ve now turned 55 and for various reasons was hoping to take early retirement, accepting the reduction factors which would apply to my LGPS.
For a while now I’ve ploughed as much as I can into my Pru in-house AVC, and from the very helpful calculations provided on this forum I believe - as planned - I’m pretty near the cusp of reaching the maximum TFLS with my LGPS lump sum also factored in.

I’m aware that if I exceed that figure, I should have an option to purchase index linked LGPS benefits.  But what I’m not sure of is if they would still be subject to the same reductions as per the rest of the pension?

I really need to know as my thoughts were to reduce or even stop paying in to the AVC around now just in case I’d be losing out.

However to throw a spanner in the works, I’ve now heard there is a possibility that voluntary redundancies could offered in my company in the Summer/Autumn.  Clearly then it makes sense for me to hang on and see how that pans out. 
Of course, if I was successful, my pension wouldn’t be reduced so presumably this will raise the maximum possible TFLS and hence it seems it would make sense for me to carry on building up my AVC…?

Any thoughts you could offer?

Silvertabby

Knowhere said:

Hi,

I’ve now turned 55 and for various reasons was hoping to take early retirement, accepting the reduction factors which would apply to my LGPS.
For a while now I’ve ploughed as much as I can into my Pru in-house AVC, and from the very helpful calculations provided on this forum I believe - as planned - I’m pretty near the cusp of reaching the maximum TFLS with my LGPS lump sum also factored in.

I’m aware that if I exceed that figure, I should have an option to purchase index linked LGPS benefits.  But what I’m not sure of is if they would still be subject to the same reductions as per the rest of the pension?

I really need to know as my thoughts were to reduce or even stop paying in to the AVC around now just in case I’d be losing out.

However to throw a spanner in the works, I’ve now heard there is a possibility that voluntary redundancies could offered in my company in the Summer/Autumn.  Clearly then it makes sense for me to hang on and see how that pans out. 
Of course, if I was successful, my pension wouldn’t be reduced so presumably this will raise the maximum possible TFLS and hence it seems it would make sense for me to carry on building up my AVC…?

Any thoughts you could offer?

The factors for converting AVCs to LGPS benefits are age related, so using £X of AVCs at 55 will buy you considerably less LGPS pension than the same amount would buy you at SPA/67.

It would certainly make sense to hang on if you have a sniff of redundancy.

Knowhere

Hi Silvertabby 
Thank you for the quick reply.
So is it simply the age related conversion to consider?
Or if I did retire under my own steam (not redundancy) would there any reductions applied as well for early payment as per the different elements of the pension itself?

Silvertabby

Knowhere said:

Hi Silvertabby 
Thank you for the quick reply.
So is it simply the age related conversion to consider?
Or if I did retire under my own steam (not redundancy) would there any reductions applied as well for early payment as per the different elements of the pension itself?

It's 6 of one and half a dozen of the other.  Your AVC bought additional benefits wouldn't be reduced for early payment, because that had already been accounted for by the use of a lower (age related) conversion factor.

Using VERY rough figures for example only ...

If your AVC of £XX would buy you £500 of fully index linked LGPS pension from age 67/SPA, that same £XX AVC may only buy you £250 of fully index linked LGPS pension from age 55.  No further reduction for early payment would be applied, as the age related conversion factor has already taken that into account.

Just to add - if you were to be made redundant, only your main scheme benefits would be paid without any early payment reductions.  Any additional pension bought with your AVCs would still be age related.  

Further - apologies if I'm teaching you to suck eggs, but I've known many people get this wrong in the past......if you were to be made redundant, then your pension would be the amount you had accrued up to your last day of service, and not what you would have accrued had you continued working until 67/SPA.

Knowhere

Thanks again Silvertabby, your information encouraged me to do some more research.
So, I've now found this page - https://www.lgpsregs.org/schemeregs/actguidance.php
If I'm reading the spreadsheet that links to correctly, I reckon at 55 and in reasonable health it is a conversion factor of approx £4 extra LGPS for every £100 of excess AVC.  Does that sound about right?
That being the case, in very simplistic terms it'd seem to take 25 years to 'get my money back' (though I appreciate the £100 hasn't cost me that going in, its index linked etc).
Being clueless about anything like this, does that seem a good deal?
Are there any other alternatives to buying extra LGPS if I have excess AVC?
Or is the cautious approach to stop paying in to the AVC before I exceed the maximum as redundancy is far from guaranteed?
Thanks in advance (again!).

