We have a client. Let’s call her Jane. She is in her mid-fifties. She is single. Never been married. Doesn’t have any children. Doesn’t have a life partner. She does though have a mother who lives with her life partner and a sister who is married with two children – a son and a daughter who are both adults.  She is a member of the Local Government Pension Scheme and has about 30 years’ pensionable service. She is quite comfortably off financially.

 

She recently had a meeting with one of the LGPS staff and was advised that her pension would die with her because she had no spouse, no children and no life partner. She cannot leave her pension to her sister, nephew or niece. How bad is that?

 

 

She could potentially die before her normal retirement age of 65 and leave nothing to her loved ones in spite of contributing to the LGPS pension scheme for more than 30 years. You really couldn’t make it up, could you?

 

She is now considering working full-time until age 60, taking her actuarially reduced LGPS pension and tax-free cash lump sum early and working part-time. It sounds like a plan.

 

Personally I truly hate the idea of paying into something for a long time and potentially getting nothing back.  Zilch.  So I recommended exploring taking the LGPS pension now and accepting the actuarial reduction. At least it would mean she would receive the tax-free cash lump sum and a reduced pension.

 

Interestingly the LGPS final salary pension scheme is one of the few funded public sector pension schemes in the UK. The only other large one I know of is the Universities Superannuation Scheme.  This means that technically she could transfer her LGPS scheme into a personal pension. We did obtain a transfer value from the LGPS scheme a few years ago and it was such a low CETV (Cash Equivalent Transfer Value) that it wasn’t even worth considering a transfer. She remains of that opinion.

 

 

I did some research and discovered that if she takes her LGPS pension five years before her normal retirement age at 60 her pension will be reduced by 20.9% and her tax-free cash lump sum by 8.1%.  Even though there will be an actuarial reduction for early retirement she will receive her LGPS pension for an extra five years. What this means is that the break even point will be about 15-20 years into the future by when the full accumulated pension she would have received at age 65 will have exceeded the reduced accumulated pension she would have received from age 60.  

 

If she were to take her LGPS pension now at age 55, fully 10 years before her normal retirement age, the actuarial reduction would have been 35.6% on her pension and 15.5% on her tax-free cash lump sum.  On balance, I think her decision is a wise one. She is in good health, eats well and exercises regularly, so she is expected to live for at least another 25 years.

 

Is there anything else she could have done? Well, there is a potential creative solution that could have been considered. She could find another single person in the same situation as her, marry that person and make a pension death benefit nomination of 100% to each other. That way potentially neither of their pensions would be wasted. Obviously, they would need to take legal advice and probably have some form of a pre-nuptial agreement in place. It would clearly be just a marriage of convenience. It is something only the most broad-minded of people could possibly consider. Nonetheless, it could be right for some people. You know it makes sense.*

 

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.  This blog is based on my own observations and opinions.  

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