Lump sum calculation at age 55

[EMoore]

Hi everyone. I'm wondering if anyone knows or has experienced this.
I'm thinking of taking my NRA 60 benefits at 55. (I live in Australia and that seems to be best option given the tax situation.)
I can see that my annual pension at age 60 would be 16k and at age 55 would be about 12k.
If I use the 20 multiplier then I'd be getting a much smaller lump sum at age 55 , which seems odd. Isn't it supposed to be 25% - ie of the total pot which is little different at age 55 or 60 (ignoring the small annual increases). It makes a big difference to me. I am trying to ask the scheme but I thought someone hear might have taken theirs early and know what happens.
My question is - how is the max, 25% lump sum calculated if you take the pension early at 55 ?
Thanks in advance
E

[NorthernBoy]

My question is - how is the max, 25% lump sum calculated if you take the pension early at 55 ?

Not taken mine yet but I believe it is calculated the same as if you were to take it at 60.

20 x annual pension, plus any AVCs = X, of this you can potentially take up to 25% tax free

So using your example at age 55 (assuming no avcs) would be 20 x 12k = £240k, of which you could take up to 60k tax free. If you are in section c you would have to give up some of your yearly pension to fund the lump sum.

When giving up pension to fund a lump sum the conversion rate is often around the £1 given up gives £20 lump sum (rough guide)

Hope this helps.

[Kingy7185]

When working out your final pension is the AVC offered Tax free along with lump sum.

Trying to work it out

£8000 per year at 60
Plus £22K AVC

How much considering both pension and the AVC could I take tax free ?

[ finding it very difficult to work out

[NorthernBoy]

When working out your final pension is the AVC offered Tax free along with lump sum.

Trying to work it out

£8000 per year at 60
Plus £22K AVC

How much considering both pension and the AVC could I take tax free ?

[ finding it very difficult to work out

Yes the avc is tax free as long as it does not exceed 25% of your total pension size. In your case it does not.

Using your figures you can take up to 25% of £182k which is £45500. Your avc accounts for 22k and if you were to take the rest of 23.5k you would have to give up some yearly pension.

If this is section c, then as a very rough guide you would give up £1175 in pension for the extra 23.5k in lump sum (assuming a 1 to 20 conversion rate). Only you can decide if this is worth doing or not.

Hope this helps.

[EMoore]

Hi Northern Boy
I'm hoping it's different for age 55. It shouldn't be the same given that you're receiving the pension for longer - eg maybe the multiple should be 25 instead of 20.
I'll keep my fingers crossed !
Eileen

[freespeech]

My question is - how is the max, 25% lump sum calculated if you take the pension early at 55 ?

Not taken mine yet but I believe it is calculated the same as if you were to take it at 60.

20 x annual pension, plus any AVCs = X, of this you can potentially take up to 25% tax free

So using your example at age 55 (assuming no avcs) would be 20 x 12k = £240k, of which you could take up to 60k tax free. If you are in section c you would have to give up some of your yearly pension to fund the lump sum.

When giving up pension to fund a lump sum the conversion rate is often around the £1 given up gives £20 lump sum (rough guide)

Hope this helps.

You will need to take off 25% of the £240K for taking the pension 5 years early. £240k becomes £180k so LS would be £45k.

[mags999]

bloody hell he must be a dom 16 grand pension at 60

[RobertT]

My question is - how is the max, 25% lump sum calculated if you take the pension early at 55 ?

Not taken mine yet but I believe it is calculated the same as if you were to take it at 60.

20 x annual pension, plus any AVCs = X, of this you can potentially take up to 25% tax free

So using your example at age 55 (assuming no avcs) would be 20 x 12k = £240k, of which you could take up to 60k tax free. If you are in section c you would have to give up some of your yearly pension to fund the lump sum.

When giving up pension to fund a lump sum the conversion rate is often around the £1 given up gives £20 lump sum (rough guide)

Hope this helps.

You will need to take off 25% of the £240K for taking the pension 5 years early. £240k becomes £180k so LS would be £45k.

That's already been factored in!

The full pension at 60 is £16k, reduced by 25% at 55 to give £12k.

[EMoore]

Hi RobertT - thanks for chiming in :)

Do you know of anyone that's taken the pension at 55 with a lump sum please ?
The max lump sum, 25%, is supposed to be of the total value of the pension, which should be the same whether taken over 20 or 25 years (age 60 or age 55). It seems logical that a different multiplier would be used - eg 25 if taken early at 55. Of course it's a multiple of a lower amount.
What do you think ?

Thanks
Eileen

[RobertT]

I agree with NorthernBoy!

As far as I know, the multiple used is 20 regardless of when you take your benefits.

[renrag40]

Hi RobertT - thanks for chiming in :)

Do you know of anyone that's taken the pension at 55 with a lump sum please ?
The max lump sum, 25%, is supposed to be of the total value of the pension, which should be the same whether taken over 20 or 25 years (age 60 or age 55). It seems logical that a different multiplier would be used - eg 25 if taken early at 55. Of course it's a multiple of a lower amount.
What do you think ?
The tax free lump sum is taken from the total pension pot when you take your pension. If you take it earlier than the nra then it is reduced by 5% per year for each year you take it early. Therefore, if you are taking your pension at 55 you are receiving 25% of the pension pot. The multiplier will always stay constant whether you take the pension at 55 or normal retirement age. To increase the multiplier when you take your pension earlier than nra would encourage people to take the pension early...... For example, if you were to receive £10,000 at nra 60 it would give a pension pot of £200,000, with a tax free lump sum of £50,000 and a monthly pension of £625. If you took it at 55, with a 20 multiplier,your pension pot would be worth £150,000 with a tax free lump sum of £37,500 and a monthly pension of £468.75. Now if you increased the multiplier to 25 when you take your pension 5 years early you would have a pension pot of £187,500, with a tax free lump sum of £46,875 and a monthly pension of £586. So, you would receive £35,156 in monthly pension over the 5 years between ages 55 and 60 be only £3,125 worse off on the lump sums and £39 per monthly pension worse of from age 60 onwards. Which would mean you would have to live until you are 128 years and 5 months old before you would be better off taking your pension at nra 60 than at 55 with the multiplier increase to 25 at age 55.
So, in short , no it is not logical to have a higher multiplier when you take your pension early.

[EMoore]

Hi Renrag
"If you took it at 55, with a 20 multiplier, your pension pot would be worth £150,000 with a tax free lump sum of £37,500 and a monthly pension of £468.75.
Now if you increased the multiplier to 25 when you take your pension 5 years early you would have a pension pot of £187,500, with a tax free lump sum of £46,875 and a monthly pension of £586."
Thanks for all that work. I've been looking at the NPVs of various scenarios myself too, which is why I question the multiplier being the same.
In your example I don't know why you increased the monthly pension when you increased the multiplier.
The point is that the multiplier is being applied to a lower pension, so there's a double disbenefit.

Apart from a bit of CPI the value of the pension pot should be the same at 55 as at 60, the total value is the same so the annual value has to be less.

[renrag40]

Probably because I have made a mistake and divided the remaining pension pot by a multiplier of 20 instead of 25.
But, the logic is still the same, there would be no financial incentive to take your pension at the normal retirement age if you had a greater multiplier at 55 than at 60.

[EMoore]

It's multiplying a lower number so the total is lower (in the real life example).
There should be no incentive to take the pension early or late, the Net Present Value (lump sum plus pension) of the 2 options should be the same. It's not a punishment or reward system.

Thanks everyone for comments :)