Local government pension scheme- earlier access reductions

[RosieLeaLovesTea]

Hello
I got my annual pension statement last week. My normal retirement date is 06/01/0248.
My projected pension at NRD is £66,091
Automatic lump sum is £20,350

I looked at the reductions if I want to access it early. Ideally at 58. I would be retiring 10 years early.

The website says you lose 36.6% from the pension -so would you reduce the annual amount by 36.6%?

It’s says lump sum amount would reduce by 18.0%. Would I take 18.0% off £20,350?

Thanks

That seems right.

I know it sounds like a big reduction but work out your total pension under each scenario until you are, say, 80 and look at that. I think there's a lot of advantge to going early.

Presumably not all of the pension has an NRA of 68.

This is helpful. I intend to take mine early. As ill pay little tax on it before (if) i get my state pension.

Does the figure assume you’d be working up until NPA (they usually do)? If so, you’d also have to take 10 years’ accrual away from the projection before reducing it.

@AmazonAntiqueStore very good point. Yes it probably does assume that and if o leave 10years alearly the pension won’t be £66,000 per year. Probably 50,000 ish.

I can look at mine online, so can alter the date and it gives me different figures

have you thought of buying extra pension to increase the pension and still retire at 58?

@ArtieChoke I know that I can make advanced contributions and if I do I can save on tax. So this is possible for me. But in reality I am overpaying on my mortgage to finish it earlier and we are due to remortgage next year after having a low rate for last 5 yrs so trying to pay as much off as possible so it’s not too much of a shock.

its better to put extra into your pension now, as it has longer to cook

whilst I understand the urge to clear debt, reduce payments

youre not getting the tax relief or allowing for extra time on the pension

id finish off your ovp until next year then look at overpaying - you’ll put in £100 and it’ll cost you £70 - so it’s a bargain

I promise you’ll not regret it if you want to retire early

youre only tied in for a year at a time anyway

also don’t forget its a decent pension to be investing in and the earlier you do so the better for you

Wow, 68k per year!

That is in 22 years time, if opworks at the same place for another 22 years - a lot can happen in 22 years. Inflation over 22 years will also diminish that pension.

22 years ago NMW was £4,85 and average wage £20k

Are you sure those figures are the right way round and that the larger one is the lump sum? Not in the LG scheme but I'm aware of other public sector ones.

@RosieLeaLovesTea To get £60,000 a year you must be earning a lot so why is the lump sum so low? Mine was 6 times my LG annual pension. The lump sum seems very low.

You should be able to look at the pension online and play about with the retirement date and lump sum figures.

I'm hoping to go at 58 (after 42 years service) then work part-time doing something with zero responsibility just for fun.

I am assuming that your pension falls into two different schemes since only the pre 2008 pays a lump sum which is 3x the pension. This part of the pension will be closed and will only grow by inflation. The other part of the pension will be a CARE type of pension and growth depends on career average earnings. The older pension is based on final salary.
Your estimated pension will be based on estimated pay in 2048 not 2038 so both schemes will yield a much lower pension. The end salary will be calculated using your salary in 2038 and with 10 yrs less service. The CARE pension will have 10 years less of contributions. Both will be subjected to early payment reduction. Also check the pension age of each scheme you belong to. You may be able to take an older scheme early without the same level of reduction.

So you need to look at how the estimated pension has been calculated and recalculate it based on 10yrs less service then apply the early payment reduction.

If you look at the website you may find a calculator that will help but it will only be an estimate.

Early retirement is tempting but you really need to firm up your figures. There are some good pension advisers around but make sure that specialise in public sector pensions. Building up extra pension to cover shortfalls if you retire early can be complicated by tax.

I retired at 59 with my NHS pension which was a decent pension and I’ve been able to build up a SIPPs by continuing to work part time in the private sector. I will retire completely at the end of next year at age 63, using the SIPPs as a draw down until I reach state pension age. The draw down will top up my pension to the basic rate tax limit and I can take 25% of it as a tax free lump sum. The benefit of a draw down pension is that the investment continues to grow and I can choose how much I draw on an annual basis. When I reach SPA it will then be left as an investment and emergency fund. If the government increase the tax limits I can dip into it further but it will probably left for my DS to inherit.

I think you are wise to start planning your pension now.