Silvertabby

4% at 55 sounds about right - and is better than a comparable open market annuity (if you can even  get an annuity with spouse's benefits, 5 year guarantee and uncapped CPI increases for life).

Your only alternative to buying LGPS benefits would be to transfer your excess AVCs to a personal plan, then take (taxable) draw down.  To be honest, if you don't go over the AVC tax free limit by much, then the least hassle option by far would be to buy LGPS additional pension.

Knowhere

Thank you.
I’Il have to have a good think about it but stopping my AVC and ensuring I don’t have an excess whatever the circumstances seems like it might just be easier/safer.
If so, I would ensure the amount I normally put in the AVC is saved/invested to have available if necessary when I take the benefits.

SarahB16

Knowhere said:

Thank you.
I’Il have to have a good think about it but stopping my AVC and ensuring I don’t have an excess whatever the circumstances seems like it might just be easier/safer.
If so, I would ensure the amount I normally put in the AVC is saved/invested to have available if necessary when I take the benefits.

Ensuring that I don't have an excess that I would need to take as additional pension is something that I'm very mindful of too.

I'm c.10 years away (hopefully) from retirement at c.62 years but based on my current £1,000 (gross) contribution a month I use forecasting tools which show what this could grow to in 10 years with £1,000 a month contributions and varying levels of growth.  Noting in the years from 62 to 65 the growth is likely to be lower as I derisk my AVC pot.  

https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php  

I'm not overly concerned about exceeding my limit a little (due to the AVC cannot exceed LGPS DB pension x 6.6666 rule) but what is also key for me is to keep in the lower rate of tax bracket due to my AVC contributions and in a couple of years or so I may need to increase my AVC contributions above the £1,000 a month because of this.   

Rather than paying say £1,500 a month into my AVC (and only attracting the additional tax relief of a lower rate tax payer) I would ideally rather put that £500 into an ISA for the added flexibility of having this as an ISA that can be drawn upon below the age of 65 (the age I expect to draw my LGPS pension and take my AVC pot). 

The reason I have posted this is there might be some people on here aged c.45-50 years and are throwing everything at their LGPS AVC pot (i.e. even where the contributions only attract lower rate of tax) and then cannot take it all as a tax free lump sum until they draw down their LGPS pension.  Noting of course you can take your pension below 65 and have the actuarial reductions (but some people do prefer to still wait to 65 or even 67).  

I think the ideal scenario is to try to forecast what is the maximum LGPS AVC pot you can take based on what you think your LGPS pension will be, the number of years of contributions and an expected rate of return (I know all this is difficult to predict) and also being mindful of the maximum tax free cash limit of £268,275.  

Aylesbury_Duck

SarahB16 said:

Knowhere said:

Thank you.
I’Il have to have a good think about it but stopping my AVC and ensuring I don’t have an excess whatever the circumstances seems like it might just be easier/safer.
If so, I would ensure the amount I normally put in the AVC is saved/invested to have available if necessary when I take the benefits.

Ensuring that I don't have an excess that I would need to take as additional pension is something that I'm very mindful of too.

I'm c.10 years away (hopefully) from retirement at c.62 years but based on my current £1,000 (gross) contribution a month I use forecasting tools which show what this could grow to in 10 years with £1,000 a month contributions and varying levels of growth.  Noting in the years from 62 to 65 the growth is likely to be lower as I derisk my AVC pot.  

https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php  

I'm not overly concerned about exceeding my limit a little (due to the AVC cannot exceed LGPS DB pension x 6.6666 rule) but what is also key for me is to keep in the lower rate of tax bracket due to my AVC contributions and in a couple of years or so I may need to increase my AVC contributions above the £1,000 a month because of this.   

