An overview on unlocking your police drawdown pension
If you’d like to unlock your funds before age 55, it would be necessary to switch your pension to a new pension product with the drawdown facility. In most cases, the LGPS pension scheme is too good for a financial advisor to recommend switching.
What is the Local Government Pension Scheme (LGPS)
The Local Government Pension Scheme (LGPS) is one of the largest pension schemes in Britain, available for general government employees, or for those who work for private contractors participating in the scheme.
It offers a tax-free pension scheme that keeps pace with the cost of living. It also offer life cover and pensions for all active members of the scheme.
Survival pensions may be paid to your spouse, civil partner, or eligible cohabiting partner or children, if you die during a minimum of two years employment, or after leaving the job.
Each year, on April 1st, a 49th of your pensionable pay is automatically put into the pot and adjusted according to the amount of money you earned that year, taking after-hour work into consideration.
If you have a pension with another provider, you may be able to transfer it into the LGPS pension, as long as you do so within 12 months of joining. You can also opt out of the LGPS, as long as you give your employer at least 12 months notice before normal retirement age (namely, 65).
How much do you contribute to the LGPS?
The contribution rate depends on how much you’re paid. If you have more than one job, your rate is separately assessed for each. As of February 24, 2019, contribution rate averages 6.5% of your pensionable pay, ranging from 5.5% to 12.5% of pay. The website of the Local Government Pension Scheme has a handy chart with rates for each income bracket.
For difficult financial circumstances, the LGPS provides a short-term 50/50 option where you pay half the amount you normally would. While this keeps you in the scheme, helping you retain your benefits, it also halves your pension income.
LGPS pension drawdown
To really profit from the Local Government Pension Scheme, you’d want to wait until you’ve reached your State Pension age of 65 when you’re allowed your full pension benefits. You can also defer accessing your benefits, allowing your savings to continue growing.
All the same, from age 55 on, and as long as you’ve been employed at least two years, you’re allowed an annual amount of tax-free cash that you can access without your employer’s consent.
Since converting some of your pot into cash would reduce your benefits, your employer may allow you (on compassionate grounds) to unlock your funds without reduction. The entire pension must be claimed before your 75th birthday.
In the case of ill health - decided by an independent physician appointed by your employer - your pot may be given to you without reductions. In fact, the State may even add benefits if it decides you’re incapable of gainful employment.
How about if you move to a less senior position or reduce your hours?
You may want to discuss the option of flexible retirement with your employer, where, from age 55, and, if your employer agrees, you can access your LGPS savings. However, early LGPS pension drawdown may come with pension reductions.
Alternately, as you’ll still be working, you and your employer will still pay into your scheme, building up further pension based on your new hours or grade. This further pension will be paid to you when you're fully retired.
If you're made redundant or you retired because you have less physical or mental stamina, and you’re age 55 or over, your benefits will be paid immediately with reductions for early payment.
Problems with LGPS pension drawdown
As with all pension schemes, the Local Government Pension Scheme tends to frustrate recipients in the following ways:
Lack of access: You have to wait until age 55 to convert some of your LGPS savings into ready funds. For people experiencing tough financial circumstances, like illness or disability, this can be particularly frustrating. The LGPS is a “defined benefit scheme”, which means that to fully benefit from its invaluable benefits, you have to follow its terms. You can, of course, transfer your LGPS funds to a “defined contributory scheme”, where you can flexibly withdraw money whenever you wish to the point of emptying your pot in one go. At the same time, you lose your life coverage, as well as those of potential beneficiaries, and your pot is no longer protected (it’s vulnerable to market and investment changes). Worse still, pension scams may cause you to lose your entire pension protection.
Chunk limitations: Even once you’ve reached 55 and can unlock some of your pension, you’re only allowed 25% of your annuity tax-free. Choose to withdraw more, and subsequent taxes may devalue your savings.
Complex policies: If you unlock your account before age 55, penalties are that severe that you may end up losing all your money with no recourse for protection. Worse still, these penalties apply even if you offer to replace the sum, plead ignorance, or have spent all the money. The LGPS is replete with regulatory intricacies, violation of which can get you into trouble even if infractions were unintentional. For this reason, its regulators repeatedly urge seeking professional advice.
Given these limitations, some LGPS recipients prefer an Individual Savings Account (ISA) investment which, largely, allows you to release your money whenever you want and is tax-free.
The ISA has its pros and cons. Its main problem is you have to use it within a given tax year, otherwise you lose your allowance.
You could choose pension-unlocking alternatives like borrowing against your home’s value (a home-equity loan), refinancing your mortgage with cash-out at closing, or withdrawing a personal loan, among other solutions.
Each of these options has its pros and cons and deserves weighty consideration.
In all, users who seek LGPS pension drawdown tend to seek professional advice to steer them in the right direction. In fact, the Government obligates you to see an independent financial advisor if you plan to transfer an LGPS scheme worth more than £30,000.
Talk to an advisor who is an expert on police drawdown pensions
If you have questions about the LGPS or about other statutory pension schemes and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
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