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

Silvertabby

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.

Noooo! 

Under redundancy, the pension accrued to the last day of service is paid without any actuarial reductions.  It is NOT enhanced to what it would have been had the fund member carried on working/contributing to the scheme until normal retirement age.  The times I have had this conversation.....

In this case, and using figures for example only...

Works/contributes to NRA/age 67
Pension payable  = £15K per year.

Worked/contributed to age 58, then left on normal/voluntary retirement.
Pension accrued = £10K per year
£10K minus early payment reduction of £4k
Pension payable = £6K per year

Worked/contributed to age 58, then made redundant.
Pension accrued = £10K.
Pension payable (without early payment reductions) = £10K per year.

Still well worth having, though!  

letsomebodyloveyou

Silvertabby said:

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........

Thank you for the explanation @Silvertabby - my goal was to get another job enabling me to rejoin LGPS, but not for at least 4 weeks otherwise I will lose my redundancy payout. Will hang on until the redundancy pension is in payout too. Thank you  

Marcon

letsomebodyloveyou said:

Marcon said:

letsomebodyloveyou said:

Hi, I am being made redundant on 31 Aug at 58 years old. I had no intention of retiring as I simply cannot afford to. I have only been part of the LGPS for 7 years, no other pension. Apparently I have to start taking my pension, and therefore have to choose between the max conversion option of a lump sum and reduced annual pension, or take the standard unreduced annual pension (no lump sum). Neither amount is enough to live on, so I will have to find another job anyway.

I thought it would just mean finding another job, but the whole 'having to start taking my pension early' has thrown me as I was banking on that pension for when I actually planned to retire at 67. I am aware that I will have to pay tax on my annual pension when I get another job. The MoneyHelper site doesn't seem to help with what I understand is a defined benefit CARE pension.

My question is... am I better off taking the estimated reduced annual pension of £6k and investing the £40k lump sum now, or opting for the greater annual pension of £10k? It is only that high as my employer is putting an extra amount in due to making me redundant before my usual retirement age. My £3k redundancy will keep me off the streets for a little while until I find a new job. 

My limited understanding calculations suggest a break even with these two options at age 70, so if I live longer than 70 I am better off not taking a lump sum. Is that too simplistic?

Apologies if the answer is obvious - it is not obvious to me. Thank you for any thoughts  

Have you recognised the huge benefit that your LGPS pension is being early (ie before the scheme's Normal Retirement Age) without any reduction for early payment? Most people would give their eye teeth for that sort of golden goodbye from a job.

You say you were 'banking on that pension for ...when you retire at 67' but the pension is still going to be there in its entirety - it isn't a defined contribution scheme, where taking cash out early depletes the pension pot. Once you begin to draw the LGPS pension, it will increase each year, so I think there's a bit of confusion somewhere.

Sorry @Marcon I missed this bit. A lot of confusion my end Are you saying the amount of pension I will get each year between now and 67 is made up from the extra amount my employer is putting in, and that the actual amount I have already built up in my pension will not have reduced by me having to take my pension early? 

Just checking that the pile of answers you've had in the last couple of hours have now answered this fully and in a way you can understand, despite your current distress?

If the penny has dropped, you'd have realised that the title to your thread should in fact read:

...redundancy means I have can to take my LGPS pension at 58 without reduction for early payment

letsomebodyloveyou

gwynlas said:

When I was made redundant at 52 I knew that I had finished and was not ready for another job though i had planned to take my pension at 57 anyway as maximum would have been paid in. Resented thought of paying more tax 

Some people were very indignant at the term redundancy as they saw it as me being made redundant not my role.some debt through other circumstances

I was lucky and managed financially though did get into some debt through other circumstances until Statutory Pension age approaching

Outside of the lump sum which is your choice but might be useful to pay down mortgage think of your pension as allowing you to perhaps take on a lower paid role than you might have had to consider as I'm sure you have many transferable skills

Thanks for your insight @gwynlas - now the initial shock has worn off I am going to make the most of a few weeks off whilst looking for another role. Perhaps part time on good salary, or lower paid, or whatever I can find. I hope you are enjoying your retirement  

letsomebodyloveyou

BrilliantButScary said:

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.

Thanks @BrilliantButScary - annual salary increases have been pretty much non-existent working in schools for the last 22 years. I have worked since I was 16, apart from a brief maternity break, so I think I am on track for the full state pension, but will double check. I will snatch away, thank you  

Secret2ndAccount

Silvertabby said:

Noooo! 

Under redundancy, the pension accrued to the last day of service is paid without any actuarial reductions.  It is NOT enhanced to what it would have been had the fund member carried on working/contributing to the scheme until normal retirement age.  The times I have had this conversation.....

In this case, and using figures for example only...

Works/contributes to NRA/age 67
Pension payable  = £15K per year.

Worked/contributed to age 58, then left on normal/voluntary retirement.
Pension accrued = £10K per year
£10K minus early payment reduction of £4k
Pension payable = £6K per year

Worked/contributed to age 58, then made redundant.
Pension accrued = £10K.
Pension payable (without early payment reductions) = £10K per year.

Still well worth having, though!  