Rather than paying say £1,500 a month into my AVC (and only attracting the additional tax relief of a lower rate tax payer) I would ideally rather put that £500 into an ISA for the added flexibility of having this as an ISA that can be drawn upon below the age of 65 (the age I expect to draw my LGPS pension and take my AVC pot). 

The reason I have posted this is there might be some people on here aged c.45-50 years and are throwing everything at their LGPS AVC pot (i.e. even where the contributions only attract lower rate of tax) and then cannot take it all as a tax free lump sum until they draw down their LGPS pension.  Noting of course you can take your pension below 65 and have the actuarial reductions (but some people do prefer to still wait to 65 or even 67).  

I think the ideal scenario is to try to forecast what is the maximum LGPS AVC pot you can take based on what you think your LGPS pension will be, the number of years of contributions and an expected rate of return (I know all this is difficult to predict) and also being mindful of the maximum tax free cash limit of £268,275.  

A really interesting post, thanks.  I'm one of those throwing lots at my LGPS-linked AVC. The value of my AVC is currently 39% of the aggregated value of my whole LGPS+AVC, so well above the 25% amount I could take entirely tax-free at the point I start drawing my LGPS.  My current thinking is to take the actuarial reduction associated with beginning my LGPS a few years early, take the maximum TFLS at the same time, and use the excess to buy more LGPS, perhaps getting back towards the LGPS value I would receive had I waited until 67.

I'm only 52 though, so there's plenty of time for my earning circumstances to change, along with my retirement plans.

SarahB16

Aylesbury_Duck said:

SarahB16 said:

Knowhere said:

Thank you.
I’Il have to have a good think about it but stopping my AVC and ensuring I don’t have an excess whatever the circumstances seems like it might just be easier/safer.
If so, I would ensure the amount I normally put in the AVC is saved/invested to have available if necessary when I take the benefits.

Ensuring that I don't have an excess that I would need to take as additional pension is something that I'm very mindful of too.

I'm c.10 years away (hopefully) from retirement at c.62 years but based on my current £1,000 (gross) contribution a month I use forecasting tools which show what this could grow to in 10 years with £1,000 a month contributions and varying levels of growth.  Noting in the years from 62 to 65 the growth is likely to be lower as I derisk my AVC pot.  

https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php  

I'm not overly concerned about exceeding my limit a little (due to the AVC cannot exceed LGPS DB pension x 6.6666 rule) but what is also key for me is to keep in the lower rate of tax bracket due to my AVC contributions and in a couple of years or so I may need to increase my AVC contributions above the £1,000 a month because of this.   

Rather than paying say £1,500 a month into my AVC (and only attracting the additional tax relief of a lower rate tax payer) I would ideally rather put that £500 into an ISA for the added flexibility of having this as an ISA that can be drawn upon below the age of 65 (the age I expect to draw my LGPS pension and take my AVC pot). 

The reason I have posted this is there might be some people on here aged c.45-50 years and are throwing everything at their LGPS AVC pot (i.e. even where the contributions only attract lower rate of tax) and then cannot take it all as a tax free lump sum until they draw down their LGPS pension.  Noting of course you can take your pension below 65 and have the actuarial reductions (but some people do prefer to still wait to 65 or even 67).  

I think the ideal scenario is to try to forecast what is the maximum LGPS AVC pot you can take based on what you think your LGPS pension will be, the number of years of contributions and an expected rate of return (I know all this is difficult to predict) and also being mindful of the maximum tax free cash limit of £268,275.  

A really interesting post, thanks.  I'm one of those throwing lots at my LGPS-linked AVC. The value of my AVC is currently 39% of the aggregated value of my whole LGPS+AVC, so well above the 25% amount I could take entirely tax-free at the point I start drawing my LGPS.  My current thinking is to take the actuarial reduction associated with beginning my LGPS a few years early, take the maximum TFLS at the same time, and use the excess to buy more LGPS, perhaps getting back towards the LGPS value I would receive had I waited until 67.

I'm only 52 though, so there's plenty of time for my earning circumstances to change, along with my retirement plans.

Part of my thinking is that I also have a small DC pot that I wish to fully draw down (age c.62 to 65) and not pay any tax on it (using my personal tax allowance) and also have another DB pension that I will start drawing at c.63. 

