LGPS retirement: is a larger lump sum or pension better?

[Pollypensions]

I live by myself and get state pension . I am retiring next month and will have an LGPS pension. ( I am taxed quite heavily at moment but wanted to work)Is it better to go for large sum and small pension or the other way round.
i am 67 and also get a small works pension from my late husband.
I have tried to phone our payroll to ask questions but they can’t give answers- I just wanted to know if the lump sum is tax free and if I went for a lump sum and roughly the £10000 pension - how much would I get a month.

I really suggest contacting the offices of the LG pension scheme in your area. Whenever I have a query they are most helpful.

You need independent financial.advice.
The lump sum is tax free.
It's about life expectancy and the balance of your assets
How much is the annual pension if you take the lump sum and how much if you don't?

You say your pension will be £10k if you take the £100k lump sum and you have you state pension and your dh's pension.

Add the pensions together and divide by 12, look.at your tax threshold and deduct your tax. You may have to submot tax returns moving forward.

My understanding is that you sacrifice approx £1k for every £12k of lunp sum.

Your payroll office can't advise, they are likely not registered financial advisers.

You can ask for pension forecasts both with and without the lump sum. A 25% lump sum is tax free. It’s really just then a case of sitting down and working out your actual monthly income and making a decision about how you want to take it.

The LGPS for where I work is run by (name of county) pensions, they have a website that is separate from that of my employer. I can log into a portal on the website and use a tool that shows me what lump sum and annual pension I would get. For example, I can move the slider to vary the lump sum and see the pension I would get if I chose a lump sum of that amount.

PPs are correct in that your pension team can’t tell you which combination of lump sum and pension is “best” for you - only financial advisers can do that. The pension team can only give you factual information about the pension.

Your pension department would give you a forcast it has 2 or 3 options
If i recall its all or two of these
Lump sum no pension
Smaller lump sum and a monthly pension
Pension no lump
Its 25% tax free of lump sum

It's also worth considering how long your family tend to live for. If you are only likely to live to your early 70s then you might want to enjoy the lump sum, but if you are likely to live to 100, then you may appreciate having a larger pension to cope with living costs.

Some people use it to pay off their mortgage, but using it to give to your local church group and holidays may be a less wise decision.

Agree with everyone else.

Your payroll, or your pension providers, can't tell you which is "best" as that is subjective, not objective.
But also, they can't know all the things that would even affect their 'opinion', even if they were allowed to give one, as they don't know if you need to re-roof your house, or replace your car, or have money upfront to do some other 'big expense'. They won't know if you want to push the boat out when you retire and go on that World cruise for 6 months, or even do something like pay off outstanding mortgage or other debts.
Mostly, they can't know how long you are going to live.
If you live to be 107, then more pension for the next 40 years is going to be far better for you than a lump sum now BUT, if you die at 71, then, financially, takng the larger lump sum now is going to be better than just getting 4 years of a higher amount of pension.

See, I’m always a bit flummoxed by having to decide how long I will live for. Dad died at 65, mum at 83. I’m 63. I don’t smoke but drink alcohol within reasonable limits. Exercise a bit and have been trying to do 10k steps daily. But who knows what’s lurking deep in the organs of my body?

I am not so close to retiring, but i have a friend who is a financial adviser and helps me with my pensions. In our last meeting I was saying how do you know which option to do, and he said "always take the lump sum". I am going to do that. You don't have to!

It’s really important that you get proper advice on this (by which I mean NOT Mumsnet!), not least because the LGPS is a Defined Benefit pension scheme, not a Defined Contribution scheme, which does make a difference to your decision - and many people responding won’t even recognise that, let alone understand the implications. Get some time with a financial advisor - it will be well worth it.

Nobody can really answer which option would be best for you without knowing how long you are going to live!

What is your health like?

The decision to take a larger lump sum and smaller pension is very personal to someone’s circumstances.
I had to make that decision when I took my pension. I decided to take an additional lump sum (ALS) with a reduced pension. I used the ALS to pay off my mortgage, the amount my pension was reduced by was far below the monthly mortgage payments. I continued to work part time, and as the lump sum is tax free, by taking the ALS it meant that less of my monthly pension was clawed back in tax. The remaining lump sum has been invested and is now worth substantially more than it did 6 years ago. I had already calculated how much income I needed to live on until my State pension kicked in and knew I could manage on the reduced pension.
I now receive both my State pension and teacher pension and am able to save some of my income. With increases, my teacher pension is now greater than it was before I took the ALS (my pension was reduced by £3K but it’s now £5K greater than 6 years ago).

That’s really bad advice! Converting annual pension to lump sum will be beneficial in some circumstances, not so much in others. It takes around 13 years to ‘break even’ when converting pension into lump sum but if you live more than 13 years, you’re losing out.
My DM took an additional lump sum of £60K at 55, reducing her pension by £5k. She lived for 30 years after retirement so started to lose out when she was 68. If she had not taken the ALS, she would have received a further £85K in pension payments (increased by annual uplifts).