I understand that and agree with some of it. However, my comparison is fair. By leaving at 57, Jim has only accrued 10k, reduced to 7k. So the comparison 7k for Jim and 10k for lsly is fair. We don't know what would have happened with Jim if he stayed. Might have been promoted. Might have met an untimely demise.
By being freed from their jobs at 57 both Jim and lsly have the opportunity to work somewhere else. Maybe go to the NHS and accrue the missing 5k - still leaving lsly 3k better off. Maybe get a job in the garage and build up a bit of a DC pot to add some flexibility to their spending.
Neither has been robbed of the 5k. Both have been robbed of the opportunity to accrue the 5k. Both have the opportunity to accrue somewhere else.

letsomebodyloveyou

Silvertabby said:

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.

Noooo! 

Under redundancy, the pension accrued to the last day of service is paid without any actuarial reductions.  It is NOT enhanced to what it would have been had the fund member carried on working/contributing to the scheme until normal retirement age.  The times I have had this conversation.....

In this case, and using figures for example only...

Works/contributes to NRA/age 67
Pension payable  = £15K per year.

Worked/contributed to age 58, then left on normal/voluntary retirement.
Pension accrued = £10K per year
£10K minus early payment reduction of £4k
Pension payable = £6K per year

Worked/contributed to age 58, then made redundant.
Pension accrued = £10K.
Pension payable (without early payment reductions) = £10K per year.

Still well worth having, though!  

Love a worked example - thank you @Silvertabby  

letsomebodyloveyou

Marcon said:

letsomebodyloveyou said:

Marcon said:

letsomebodyloveyou said:

Hi, I am being made redundant on 31 Aug at 58 years old. I had no intention of retiring as I simply cannot afford to. I have only been part of the LGPS for 7 years, no other pension. Apparently I have to start taking my pension, and therefore have to choose between the max conversion option of a lump sum and reduced annual pension, or take the standard unreduced annual pension (no lump sum). Neither amount is enough to live on, so I will have to find another job anyway.

I thought it would just mean finding another job, but the whole 'having to start taking my pension early' has thrown me as I was banking on that pension for when I actually planned to retire at 67. I am aware that I will have to pay tax on my annual pension when I get another job. The MoneyHelper site doesn't seem to help with what I understand is a defined benefit CARE pension.

My question is... am I better off taking the estimated reduced annual pension of £6k and investing the £40k lump sum now, or opting for the greater annual pension of £10k? It is only that high as my employer is putting an extra amount in due to making me redundant before my usual retirement age. My £3k redundancy will keep me off the streets for a little while until I find a new job. 

My limited understanding calculations suggest a break even with these two options at age 70, so if I live longer than 70 I am better off not taking a lump sum. Is that too simplistic?

Apologies if the answer is obvious - it is not obvious to me. Thank you for any thoughts  

Have you recognised the huge benefit that your LGPS pension is being early (ie before the scheme's Normal Retirement Age) without any reduction for early payment? Most people would give their eye teeth for that sort of golden goodbye from a job.

You say you were 'banking on that pension for ...when you retire at 67' but the pension is still going to be there in its entirety - it isn't a defined contribution scheme, where taking cash out early depletes the pension pot. Once you begin to draw the LGPS pension, it will increase each year, so I think there's a bit of confusion somewhere.

Sorry @Marcon I missed this bit. A lot of confusion my end Are you saying the amount of pension I will get each year between now and 67 is made up from the extra amount my employer is putting in, and that the actual amount I have already built up in my pension will not have reduced by me having to take my pension early? 

Just checking that the pile of answers you've had in the last couple of hours have now answered this fully and in a way you can understand, despite your current distress?

If the penny has dropped, you'd have realised that the title to your thread should in fact read:

...redundancy means I have can to take my LGPS pension at 58 without reduction for early payment

Yes thank you @marcon - I'm a vaguely intelligent woman until it comes to pensions

Usually I help others rather than asking for help myself - have just helped to secure an additional £13k tax-free redundancy payout for my colleague by sharing my knowledge.

My employer has made this far more stressful by their approach and actions throughout the short redundancy process. I can only hope that I actually receive the amounts in my pension estimate. 

However, I do understand my pension position better now thanks to the kind folk on this forum taking the time to respond  

Brie

Just to add to the positive thoughts - I got hired by a large company in 2008 at the age of 51 and they announced redundancies 3 months later, found another role in the company and then they announced redundancies 5 years later (58 yo).  Found another role in the company and then they announced redundancies 3 years later (61 yo).  Found another role in the company and they announced redundancies another 3 years later (64 yo).  I practically cheered at that point as I knew I could retire, but I got another job with someone else and have finally retired nearly another 3 years on (67).  You can get a job if you want a job.  Might not be the job you expected but it might also be the best job you've ever had.  I've enjoyed each job better than the one before since 2008.  

letsomebodyloveyou

Brie said:

Just to add to the positive thoughts - I got hired by a large company in 2008 at the age of 51 and they announced redundancies 3 months later, found another role in the company and then they announced redundancies 5 years later (58 yo).  Found another role in the company and then they announced redundancies 3 years later (61 yo).  Found another role in the company and they announced redundancies another 3 years later (64 yo).  I practically cheered at that point as I knew I could retire, but I got another job with someone else and have finally retired nearly another 3 years on (67).  You can get a job if you want a job.  Might not be the job you expected but it might also be the best job you've ever had.  I've enjoyed each job better than the one before since 2008.  

Thanks @Brie - certainly looking forward to seeing what opportunities arise