Who knows what the higher rate threshold will be in c.10 years' time and whilst I doubt I will be a higher rate tax payer in retirement when my state pension commences it might possibly push me into the higher rate (too far off to accurately predict at this stage).  Of course, if that looked likely I could begin drawing down my LGPS pension earlier so that the annual pension was lower.  

I obviously don't know all your financial circumstances @Aylesbury_Duck but the beauty of this excellent forum is that it gives us different ideas and let's us consider different options too.   

Aylesbury_Duck

SarahB16 said:

Aylesbury_Duck said:

SarahB16 said:

Knowhere said:

Thank you.
I’Il have to have a good think about it but stopping my AVC and ensuring I don’t have an excess whatever the circumstances seems like it might just be easier/safer.
If so, I would ensure the amount I normally put in the AVC is saved/invested to have available if necessary when I take the benefits.

Ensuring that I don't have an excess that I would need to take as additional pension is something that I'm very mindful of too.

I'm c.10 years away (hopefully) from retirement at c.62 years but based on my current £1,000 (gross) contribution a month I use forecasting tools which show what this could grow to in 10 years with £1,000 a month contributions and varying levels of growth.  Noting in the years from 62 to 65 the growth is likely to be lower as I derisk my AVC pot.  

https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php  

I'm not overly concerned about exceeding my limit a little (due to the AVC cannot exceed LGPS DB pension x 6.6666 rule) but what is also key for me is to keep in the lower rate of tax bracket due to my AVC contributions and in a couple of years or so I may need to increase my AVC contributions above the £1,000 a month because of this.   

Rather than paying say £1,500 a month into my AVC (and only attracting the additional tax relief of a lower rate tax payer) I would ideally rather put that £500 into an ISA for the added flexibility of having this as an ISA that can be drawn upon below the age of 65 (the age I expect to draw my LGPS pension and take my AVC pot). 

The reason I have posted this is there might be some people on here aged c.45-50 years and are throwing everything at their LGPS AVC pot (i.e. even where the contributions only attract lower rate of tax) and then cannot take it all as a tax free lump sum until they draw down their LGPS pension.  Noting of course you can take your pension below 65 and have the actuarial reductions (but some people do prefer to still wait to 65 or even 67).  

I think the ideal scenario is to try to forecast what is the maximum LGPS AVC pot you can take based on what you think your LGPS pension will be, the number of years of contributions and an expected rate of return (I know all this is difficult to predict) and also being mindful of the maximum tax free cash limit of £268,275.  

A really interesting post, thanks.  I'm one of those throwing lots at my LGPS-linked AVC. The value of my AVC is currently 39% of the aggregated value of my whole LGPS+AVC, so well above the 25% amount I could take entirely tax-free at the point I start drawing my LGPS.  My current thinking is to take the actuarial reduction associated with beginning my LGPS a few years early, take the maximum TFLS at the same time, and use the excess to buy more LGPS, perhaps getting back towards the LGPS value I would receive had I waited until 67.

I'm only 52 though, so there's plenty of time for my earning circumstances to change, along with my retirement plans.

Part of my thinking is that I also have a small DC pot that I wish to fully draw down (age c.62 to 65) and not pay any tax on it (using my personal tax allowance) and also have another DB pension that I will start drawing at c.63. 

Who knows what the higher rate threshold will be in c.10 years' time and whilst I doubt I will be a higher rate tax payer in retirement when my state pension commences it might possibly push me into the higher rate (too far off to accurately predict at this stage).  Of course, if that looked likely I could begin drawing down my LGPS pension earlier so that the annual pension was lower.  

I obviously don't know all your financial circumstances @Aylesbury_Duck but the beauty of this excellent forum is that it gives us different ideas and let's us consider different options too.   

 
I see a lot of people on here concerned about ending up in the HRT bracket in retirement.  Is it really something to worry about?  It's definitely one for the "nice problem to have" category and I appreciate that minimising any tax is desirable, but it seems a strange approach to artificially impoverish oneself for certain periods when one should be enjoying the fruits of one's lifetime of hard work at the back end of one's life.