I’m taking a larger lump sum and smaller pension (NHS). I want that money now whilst fit and healthy to spend and enjoy it, and gift to my young adult children now, when they need it. If I live to 80 plus I’ll start slowly losing out. But the bar by then will be much lower, I may be too frail or demented to care.
Having seen family members spend hundreds of thousands on care whilst subsidising Bob in the room next door who had nothing, quite happy to be Bob tbh.

I’ve got an NHS pension, though I still work part time.

I attended a pre retirement session at work who suggested if you’re not on a state pension (I know you are but I’m 60 so don’t get it yet) you can ‘preload’ your state pension by getting the bigger lump sum. This gives you the option of taking a larger sum while you’re still able to do things. Later on when you’re less able and not going on so many holidays etc you’ve still got work and state pension to live on.

plus with me my dad died at 56 and mum at 67. I know you never know when the grim reaper will strike, but I figure I don’t have longevity genes so I may as well make the most of it!

When I retired I took the standard lump sum and had state pension. My colleague who retired at the same time took a larger lump sum (100k) to put down as a deposit on a house. But his wife (younger) was working so they were better doing that. Each to their own but once your lump sum is spent that's it. You have to look at your circumstances and decide what suits you.

My DH had the same dilemma 2 years ago. He is healthy except for a dodgy knee caused by rugby in his past. He chose to take 25 percent lump sum as tax free and bigger pension for life which if he dies I'll get 50 percent for my life time. If you take bigger lump sum I believe you pay more tax.

Have you had your free government pensionwise appointment? If not, I would thoroughly recommend share.google/qzfaQ00vn0OtChF11

Everybody that I know who had a Defined Benefits pension scheme took the largest lump sum and the lower monthly pension. DH & I both worked in businesses with DB schemes so know quite a few people who have done this.
I can't remember the exact calculation on mine but I think it was something like 18 years before the break even point. Now I took my pension at 60 and hope to live beyond 78 but, my state pension will kick in at 67 and the general thought is that you'll want to enjoy your money more in early retirement. I can vouch for the fact that my parents spent very little in their later years (lived to 86/87).
But it does very much depend on your retirement plans and your living costs - and don't forget to factor in replacing cars or major household replacements/maintenance.

It’s important to note that the survivor’s pension in the LGPS (if you are married), is very low compared with the survivor’s pension in DC pensions. So that might factor in to how much lump sum you take up front.

It sounds awful, but you need to consider how long you may live for given family history. I put the options (max lump sum and subsequent monthly pension amount vs minimum lump sum and monthly pension amount) into AI and asked it to work out the age I’d need to live to with both options to ‘beat the bank,’ it was interesting to think about…

This illustrates my previous point exactly. So in a defined benefit pension, the survivor’s pension is nowhere near 50%!

@autumnaunt exactly that, it’s a guesstimate. I retired 6 years ago, my health has actually taken a plummet since. Hereditary heart issues, was fine at the time.

We sat and did the sums, I chose the bigger lump sum. I agree with what @Spidey66 has written. Now are the healthier years. Because I now have a diagnosed heart issue my travel insurance is double what DH costs.

Let’s be honest most 75 years ago olds aren’t hiking up Kilimanjaro, I’m sure a few could but most can’t.

The lump sum will be tax free, Labour are scrutinising pensions, many wanting rid of triple lock and there are IHT legislation proposals. I would just take as much as possible now.

If you get 10k pa it’s £833 per month plus your state pension is £1045 per month. So 1879 per month plus whatever your DH pension was. Remember you pay tax on anything over the standard regular tax allowance so for you that’s taxable income of at least 9977 plus you need to add on your DH pension. So you will pay tax of at least 2k PA.

Usually people are too quick to recommend taking financial advice on this site but this is one of the situations where some discrete advice could be well worth it.

The commutation rate for the LGPS is 12, which is generally considered quite poor (for every £12 you take as a lump sum you give up £1 annual income). There is a calculator on the website which you can use to model different choices.

Things to consider-

• what tax band will you be in? Giving up £1 taxed at 20% is less attractive than giving up £1 taxed at 40%
• any reason to think you're likely to live for an especially long or short time? Average life expectancy at your age is 88.
• anything specific you would do with the lump sum if you took it?
• how much income do you need to meet your basic living costs? Once that's covered (through a combination of SP, your late husband's pension (was that DB?) and a proportion of your LGPS pension) the benefit to you of more guaranteed income versus the flexibility of the lump sum may change.
• Do you have children you'd like to leave money to? If so, that would be a factor in favour of taking the larger lump sum.

Generally speaking, most people will end up better off not taking the lump sum with a commutation rate of 12 but whether it's the right decision for you depends so much on your personal circs and preferences. It's definitely not one size fits all.

Thank you all so much for answering - still unsure but lots to think about- I am going to talk with the financial advisor who sorted out my husbands pension when he died.
I appreciate everyone who commentated.

Don't believe the idea you will get by. Struggling on less is not a good option. You need to be receiving what you were getting at work or more to enjoy retirement imo