LGPS lump sum

[plantgirl1]

I worked in local government (Scotland) for a while but left 20+ years ago. I am now planning to start drawing down the pension from the contributions I paid in to the LGPS (final salary scheme). I am planning doing this a few months before my 60th birthday next year as I want to cut down my working hours as soon as possible, and have had an estimate which shows that the cost of taking it early is tiny. It also seems that isn't any real advantage in deferring drawing it down.

I am planning to continue to work part-time (I work freelance) for a good few years past my 60th birthday. I will still be paying contributions in to a NEST pension and I have already accrued enough years for full state pension when I reach 67. DH also has various pensions, the first one, an LGPS one like mine, falling due in a few months when he reaches 60, and others which will kick in later on.

When I received my estimate figures for lump sum and monthly payments, I was surprised to find that I could elect to draw down a further 25% lump sum tax-free, meaning that I could take £54k rather than £30k. This would mean a lower monthly pension amount but I have calculated that I would really only start losing out financially after 12 years (1212monthly reduction = £24k), when we will have other pension income coming in (assuming that we are both still around!).

I also reckon that taking the lower monthly amount and higher lump sum will save me some income tax while I am still working as the monthly pension will be calculated as part of my taxable income once I reach the annual income tax threshold. I could reinvest the extra £24k (as I will do with the £30k) to produce additional income each year, although I don't think any investment income will cover the monthly income reduction.

Am I missing something or does it make sense to take the higher lump sum now with the lower monthly amount?

I will get some independent financial advice but just wondered if anyone else has any experience with this.

Remember your pension, once you draw it, increases annually each April based on September CPI. So you also need to factor in the lost increase on the pension you convert to lump sum.

Personally with all the other pensions you have taking the higher lump sum may make sense for you.

I am planning to do the same. There's obviously arguments both ways but I think it's better for me. I've been told that once you take your pension you don't pay National Insurance any more. Unlike you, I'm not planning to work but it might mean your pension income post tax will be more than you think.

@nettie434 you don’t pay NI on your pension but do on earnings unless you are state pension age.

I suggest also doing a state pension forecast as LGPS was a contracted out scheme and many people retiring now find they are short of a full state pension. https://www.gov.uk/check-state-pension

Thanks for that clarification @Sisterpita. You are right about being contracted out of the State Pension. When I checked a while ago it was not too bad but I need to double check.

Another factor to remember is you don’t pay pension contributions on you pension. It may sound obvious but when you look at a pay slip you have a lot of deductions that aren’t deducted from a pension.

A gross to net pay calculator can show how you take home more of your pension. A lower pension than salary can see the drop in net pay being less than expected.

Finally, when you start to be paid your state pension that is untaxed so your private pension net goes down to ensure your tax is correct.

A 12:1 commutation factor is shockingly poor value - take it if you’d prefer the cash, but financially you’d be better off having it as income (unless you have reason to think you won’t live more than 12 years).

It may sound obvious but when you look at a pay slip you have a lot of deductions that aren’t deducted from a pension.

Thanks again @Sisterpita!

Agree, that is a poor commutation factor. If you don’t have an immediate need for the money (sounds like you don’t), it would usually be better to leave it as a monthly pension that’s guaranteed to increase with inflation and be paid for life.