Public Sector Pension - lump sum

[Clariman]

My wife has a public sector final salary pension which has been deferred. She plans to take it this year - which is a year before normal retirement date.

There is a lump sum associated with the pension. I would expect the annual pension to have an actuarial adjustment because it would be paid for a year longer. However, the actuarial adjustment has also been applied to the lump sum. Why would that be? It is a one-off that gets paid once so it isn;t costing the provider any more surely?

Is this normal practice?

C

[staffordian]

Just to play devils advocate, there is an argument for at least some adjustment because if the pension fund loses the value of the lump sum a year earlier than calculated, it will lose the benefit of the investment return on that money for the year.

Staffordian

[Clariman]

Fair point, except it is the same adjustment figure (x 0.959) as the pension itself

[Wuzwine]

Clariman,

Like a lot of things it's just is done this way!

Does she have an option to take it all or part of the lump sum as pension? I had the option, although most of my cohort took a lump sum at least up to the £30,000 that was tax free.

People decided based on how long they expected to live and how much they needed a lump sum to pay off debts etc. It was a difficult decision and was complex as there were varying rules such as those on spouses inheriting the pension to take into account.

I don't think it was ever claimed to be a fair system!

Wuz

[StepOne]

Fair point, except it is the same adjustment figure (x 0.959) as the pension itself

That seems about right, if they consider they will make a 4.275% return on their money annually. The adjustment would be the same for the pension itself, since every year's payment is now being brought forward one year.

StepOne

[Clariman]

Thanks. Other answers have begged the question .... so is the first £30K tax free then the rest taxable?

If so, adding the delta back into the pot for annual payments might be a good call.

[Alaric]

Thanks. Other answers have begged the question .... so is the first £30K tax free then the rest taxable?

There's no £ 30,000 limit. Are you confusing it with the redundancy rules?

As a broad brush 25% of the "value" can be taken tax free. The public sector expressed this in a different way with separate accruals for cash and pension income.

The public sector rule is, or was, that tax free cash was 3/80ths of "final" salary for every year of service and that pension income was 1/80th of "final" salary. Thus for someone working for 40 years, their retirement income was one-half of their pre-retirement income and they got a tax free lump sum of one and half times that income.

[Clariman]

Thanks. Other answers have begged the question .... so is the first £30K tax free then the rest taxable?

There's no £ 30,000 limit. Are you confusing it with the redundancy rules?

It was following on from what Wuzzine said

Does she have an option to take it all or part of the lump sum as pension? I had the option, although most of my cohort took a lump sum at least up to the £30,000 that was tax free.

So is the lump sum ALL taxable or all non-taxed? Her lump sum is 3 x annual pension so quite a decent sum!

[parallellines]

It's all untaxed.

I expect the confusion is indeed with the £30K limit on tax free payments for redundancy. Coupled with the complication that public sector schemes often have a separate lump sum associated with the pension , whereas most private sector DB schemes just promise a pension (with any lump sum paid on retirement that's on member request terms being made by giving up some of the pension).

[Alaric]

So is the lump sum ALL taxable or all non-taxed?

Pension lump sums are free of tax. It was the previous poster confusing the issue with the redundancy limit. Early retirement and redundancy can be simultaneous of course.

In private sector schemes, you can now get a lot more than three times the annual income. I don't think the freedom to vary the relative proportions of cash and income was ever extended to the public sector, at least not for those who left the public sector years ago.

[staffordian]

So is the lump sum ALL taxable or all non-taxed?

Pension lump sums are free of tax. It was the previous poster confusing the issue with the redundancy limit. Early retirement and redundancy can be simultaneous of course.

In private sector schemes, you can now get a lot more than three times the annual income. I don't think the freedom to vary the relative proportions of cash and income was ever extended to the public sector, at least not for those who left the public sector years ago.

There is more flexibility in at least some public sector schemes, though it will probably vary from scheme to scheme.

I was in the Local Government scheme and when I retired five years ago I had the option to increase the lump sum from the default three times the pension, at the cost of a reduced pension. I could also have increased the pension by taking a smaller lump sum IIRC.

As far as the tax position is concerned, the above two posts don't mention it but as far as I am aware, the tax free element only applies if the lump sum does not exceed 25% of the notional pot value. Having said that, this is probably the upper limit of the allowed amount within the scheme, so in that sense it is true to say all the lump sum is tax free.

Staffordian

[Regdragon]

Hi Alaric. I've not long retired with a public sector pension and I had the option to increase my lump sum, paid now, in return for a reduced annual pension - but not an option to do it the other way around I.e reduce my lump sum to take more in annual pension. I can well understand why that might be.

Regards

RD

[Clariman]

Thanks all. Yes there is an option to increase the lump sum at the expense of the annual amount. We wouldn't plan to do that.

[Alaric]

Thanks all. Yes there is an option to increase the lump sum at the expense of the annual amount. We wouldn't plan to do that.

Considerations would be the exchange rate between lump sum and annual amount, whether you needed the annual amount guaranteed and whether receiving the lump sum gross of tax overcame any shortfall on the exchange rate.

[Wuzwine]

Hi Clariman,

Sorry I must have remembered wrongly or the rules have changed. I suspect the former, as I have looked at the current booklet and it does say

"At the time you retire you can choose, under
current rules, to give up part of your pension for
a tax-free lump sum. You can choose how much
lump sum you want, up to a maximum of 30/7 x
your pension, but you must give up £1 of pension
for each £12 of lump sum.
You can find out how much lump sum you can
take, and the effect it will have on your pension by
using the calculator on the Civil Service website..."

Sorry for misleading you. I should really NOT rely on my memory!

Regards,

Wuz