So confused... planning to retire at 67, redundancy means I have to take my LGPS pension at 58

letsomebodyloveyou

la531983 said:

letsomebodyloveyou said:

Thank you @Marcon - no I don't understand the huge benefit.

Basically you are getting at least £36k (9 years @ 4k) before you should be doing under normal circumstances.  I say "at least" as it will go up by inflation each year.

Thank you @la531983 - I rounded the figures in my original post. So if the difference between taking an annual pension pension with/without a lump sum is actually £3100, are you saying I am getting £27,900 before I should be? I am clearly being a bit dim  

Aylesbury_Duck

Park the lump sum for a minute, I think it's confusing matters.

You're actually in a reasonable position (apart from losing your job of course, which is know is difficult).  You are able to draw your LGPS now, with no reduction for taking it nine years early.  It will continue to rise with inflation, too.    The lump sum is a different matter.  Taking the lump sum reduces your annual pension income and unless you leave the lump sum untouched and invested wisely, it's unlikely to realise the same value as the full annual pension.  I understand that if you think it might be a while before you're earning again, and the redundancy and notice pay (plus any savings) will run out before your next job, that the lump sum may be attractive, but if you can get by, taking the full pension and no lump sum will almost certainly be the better bet.  Unless you have a health problem that might see you off in the next few years...

daveyjp

Unless the recipient has a limited life expectancy paying a lump sum is usually of more financial benefit to the pension provider than it is to the individual.

Silvertabby

You will get the pension you have accrued up to your last day of service, but receiving payment on redundancy terms means that your benefits aren't reduced for early payment.

As has already been said, the employer strain costs have no bearing on the pension you will receive but, as you are curious.... The employer strain costs reflect the difference between your unreduced pension, and what would have been your pension (ie, after 9/10 years of early payment reductions)  had you taken normal retirement on the same day.  Multiplied by the number of years you are expected to live.  Based on your pension figures and age that will be a HUGE amount and is a reflection of how redundancy pension payments aren't to be sniffed at!

Back to your full pension/reduced pension with lump sum question, the LGPS commutation rate is a p. poor 1:12.  ie, you give up £1,000 of fully index linked pension for the rest of your life in return for a one-off tax free lump sum of £12,000.  The break even point is about 12 years, so the longer you live beyond 70 the better off you will be with the full pension.

Being made redundant from this post won't stop you re-joining the LGPS in another position, but I would suggest that you don't do that until your redundancy pension is in payment.  Just keeps things simple........

letsomebodyloveyou

daveyjp said:

I wouldn't worry about strain costs and how numbers are calculated or breaking even.  It makes no difference to your payment.

At 58 you could be receiving  this pension income for 40 years.  A £40k sum is tempting, but will need continual management to beat inflation over such a length of time.

The £10k a year is guaranteed to increase with inflation with no ongoing management or costs to achieve that and consijdering you only have 7 years service it is one hell of a deal.  Someone in LGPS who isn't made redundant would need many many years service to retire at 58 and achieve £10k a year due to the significant deductions for early retirement, something you aren't subject to.

Thank you @daveyjp - I've got about 12 years in LGPS, but 5 of those were on a really low salary so I thought they wouldn't have counted for much. Wished I'd joined LGPS when I first started working in schools in 2003 but I was advised against it at the time and my salary then was really low... I did make some AVCs for 3 years when my salary improved and I changed employer but stayed in LGPS.

Your comments were really helpful - thank you  

BrilliantButScary

daveyjp said:

I wouldn't worry about strain costs and how numbers are calculated or breaking even.  It makes no difference to your payment.

At 58 you could be receiving  this pension income for 40 years.  A £40k sum is tempting, but will need continual management to beat inflation over such a length of time.

The £10k a year is guaranteed to increase with inflation with no ongoing management or costs to achieve that and considering you only have 7 years service it is one hell of a deal.  Someone in LGPS who isn't made redundant would need many many years service to retire at 58 and achieve £10k a year due to the significant deductions for early retirement, something you aren't subject to.

I think you should 'snatch their hand off' at £10k per annum! You will not be paying NI contributions or pension contributions on this, so it is worth a lot more.

Increases in the LGPS pension, based on CPI, were
9.1 % in 2022 and 7.3% in 2023, therefore faring a lot better than salary increases. 

