Thoughts on Delaying Claiming Civil Service Classic Pension

JamesCoster

Thanks @Subaru_WRX

If I do defer my Classic pension, how is the deferred amount paid to me once I do take it – i.e. as a single sum added to my lump sum or divided over a number of subsequent months.

horsewithnoname

I believe you get the “arrears” as a lump sum, from normal pension age till you claim it, then an ongoing pension 

hugheskevi

horsewithnoname said:

I believe you get the “arrears” as a lump sum, from normal pension age till you claim it, then an ongoing pension 

And just for avoidance of doubt, the lump sum arrears are a taxable lump sum, separate to the non-taxable Pension Commencement Lump Sum (PCLS) that Classic provides. 

The PCLS you will receive is just the amount you would have been paid had you taken the pension at age 60, and never increases.

Yorkie1

• [quote] 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 [/quote]

Just thinking through the maths of the Classic aspect if not claimed at 60 with a worked example.

Say, for the sake of argument: at age 60, your salary is £30K. You have twenty years' service, so 20/80 of salary is pension of £7500; lump sum would be x3, therefore £22500.

Do not claim Classic until three years later, at age 63. Assume that inflation for each of the intervening years is 2%. So, the pension figures per year would have been:

• Age 60 = £7500
• Age 61 = £7650
• Age 62 = £7803
• Age 63 = £7959

When claiming the pension at age 63, is the following the position:?

1. Are the pension arrears the totals of the first 3 years (i.e. £22953)? Paid as a taxable lump sum.
2. You'd get an automatic lump sum of £22500 as that is the amount you would have got at age 60?
3. And thereafter an annual pension of £7959? (uplifted for inflation thereafter).
4. If the taxable arrears of pension push you into the next tax band in the tax year of receipt (for example), you can ask for a letter which sets out the amount for each of those tax years the payment covers, and ask HMRC to recalculate the historical tax for those tax years, rather than taxing you all in the year of receipt?

hugheskevi

1. Are the pension arrears the totals of the first 3 years (i.e. £22953)? Paid as a taxable lump sum.
2. You'd get an automatic lump sum of £22500 as that is the amount you would have got at age 60?
3. And thereafter an annual pension of £7959? (uplifted for inflation thereafter).
4. If the taxable arrears of pension push you into the next tax band in the tax year of receipt (for example), you can ask for a letter which sets out the amount for each of those tax years the payment covers, and ask HMRC to recalculate the historical tax for those tax years, rather than taxing you all in the year of receipt?

Yes, exactly that, for all the above.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81939000#Comment_81939000

@hugheskevi

Would it also be exactly that if you were still employed in the same job you accrued the Classic pension with and are a current member of the Alpha scheme?

hugheskevi

https://forums.moneysavingexpert.com/discussion/comment/81939035#Comment_81939035

No, if employed then no arrears would be due. The classic pension and lump sum would be calculated as at last day of service.

So in that scenario it becomes a take it or lose it position. The classic pension is still linked to earnings, but it would take a big salary increase to make it optimal to forego the pension.

An individual in this position is only working for alpha pension accrual for whatever portion of the week would be covered by pension if drawn. The 2015 Remedy helps though, as if they work meaningfully past 60 then it is very likely that choosing to have 2015-22 service in alpha will be best, so the damage is mitigated. Also, the value of alpha for those over 60 is huge - the value of the employer contribution is over 40% due to the high accrual rate, far higher than the value for a young employee.

Anyone in a public service pension scheme with a normal pension age of 60 needs to give careful thought to what they do at age 60 and understand the pension consequences.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81939124#Comment_81939124

Thanks, have an old colleague who is in this situation and I think her ideal choice would be partial retirement but if that isn't agreed it's a bit of a Hobson's choice!

Working part of the week effectively for free, albeit with a bit of extra Alpha accruing, seems an awful option but retiring and not having any salary might not be a viable option for everyone.

horsewithnoname

https://forums.moneysavingexpert.com/discussion/comment/81939124#Comment_81939124

there is no employer contribution. It is defined benefit not defined contribution- except for the partnership scheme.

hugheskevi

there is no employer contribution. It is defined benefit not defined contribution- except for the partnership scheme.

There is an actual employer contribution - 28.97% - but that is irrelevant, as it contains past service deficit payments and is averaged across the whole scheme so is of no practical use in determining the value of pension.

But the pension clearly has a value. That is determined by actuaries and represents the cost to the Exchequer of providing the pension and the value to the individual. Some of the cost is met by employee contributions, and the remainder of whatever the cost is of providing the pension to the individual is the value of the contribution of the Exchequer (or the employer, the same thing in this context).

Hence why I say "the value of the employer contribution" rather than referring to the employer contribution itself, as for an older employee, the value of the employer contribution is far higher than the stated 28.97% actual employer contribution.