Gov pension LS, what am I missing?
Discussion
Really this is a "do I take my lump sum" question but the actual figures are so strongly weighted towards not taking the LS that alarm bells are ringing....
Gov pension. I can take a lump sum aged 60 of £100k, or take the full pension which is £10k pa difference if no LS taken.
So this is effectively an annuity of 10%! Wow. Do they know something I don't about my health....
Given the debt to GDP, UK Gilt rates, is this generous annuity rate really because the Gov wants to push as much liability out to the future where they can QE as much pension liability away? Yes, a Gov pension should be index linked, but real asset inflation is far higher than CPI/RPI.
So although the LS doesn't look the best option, would a £100k not be better spent paying off the mortgage, gold coins, premium bonds, stocks and shares ISA (assuming all tax free)?
Gov pension. I can take a lump sum aged 60 of £100k, or take the full pension which is £10k pa difference if no LS taken.
So this is effectively an annuity of 10%! Wow. Do they know something I don't about my health....
Given the debt to GDP, UK Gilt rates, is this generous annuity rate really because the Gov wants to push as much liability out to the future where they can QE as much pension liability away? Yes, a Gov pension should be index linked, but real asset inflation is far higher than CPI/RPI.
So although the LS doesn't look the best option, would a £100k not be better spent paying off the mortgage, gold coins, premium bonds, stocks and shares ISA (assuming all tax free)?
TVRBRZ said:
Really this is a "do I take my lump sum" question but the actual figures are so strongly weighted towards not taking the LS that alarm bells are ringing....
Gov pension. I can take a lump sum aged 60 of £100k, or take the full pension which is £10k pa difference if no LS taken.
So this is effectively an annuity of 10%! Wow. Do they know something I don't about my health....
Given the debt to GDP, UK Gilt rates, is this generous annuity rate really because the Gov wants to push as much liability out to the future where they can QE as much pension liability away? Yes, a Gov pension should be index linked, but real asset inflation is far higher than CPI/RPI.
So although the LS doesn't look the best option, would a £100k not be better spent paying off the mortgage, gold coins, premium bonds, stocks and shares ISA (assuming all tax free)?
Current life expectancy at 60 is 24 years so £240k potential pre tax versus £100k net now. Gov pension. I can take a lump sum aged 60 of £100k, or take the full pension which is £10k pa difference if no LS taken.
So this is effectively an annuity of 10%! Wow. Do they know something I don't about my health....
Given the debt to GDP, UK Gilt rates, is this generous annuity rate really because the Gov wants to push as much liability out to the future where they can QE as much pension liability away? Yes, a Gov pension should be index linked, but real asset inflation is far higher than CPI/RPI.
So although the LS doesn't look the best option, would a £100k not be better spent paying off the mortgage, gold coins, premium bonds, stocks and shares ISA (assuming all tax free)?
Knowing what your needed annual income will be at 60 v do you need that £100k now is also a factor.
If a head vs heart decision then alscar's theoretical £240k gross wins
If heart vs head, then £100k net now to play with given that I could be deid in 10yrs.
Just wondering if there are any empirical arguments for the LS based on inflation, tax (yes I will be basic rate taxpayer as a retiree). Placing £100k in a tax and inflation resistant wrapper vs a generous but tax and inflation vulnerable annuity
If heart vs head, then £100k net now to play with given that I could be deid in 10yrs.
Just wondering if there are any empirical arguments for the LS based on inflation, tax (yes I will be basic rate taxpayer as a retiree). Placing £100k in a tax and inflation resistant wrapper vs a generous but tax and inflation vulnerable annuity
TVRBRZ said:
If a head vs heart decision then alscar's theoretical £240k gross wins
If heart vs head, then £100k net now to play with given that I could be deid in 10yrs.
