Monday, 4 August 2014

Knowing When ...

The mantra "Thou shalt not take thy pension early for that way actuarial reduction lies" is very well known to those of us with defined benefit pensions.

This "rule" has always made sense to me (and it still does when applied to the majority of people in the majority of situations) and so I have been planning my early retirement to comply with it and haven't questioned the wisdom of waiting until 66 to take my pension. However failing to question a general rule in the light of your own particular circumstances can be a mistake and, as the LGPS has now released the details of the 2014 pension scheme and the protections that have been put in place for those of us who have long service, I decided to take a closer look. After some time with a calculator and spreadsheet these are my thoughts and findings:
  • I had been aiming to save enough in my SIPP and FSAVC to fund the 6 years between 60 and 66 at a level just below the personal tax threshold level and supplement to the required level with income from our ISAs. As I have a small Civil Service pension and share the income from our rental flat with my husband this means that I was planning on raising a total pension pot of £48,000 (6 x £8,000).
  • In the local government scheme there has always been what is called a CRA (critical retirement age). This differs from both the normal (state) retirement age and the scheme retirement age. It is calculated using the rule of 85 - i.e. it is reached when length of service in the scheme and age, when added together, reach 85. My membership started in Nov 1995. If it continues to my 60th birthday (2019) I will have 23 complete years of membership. Therefore I will satisfy the rule when I am 62 (in March 2021). 
  • At CRA certain protections to my pension are applied one of which is that pre-2008 pension entitlement can be taken without reduction. 
  • The actuarial reduction applied to my post-2008 pension is a complex calculation applied at two different levels because the 2008 - 2014 pension has a retirement age of 65 and the 2014 onwards bit of the pension has a retirement age of 66.
  • All these factors mean that my calculations (checked and double checked) give me a figure of £9,154 pension pa if I leave at 60 and take my pension at 63. This is compared to £10,389 if I wait till I'm 66 before I draw it. Therefore I would draw £27,462 extra pension during the 3 extra years which means that it would be 27 years before the larger pension starts to be the financially better deal. 
  • In addition I would get my (slightly reduced) lump sum and AVCs (which can also be all taken as a tax free lump sum - a quirk of the pre-2014 LGPS scheme) three years earlier. Together these should come to around £27,000. I can see that there would be all sorts of advantages to getting access to this pot sooner rather than later.
In view of these considerations I have decided to be very careful about how much I put into my personal pensions because If I do decide to take my LGPS at 63 I don't want to have "left over pension" that will end up being taxable. If this does happen I might have been better off putting the money into my ISA instead.

The result is that I have reduced my target for my SIPP/FSAVC to £37,000 to give me a lump sum of £9,250 and a drawdown of £9,250 for the 3 years. This is still probably a touch high but there are all kinds of unknowns such as the status of the tax free lump sum and the personal tax threshold - a new government might make changes that could have a big impact. Also it's not yet completely clear how drawdown will work post 2015.

All this doesn't mean that I will be saving less, just putting it in different pots to get the balance right and making sure I don't leave it to cook for too long. Timing is all important, it's not just a matter of what you put into the pot, it's also about when you take it out and enjoy it.


  1. Hi Cerridwen, that CRA is an interesting rule - we don't have that for our pension. I think ours just states that pensions may be taken from age 65, although I believe it's possible to take it earlier subject to approval by the board of trustees. If I applied your rule to myself, I would satisfy it at the age of 56 in 2025!

    I've yet to really sit down and do some proper calculations. Even the spreadsheet I did which started me off on my own blog doesn't address all issues but I need to see how my savings go over the next two years to see how realistic my 'projections' are. So issues like tax haven't really been dealt with, although I suspect I would try to counter that by putting more in my ISA than my SIPP.

    Great post - shows how much more I need to do with my own calculations!

  2. Thanks weenie. The CRA makes it quite tricky to work out what you can get, and when, but it does offer some protection to those of us who joined the scheme in more generous times. Very fair, on the whole.

    As the LGPS is a funded public sector scheme I believe it will be one of those that can be transferred out to a DC pension when the rules change next year and although this wouldn't be sensible thing to do I'm sure some people will be tempted rather than take the hit with the actuarial reductions so that they can leave earlier than their normal pensionable age. Interesting times.