Advice on taking LGPS Pension early.....

Pleasereleaseme

Afternoon all....

I've virtually made my mind up to "retire" from my current LG role and am fairly comfortable with my pension forecast (almost 40 years service).  

Problem which is keeping me awake at night is whether to take the biggest lump sum (approx £100k) and smaller annual pension or lowest lump sum (approx £35k) and £5k more annual pension ??

I've been reading til I'm bored out of my mind and it seems a 50/50 split of people's advice !

It appears that the commutation rate is considered poor for the LGPS (1:12) but my head keeps telling me that the larger tax free amount would possibly earn enough interest to almost make up the difference and even if I used it for living expenses would last me many years...

Can anyone explain why the 1:12 is considered so poor a rate and offer ANY advice to finally let me sleep at night by making a decision !!

Thanks

TheSpectator

It's considered poor because it is, public sector/civil service commutation rates are amongst the lowest you can find.

You just need to weigh up the pros and cons. You don't say what age you are but say you lived for another 25 years, that's 25 years at £5,000 per year plus CPI. Savings interest rates seem to have peaked and on a downward trend.

However you also need to take into account tax on the pension vs tax free lump sum.

Perhaps a compromise is somewhere in between, taking 50% of max lump sum instead. It's all down to personal circumstances but don't be blinded by the 6 digit figures of the lump sum.

QrizB

Pleasereleaseme said:

It appears that the commutation rate is considered poor for the LGPS (1:12) but my head keeps telling me that the larger tax free amount would possibly earn enough interest to almost make up the difference and even if I used it for living expenses would last me many years...

Everyone forgets about inflation, and that LGPS pensions increase by CPI.

If you sacrifice £5k pa of LGPS pension, you'll get £60k. If you invest £60k and earn 5% on it, while CPI runs at 3%, then take £4k pa (uprated by CPI every year) from the investment to replace the LGPS pension (after 20% tax) that you surrended, you'll run out of investment money in Year 19.

A typical 65-year-old can expect to live for 22 years or more. So, unless you've got a pressing need for the lump sum at retirement (paying off a mortgage, clearing debts, stopping Mack The Knife from fitting you with cement wellies) you'll be better off overall with the extra pension.

Here's a recent thread on this exact topic (the OP in that one was only 60, so has 27+ more years ahead of her):
https://forums.moneysavingexpert.com/discussion/6576572/pension-higher-or-lower-lump-sum

Pleasereleaseme

Thanks for the responses... I'm turning 56 this year, so hopefully lots of years ahead of me... and I've no pressing need for the larger lump sum to be honest... most people are saying take the lump sum and enjoy it now etc... but just want some balanced, informed views before I decide...

BillyHorner

If you are thinking of retiring in the near future you should be absolutely hammering AVCs for all they're worth. The only downside of AVCs linked to your LGPS pension is that you have to wait until retirement to access the cash, but that doesn't sound like a long wait for you.

Even if you only end up doing it for a few months, you'll get tax relief on the way in (and NI relief if you can do salary sacrifice) and be able to take it all as tax free cash on retirement. Just make sure you've got it in a low risk fund (e.g. cash fund), if you're close to retirement.

Much better option than the paltry 12:1 commutation rate.

Nebulous2

Turn it around and look at what the £5k a year is 'worth.'  You couldn't buy a £5k CPI linked pension with  survivor benefits for £60k. 

I had an unusual situation in that I didn't have an automatic lump sum, so didn't take one at all. I retired in 2021 at 59. 

Since then I've had; 3.1%, 10.1% and  6.7% inflation linked increases. This year it will only be 1.7%, but I certainly have no regrets at my decision. 

I'm in a position where most of my day-to-day spending is met by my pension, and having that drop into my bank once a month is very reassuring. 

We have money invested, and it's reassuring knowing it is there, but I have a reluctance to spend it, because once it is gone it is gone. I don't feel that way about my pension. 