Just wondering if there are any empirical arguments for the LS based on inflation, tax (yes I will be basic rate taxpayer as a retiree). Placing £100k in a tax and inflation resistant wrapper vs a generous but tax and inflation vulnerable annuity
I assume there are no other options ie a smaller TFLS and then a larger annual pension ie best of both heart and head potential ?If heart vs head, then £100k net now to play with given that I could be deid in 10yrs.
Just wondering if there are any empirical arguments for the LS based on inflation, tax (yes I will be basic rate taxpayer as a retiree). Placing £100k in a tax and inflation resistant wrapper vs a generous but tax and inflation vulnerable annuity
TVRBRZ said:
I can take a lump sum aged 60 of £100k, or take the full pension which is £10k pa difference if no LS taken.
Is the annual salary index linked. That would work in favour of not taking the lump sum. But tax...that £10k/year extra is down to £8k.But either way, that's a rubbish LS. My wife (not govt, just private DB pension) has been offered £115K or £7K/annum more (£5600 after tax) at age 65.
No other option, LS or no LS.
I agree it does seem a rubbish LS compared to taking the full pension, but this is the crux of the question. Why is the LS so rubbish? Why does the Gov offer such a rubbish LS? The cynic in me suspects shoving pension liabilty down the road so it can be watered down by devaluing Sterling...
I agree it does seem a rubbish LS compared to taking the full pension, but this is the crux of the question. Why is the LS so rubbish? Why does the Gov offer such a rubbish LS? The cynic in me suspects shoving pension liabilty down the road so it can be watered down by devaluing Sterling...
Presumably cannot compare differentials with Government v Private but in isolation that 10 fold differential looks low v Twig’s wife scheme of x 16.4.
Mind you in comparison to mine at the time that also looks low as looking back at the papers just now mine was x23.4 at 65 or 28.4 at 60.
Mind you in comparison to mine at the time that also looks low as looking back at the papers just now mine was x23.4 at 65 or 28.4 at 60.
TVRBRZ said:
No other option, LS or no LS.
I agree it does seem a rubbish LS compared to taking the full pension, but this is the crux of the question. Why is the LS so rubbish? Why does the Gov offer such a rubbish LS? The cynic in me suspects shoving pension liabilty down the road so it can be watered down by devaluing Sterling...
Because they can and also because it’s not as if you can negotiate. I agree it does seem a rubbish LS compared to taking the full pension, but this is the crux of the question. Why is the LS so rubbish? Why does the Gov offer such a rubbish LS? The cynic in me suspects shoving pension liabilty down the road so it can be watered down by devaluing Sterling...
Clearly they also don’t want to pay out lump sums now so don’t want to make it too attractive anyway.
Unlike private schemes where reducing the fund liabilities might be considered a good thing for the trustees to do.
It's nothing to do with pushing people one way or another.
The commutation factor on public sector schemes has been 12:1 regardless of age for a long time.
This is a poor deal, especially if you're on the younger end of retirement. Taking full annual pension does mean more taxable income but it should receive CPI uncapped escalation each year.
Your numbers don't quite align with 12:1, which suggests there may be an AVC pot alongside or 3x lump sum as standard. Can you post the full figures?
The commutation factor on public sector schemes has been 12:1 regardless of age for a long time.
This is a poor deal, especially if you're on the younger end of retirement. Taking full annual pension does mean more taxable income but it should receive CPI uncapped escalation each year.
Your numbers don't quite align with 12:1, which suggests there may be an AVC pot alongside or 3x lump sum as standard. Can you post the full figures?
As has been mentioned, the commutation rate on public service schemes is pretty crap.
There are a few things to consider, though. There's the rate of tax that you'll end up paying on the pension (if you're going to be a 40% taxpayer in retirement, the lump sum can look more attractive), what rate of return you could earn on the lump sum amount if you're not planning on spending it immediately (or the interest you could save, if you're looking to use it to pay down debt) and also the fact that if you have a spouse, their dependent's pension will be based on your pre-commutation pension in some schemes, meaning she'll get double bubble if you pop your clogs shortly after retirement
Having said that, generally speaking, the first paragraph applies.