As another poster stated, you could find another job at £10k less than your current salary and still be quids in.

I would recommend that you check your state pension forecast, to see if you are already eligible for a full state pension.

https://www.gov.uk/check-state-pension

Secret2ndAccount

Fred works in the garage around the corner. Fred has a Defined Contribution pension. Each month, he pays in a bit of his wages, and his employer pays in a bit too. Gradually, a pot of money builds up. At age 68, or could be 58, Fred has to look at this pot of money, and decide how much he can take out each month. Take too much, and the pot could run out. It can work out fine for people who save enough, and do well with their investments, but it can be stressful, and it CAN RUN OUT.

Jim works for local government. His pension isn't really a pot - it's a Defined Benefit pension. Think of it like a continuing salary. He gets a payment every month for life. It increases every year to cope with inflation. It can never run out. He has a very good idea of how much he can afford to spend every month.

Would you prefer to be Fred or Jim?

Opt for the small lump sum, and the larger guaranteed salary for life. 

If Jim chooses to retire at 57, he can access his pension early. However, to recognise that he is getting it for a lot of extra years, they pay him a much reduced pension. If Jim was in line for 10k/yr at 65, he will only get about 7k/yr from age 57, and for the rest of his life. Because you are being made redundant, they are paying you the full 10k from day one and for as long as you live. Think of it as an extra 3k/yr for 30 years.

I'm sorry that you have lost your job, and that it was so sudden, but they have given you a gold plated parachute here, so not all bad.

letsomebodyloveyou

daveyjp said:

Unless the recipient has a limited life expectancy paying a lump sum is usually of more financial benefit to the pension provider than it is to the individual.

I'm a survivor so I'm not planning to peg it just yet @daveyjp ! Not sure I want to live to 98 though  

letsomebodyloveyou

Aylesbury_Duck said:

Park the lump sum for a minute, I think it's confusing matters.

You're actually in a reasonable position (apart from losing your job of course, which is know is difficult).  You are able to draw your LGPS now, with no reduction for taking it nine years early.  It will continue to rise with inflation, too.    The lump sum is a different matter.  Taking the lump sum reduces your annual pension income and unless you leave the lump sum untouched and invested wisely, it's unlikely to realise the same value as the full annual pension.  I understand that if you think it might be a while before you're earning again, and the redundancy and notice pay (plus any savings) will run out before your next job, that the lump sum may be attractive, but if you can get by, taking the full pension and no lump sum will almost certainly be the better bet.  Unless you have a health problem that might see you off in the next few years...

Thanks @Aylesbury_Duck - I am not planning on going anywhere yet! I had thought that not taking the lump sum was probably the better option in the long term, but didn't understand about no reductions for taking it early or inflation or other stuff mentioned by @daveyjp too.  Thank you for your thoughts - really helpful

letsomebodyloveyou

Secret2ndAccount said:

Fred works in the garage around the corner. Fred has a Defined Contribution pension. Each month, he pays in a bit of his wages, and his employer pays in a bit too. Gradually, a pot of money builds up. At age 68, or could be 58, Fred has to look at this pot of money, and decide how much he can take out each month. Take too much, and the pot could run out. It can work out fine for people who save enough, and do well with their investments, but it can be stressful, and it CAN RUN OUT.

Jim works for local government. His pension isn't really a pot - it's a Defined Benefit pension. Think of it like a continuing salary. He gets a payment every month for life. It increases every year to cope with inflation. It can never run out. He has a very good idea of how much he can afford to spend every month.

Would you prefer to be Fred or Jim?

Opt for the small lump sum, and the larger guaranteed salary for life. 

If Jim chooses to retire at 57, he can access his pension early. However, to recognise that he is getting it for a lot of extra years, they pay him a much reduced pension. If Jim was in line for 10k/yr at 65, he will only get about 7k/yr from age 57, and for the rest of his life. Because you are being made redundant, they are paying you the full 10k from day one and for as long as you live. Think of it as an extra 3k/yr for 30 years.

I'm sorry that you have lost your job, and that it was so sudden, but they have given you a gold plated parachute here, so not all bad.

Thank you @Secret2ndAccount - I'll be Jim then now that I understand my 'pot' won't run out. Thank you for your help, really useful