This is a personal decision as much as a financial one. For most people the pension beats the lump sum financially, but there is something hugely attractive and seductive about that big lump of cash. 

Nebulous2

BillyHorner said:

If you are thinking of retiring in the near future you should be absolutely hammering AVCs for all they're worth. The only downside of AVCs linked to your LGPS pension is that you have to wait until retirement to access the cash, but that doesn't sound like a long wait for you.

Even if you only end up doing it for a few months, you'll get tax relief on the way in (and NI relief if you can do salary sacrifice) and be able to take it all as tax free cash on retirement. Just make sure you've got it in a low risk fund (e.g. cash fund), if you're close to retirement.

Much better option than the paltry 12:1 commutation rate.

Completely agree. I've just said I didn't take a lump sum, but that isn't quite true.

Shortly before retiring I started putting £800 net into an AVC. I then made a fairly quick decision to retire. I had only paid 3 months, but got £3k back tax-free at a cost of £2.4k. 

Finding spare money to commit in your last few months / years could be very worthwhile. 

Kynthia

You'll never get consensus because whether it's a good idea or not depends on your individual circumstances and your goals which are different for everyone.

Personally I think there's a good chance I'll take the maximum lump sum despite it not being the best rate for a few reasons:
1. My husband and I have worked in the public sector our whole lives and therefore when combined with our state pensions will have more guaranteed annual income than we need to live on. Therefore we can afford to reduce it.
2. As we don't have workplace DC pots we have less funds we can access flexibly to pay for holidays, large house/car expenses, and weddings/house deposits for our children a lump sum from our DB pensions would give us that flexibility. 
3. Our DB pensions can't be inherited by adult children so extracting some for a lump sum that can be inherited is attractive to us.

These reasons won't apply to everyone as they rely on someone having no DC pot, an excess of DB income, and children to leave an inheritance to. Even then someone with a different risk appetite might make a different choice.

The main thing is to make sure you have enough DB income to live on comfortably for a long time before you start reducing it.

Cobbler_tone

You see this dilemma time and time again on here. It is because we don't often (sometimes ever) get six figures tax free waved under our noses. Then it is hard to imagine the value of £5k (or whatever it is) a year. Firstly because we don't know how long we are here and old age still seems a long time away. It is probably similar to convincing some 30 year olds to contribute at a healthy level into a pension.
The one thing I always think is if you can enjoy the extra money now (whilst you can) and will you realistically need to worry about having the extra income later in old age? If it is a key part of your overall retirement income then it's a different decision. 
It's the same as bridging pensions and valuing having more now vs a more modest income later.
There is no right/wrong answer but if it is troubling you that much then maybe meet in the middle?

I do wonder how many people take the lump sum and then struggle in poverty in later years? I've certainly never read that story on here.

Sarahspangles

Cobbler_tone said:

I do wonder how many people take the lump sum and then struggle in poverty in later years? I've certainly never read that story on here.

You certainly see posts across MSE from people who can’t afford the overheads and maintenance of their home, or to make adaptations as they age. And there are people who are ‘managing’ but could have had more fun money if they’d right-sized at the right time. I’m not saying these are consequence of taking a lump sum, it’s about what you do with it. Paying off a mortgage with a lump sum when you have no plan/capital to fund long term upkeep isn’t sustainable.

Cobbler_tone

Sarahspangles said:

Cobbler_tone said:

I do wonder how many people take the lump sum and then struggle in poverty in later years? I've certainly never read that story on here.

 And there are people who are ‘managing’ but could have had more fun money 

If they had previously taken their lump sum they may have used up their quota of 'fun'. 

It gives people choices and decisions to make. We are the ones who have to live by them. I have read where people have taken lump sums to give straight to their children. I struggle with that one (without always knowing the full context but I assume it can sometimes impact on their own standard of living)....but that's the beauty of life. We are all different and have to make grown up decisions.