Civil Service pension - buying lump sum

MetManMark

Hi there

I am 50 and plan to retire at 60 so still a few years off… I have a mix of Alpha and Premium pension that I continue to build up. My statements show the amount that I will get in terms of an annual amount and that I have the option of "selling" some of this to get a lump sum. I don't "need" a lump sum to pay off a mortgage or anything like that so had assumed that I would just take the annual payment. But colleagues at work who are at retirement age have been saying that it makes most sense to sell as much as possible to get as big a lump sum as possible. This is with a view to investing it as (1) they say that the lump sum is tax free and (2) it will yield more than if you leave it as civil service pension. Is this right?

I am also contributing to a SIPP so I could take the lump sum and put it into a SIPP but I know that there are limits to how much you can add to a SIPP once you retire.

Thanks in advance for any thoughts. Note that I realise that everyone's circumstances are different and that I should get financial advice nearer the time, but I was interested in people's views and whether there is a general rule of thumb people followed…

Thanks

M

Dazed_and_C0nfused

Are you just getting a one off payment of £12 for each £1 of pension you are agreeing to give up?

You then lose that £1 forever (and all the (uncapped) annual inflation increases it would attract).

If you don't have any need for the lump sum it seems an expensive and unnecessary way of getting one.

You could easily be getting that pension for 30+ years.

Marcon

https://forums.moneysavingexpert.com/discussion/6654242/civil-service-pension-buying-lump-sum

What makes you think your colleagues know what they're talking about? Conventional wisdom (which should of course be set against personal circumstances) is that the public sector schemes have very poor 'commutation' (technical jargon for giving up some of your regular annual pension in exchange for a tax free lump sum) rates and unless you have an immediate need/use for a tax free lump sum, such as paying off debt which carries a high level of interest, then thinking twice about giving up a future inflation-linked stream of income would be a very good idea.

Whether getting tax free cash and investing it would give a better outcome will depend very much on how much risk you're prepared to take.

daveyjp

As you note all cisrcumstances are different, but your colleagues are demonstarting very little knowledge of pensions. The temptation of seeing a huge sum in a bank account and the magic words 'tax free lump sum' can cloud and impair judgement.

Why would you cash in part of a pension (which is already 'invested' in a risk free scheme and pays a guaranteed inflation proof income for life) and then take on all the risks (and costs) associated with investing the money yourself?

Selling £1 of this guaranteed income a year ( increasing each year by inflation) for £12 isn't considered a good deal (other than for the taxpayer who pays the pension).

Marcon

I am also contributing to a SIPP so I could take the lump sum and put it into a SIPP but I know that there are limits to how much you can add to a SIPP once you retire.

Even if you had sufficient earnings to put such a hefty contribution into your SIPP (your contributions are limited by your earnings), it would be classed as pension recycling, with the attendant tax penalty.

MetManMark

Thank you. Enough said.... Appreciate your thoughts