It’s still a hell of a pension and very hard for someone in the private sector or public sector to build today.

Plus most salaries haven’t kept paced with inflation, we have had something called wage stagnation…

If it’s the correct way round, as pp states it’s the lump sum that’s larger than the annual pension - seems strange the lump sum would be 20,000 and pension £60k

@Crwysmam Was the lump sum 1/3 of the pension? £60,000 pension and £20,000 lump sum. I think these are the wrong way round. LG is now lifetime earnings isn’t it? I got final salary but no one gets that now. My friend who retired 3 years ago didn’t - age 64 then.

@Crwysmam @MeetMeOnTheCorner part of my pension is protected under the final salary scheme from
2001-2014 then career average for the remaining years. I think I can give up more of my pension to increase my lump sum.

The LGPS is index-linked so will increase with inflation. It's a huge pension but I guess OP is a high earner, as well as benefiting from the previous final salary element.

@RosieLeaLovesTea It’s a very small lump sum. Defends what you need at the time though. There’s the tax element too on a pension. Lump sum is tax free.

I agree my lump sum was 3x my pension so a significant tax free amount. The lump sum quoted by the op and the dates suggests that part of the forecasted pension is in a legacy scheme that is no longer active so the lump sum reflects that part of the pension. Most public service pensions were closed in 2015 ish and members had to join CARE schemes that don’t give a lump sum although you can sacrifice some of the pension for an optional lump sum.

90% of my pension was in my legacy scheme (95) so my large lump sum was automatic. I have a very small 2015 pension which isn’t worth claiming until I am SP age.

When looking at pension forecasts you need to know which schemes you are in, the length of service in each scheme and the way each scheme calculates pension.

A lump sum of 20k at full pension age would suggest that the OP was only in the legacy scheme for a few years. A CARE scheme depends on actual contributions not final salary so the forecast is calculated on current working hours and projected years of service. If the OP reduces hours or is made redundant the current forecast would be inaccurate so you cannot rely on forecasts with CARE pensions. Like investments they are the best possible outcome. And if the OP retires early that will significantly reduce the pension since service is a key part of the calculation.

That is correct but the legacy scheme pension is fixed in terms of years of service and end salary. If you retire ten yrs early it won’t have as much impact as it does on the post 2014 scheme you are contributing to. Based on the lump sum you have been quoted your legacy scheme makes up about £6.5 k of the actual annual pension. The rest comes from the post 2014 scheme which relies on annual contributions not end salary. So if you retire 10 yrs early you will lose 10 yrs of annual contributions in addition to the reduction for early retirement.

CARE pension schemes are great if you stay the distance and work until state pension age but are less beneficial if you opt for early retirement. In that respect they have more in common with private pensions and savings. The longer you contribute the bigger your pension.

As a member of the NHS practitioner scheme my pension has always been based on total career earnings. The more I earned the bigger my pension. So many people are confused by the different schemes and it is worth looking at the terms and conditions and using the available calculators to look at the optimal time to take your pension.

Taking it early may be a good option, although it is reduced it is paid for longer. I took mine 10 months early, the result was a reduction of a £1k a year but I was paid £27k for those 10 months so will have to survive appro 20 years to reach break even and lose out longterm. Since I was able to continue working part time the last three years my income had been significantly higher. My DS is at uni so it has funded him but I get 6 day weekends. A win win situation.

What you need to remember when pension planning is that it is not a straightforward reduction for taking your pension early.

@Crwysmam Well that’s why I’m querying the small size of the pension. I was in final salary for all of mine but I only had 20 years of qualifying. My lump sum was substantially more than my yearly pension though. There was some flexibility in it but it’s made plenty via our investments. Better than having a slightly higher monthly pension so far. If the scheme is paying £60,000 pa and a low lump sum, that could be better for op but the lump sum seems low to me.

It suggests that the forecasted pension is made up of about 6.5k of a legacy scheme which depends on final salary. Drawing that pension early will mean it is significantly reduced not only by the early reduction but also because the forecasted end salary will be less.

Ah yes @Crwysmam although my pension is £8000 a year and more than 6 times that in lump sum when I took it 6 years ago (roughly then!). I didn’t take it early but wasn’t working either. It just sat there! Maybe I made a mistake?