Thoughts on Delaying Claiming Civil Service Classic Pension

123kth

Hello, first post here, as I noticed some great advice on Civil Service pensions in the forum. I would be grateful for any thoughts or experience on my current dilemma as to when to claim my preserved civil service classic pension. Here's the situation:

I turned 60 this year, so am eligible to claim my preserved Classic pension and lump sum (30 year's service, left in 2015 - so it's a reasonable amount). However, I am now a US citizen and am employed full time in the US. My wife also works, so this pushes our marginal tax rate up to 32 or 35%. Were I to claim the pension now, I would pay that marginal rate on both the lump sum (taxable in the US) and the pension - which would be unpleasant. My plan is therefore to defer claiming until our taxable income is much reduced, which may not be until 2-3 year's time.

I know that there are a few risks here: I might die (although I'm currently healthy); the exchange rate could go further south; there could be some legislative change in the UK; I'm missing out on the opportunity to invest anything left after the IRS has take their share.

Is there anything else am I missing? Thanks in advance!

Sam_666

You are working, so you should have steady income to support yourself.
If you plan to stop working in 2-3y, then this is when to take pension, it would be more tax effective.
Keep in mind you wont get tax free payments from IRS, even if HMRS gives it free.
Check tax status of each state, as they vary.

DRS1

When you stop work in the USA what will you do?  Move back to the UK?  If so maybe don't take the pension/lump sum until you are safely out of the clutches of the IRS

If you don't take the pension at 60 do you lose anything?  2 or 3 years worth of pension maybe but do early retirement factors have an impact on that?

If you take the pension now can you offset the additional tax by making extra pension contributions in the USA?  Assuming you want to have a US pension.

Do you need to take any lump sum?  What about maxing out the pension?

hugheskevi

I would be grateful for any thoughts or experience on my current dilemma as to when to claim my preserved civil service classic pension. 

As you probably know, as you are deferred, when you do claim the pension you will receive:

• Pension arrears equal to what you would have been paid had you claimed at age 60. The arrears will include the pension increases you would have got had you claimed the pension age 60. 
• The automatic lump sum you would have been paid had you claimed your pension at age 60.
• An ongoing pension that includes the increases that would have been applied since 60

Were I to claim the pension now, I would pay that marginal rate on both the lump sum (taxable in the US) and the pension - which would be unpleasant. My plan is therefore to defer claiming until our taxable income is much reduced, which may not be until 2-3 year's time.

Are you 100% certain about the taxation of arrears paid for a past period? In 2-3 year's time you would get a payment of taxable income that, if you wish, you could apply to HMRC to attribute to the past year it is applicable to and tax it accordingly. I have no idea how the US tax authorities would view this.

I know that there are a few risks here: I might die (although I'm currently healthy); the exchange rate could go further south; there could be some legislative change in the UK; I'm missing out on the opportunity to invest anything left after the IRS has take their share.

Is there anything else am I missing? Thanks in advance!

I think the main thing is the loss of investment opportunity. There is no interest paid on the arrears, nor any late payment uplift, so you just get the cash amount in a few years. During that time you could have got returns on that money that you are foregoing. The key question is whether the tax advantage would outweigh that or not.

DRS1 said:

Do you need to take any lump sum?  What about maxing out the pension?

The lump sum is automatic. It can be converted into pension via inverse commutation, but the commutation rate is set actuarially, making it far less generous than the 12:1 rate paid when members commute pension into lump sum - the inverse commutation rate is going to be closer to 20:1 (essentially a very large buy/sell spread operated by the scheme).

123kth

Thanks for the helpful responses here. Really appreciate the viewpoints. Just to address a few of them:

Unfortunately the option to do inverse commutation is no longer available after pension age. Which actually was my initial thinking to do, even though the conversion rate is somewhat unattractive. Therefore I now have no option but to take the lump sum and most likely pay tax on it in the US. As a US citizen that wouldn't change even if I moved back to the UK - you can't escape the clutches of the IRS by moving abroad.

Also, my understanding is that I will have UK tax deducted at source, at the applicable rate for the years in which the pension would have been paid. That's not really a factor, as I will just declare that on my US tax return for the year in which I receive the money, and receive a credit. I don't believe I will have to re-file taxes for previous years in the US.

I guess the decision comes down to the missed investment opportunity (which is of course not a guaranteed winner over a relatively short number of years, particularly with the current market) and the difference in my marginal tax rate next year versus that when I do retire. I would estimate that to be 22% in retirement against 32 or 35% next year. We are also maxing out our 401K (retirement fund) contributions, so there is no scope to offset pension income and save tax that way.

First world problems, I am aware and thankful.

DRS1

Ah sorry I missed the US citizen bit in the first post.  Still if you came back to the UK you can always give up the US citizenship (assuming you are also a UK national).

JamesCoster

Hi, not sure if this is the right place to post but I have a query about the Civil Service Pension.

I worked for the Civil Service for three decades, meaning I have a mixture of a Classic and Alpha pension. I left the Service a few years ago to take another job. I still work and turn 60 in a few months time.

I'm fortunate in that I don't need to take the pension at that point, so will defer taking it.

Question 1 - I assume that means I will then receive a higher monthly figure when I do eventually take it, as this is what the online modeller appears to indicate

Question 2 - The lump sum doesn't seem to increase beyond 60 - i.e. if I take the lump sum at 60, 62, 65, whatever, it remains the same?

Question 3 - If that is correct, is there any benefit in not taking the lump sum at 60 - it seems to make sense to take it and stick it in an ISA or similar?

Question 4 - Is it possible to take the lump sum and still defer the pension for a few years, or does the act of taking the lump sum automatically mean the monthly payments begin?

Thanks in anticipation,

James

hugheskevi

Question 1 - I assume that means I will then receive a higher monthly figure when I do eventually take it, as this is what the online modeller appears to indicate

You need to consider classic and alpha separately. Taking classic later will not increase it at all, nor will you receive any interest, you just get arrears back to age 60 (as you are a deferred member). 

Whereas alpha is enhanced the later you claim it, even if that is after the Normal Pension age.

Question 2 - The lump sum doesn't seem to increase beyond 60 - i.e. if I take the lump sum at 60, 62, 65, whatever, it remains the same?

You become entitled to the classic lump sum at age 60. If you don't claim it then it just remains at that level until such time as you do claim it.

Question 3 - If that is correct, is there any benefit in not taking the lump sum at 60 - it seems to make sense to take it and stick it in an ISA or similar?

Question 4 - Is it possible to take the lump sum and still defer the pension for a few years, or does the act of taking the lump sum automatically mean the monthly payments begin?

You have to take the pension at the same time as the lump sum. The only reason not to claim classic at age 60 is if you would prefer to take the income as arrears in a later year so as to benefit from a lower tax rate.

JamesCoster

Many thanks @hugheskevi, that's really helpful.

As regards my first question, whilst my pension is part classic, part alpha I can't see there's any way of only taking one element? Presumably it's al or nothing?

hugheskevi

JamesCoster said:

Many thanks @hugheskevi, that's really helpful.

As regards my first question, whilst my pension is part classic, part alpha I can't see there's any way of only taking one element? Presumably it's al or nothing?

No, they are separate pensions so you can commence either independently of the other.

Suba

JamesCoster said:

Many thanks @hugheskevi, that's really helpful.

As regards my first question, whilst my pension is part classic, part alpha I can't see there's any way of only taking one element? Presumably it's al or nothing?

Yes as said above they are two separate pensions. I am about to go partially retired where I will be claiming my classic only. I will continue to work part time and pay into my Alpha which I will claim at a later date. I am 59 so this could be several years. I know many people who have done this.