There are a few things to consider, though. There's the rate of tax that you'll end up paying on the pension (if you're going to be a 40% taxpayer in retirement, the lump sum can look more attractive), what rate of return you could earn on the lump sum amount if you're not planning on spending it immediately (or the interest you could save, if you're looking to use it to pay down debt) and also the fact that if you have a spouse, their dependent's pension will be based on your pre-commutation pension in some schemes, meaning she'll get double bubble if you pop your clogs shortly after retirement
Having said that, generally speaking, the first paragraph applies.
The “commutation factors” used in public sector schemes are notoriously rubbish. Fine when it was a lump sum on top (so you didn’t have to give up pension) but really stands out as poor value when you do wish to give up pension.
A couple of things:
You’re only giving up your pension. The spouse’s pension on death doesn’t reduce.
The lump sum is tax-free so, particularly if you’re a 40% tax-payer in retirement, this does make it look a bit less ungenerous.
It’s a good argument for paying AVCs if you still have time and taking those as cash rather than commuting pension.
A couple of things:
You’re only giving up your pension. The spouse’s pension on death doesn’t reduce.
The lump sum is tax-free so, particularly if you’re a 40% tax-payer in retirement, this does make it look a bit less ungenerous.
It’s a good argument for paying AVCs if you still have time and taking those as cash rather than commuting pension.
Thanks for the replies and all good points.
The heart says (as it is PH - Buy a supercar
) use the LS now, I may not live to enjoy it.
What I'm wondering is if anyone has some good examples of the effect of inflation and tax on the pension long term. If I work part time, I may tip over into the higher rate. This would be an argument for the LS if the LS is used to pay off debt or an investment that returns (tax free) a decent chunk over inflation.
I'm thinking that paying higher rate leaves me 6% from that original 10%, it doesn't seem that difficult to get a 6% return especially in something that is a bit more resistant to inflation.
(And I'll probably tip further into the higher rate once the State Pension kicks in)
The heart says (as it is PH - Buy a supercar
) use the LS now, I may not live to enjoy it. What I'm wondering is if anyone has some good examples of the effect of inflation and tax on the pension long term. If I work part time, I may tip over into the higher rate. This would be an argument for the LS if the LS is used to pay off debt or an investment that returns (tax free) a decent chunk over inflation.
I'm thinking that paying higher rate leaves me 6% from that original 10%, it doesn't seem that difficult to get a 6% return especially in something that is a bit more resistant to inflation.
(And I'll probably tip further into the higher rate once the State Pension kicks in)
Edited by TVRBRZ on Wednesday 9th September 15:56
Zigster said:
It s a good argument for paying AVCs if you still have time and taking those as cash rather than commuting pension.
^This, how much longer are you planning to work and can you make do without most of your monthly salary till then (eg utilise other funds). You can pay most of your salary in to an AVC pot that you can then take as your tax free lump sum on retirement, with the following caveats.1. Your remaining pay must remain above the national minimum or living wage (depending on rules).
2. The total lump sum has a maximum limit of £268,275 or 25% of your total pension pot value.
3. Check if your employer has a Shared Cost Additional Voluntary Contribution (SCAVC) scheme where you can also save a chunk on NI as well.
jfdi said:
Zigster said:
It s a good argument for paying AVCs if you still have time and taking those as cash rather than commuting pension.
^This, how much longer are you planning to work and can you make do without most of your monthly salary till then (eg utilise other funds). You can pay most of your salary in to an AVC pot that you can then take as your tax free lump sum on retirement, with the following caveats.1. Your remaining pay must remain above the national minimum or living wage (depending on rules).
2. The total lump sum has a maximum limit of £268,275 or 25% of your total pension pot value.
3. Check if your employer has a Shared Cost Additional Voluntary Contribution (SCAVC) scheme where you can also save a chunk on NI as well.
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