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Should we hang onto our pension plans or cash them in and hope we live long enough to enjoy them? Ged Dale investig...
Should we hang onto our pension plans or cash them in and hope we live long enough to enjoy them? Ged Dale investigates

'So why is the rule of 85 discriminatory?' I was asked the other day. The answer is that from October, your pension will be firmly regarded as deferred pay. And so it should be, as it isn't a charitable donation, but rather an integral part of your remuneration package. In other words, one earns it. And as it's earnings, people should earn the same pension rights, as distinct from the same pension.

Now consider 20-year-old Jason and 50-year-old Arthur, both being recruited and both joining the local government pension scheme. Jason, under the current rules, can draw his deferred pay in full at age 60, while Arthur will have to wait until age 65. Consequently pension rights aren't being accrued equally and the Office of the Deputy Prime Minister's counsel is that from October this will be illegal. The ODPM has also pointed out that women tend to have fewer years membership than men and therefore, with 73% of LGPS members now being women, the person receiving less deferred pay is usually not an Arthur but an Angela.

Of course the government could end this discrimination by introducing a normal retirement date of 60 for all, but this would be at substantial cost. It is therefore proposing, in recently published draft Amending regulations, a common normal retirement date of 65, albeit those close to retirement won't be affected.

As a 40-something I'll be losing a retirement date of 60, but professionally will be pleased to see the end of the rule of 85 as it is inherently complicating. Not too much so for readers of LGC Finance with continuous service, but working out the rule of 85 date for members with bits of membership here and there can be troublesome. It can also be a moving target - having an inward transfer, for example, can sometimes cause it to shift. It also invites 50-somethings to believe they can retire as of right with unreduced benefits once they attain this magical date.

As for the origins of the rule of 85, it arose during the drive in the 1990s to simplify the scheme. Among the other changes proposed in the draft regulations is something that will be popular with members and employers alike - this is the conversion of pension to lump sum at a rate of£1 of pension to£12 of lump sum. As an example, Angela foregoes£100 of annual pension and thereby boosts her tax-free retirement grant by£1,200.

Looks attractive, doesn't it? And as a basic rate taxpayer, if Angela doesn't do such a conversion she will only receive£78 pa of the unconverted pension (albeit an RPI linked£78) as the taxman will take the rest. This means that it will be a little over 13 years (assuming 2.5% inflation) before she will have received more net pension than the extra lump sum.

These conversions will be attractive from the employers' point of view as it actually costs more than£12 to fund£1 pa of RPI linked pension. Employers will therefore tend to show a profit whenever a pension to lump sum conversion is made.

One won't though be able to convert all of one's pension into extra lump sum, only as much as will take the total lump sum up to a quarter of the actuarial worth of the retirement benefits. But the standard 3/80ths lump only represents about an eighth of this value, so typically those retiring will be able to double their retirement grants via pension to lump sum conversions.

A word of caution however is that some people, prior to the change, can convert pension to lump sum at a better rate than 12:1.

Now imagine that I'm retiring and I'm weighing up my pension options. Do I choose to have lots more tax-free cash while I'm young enough to enjoy it, or do I keep all of my pension in the hope that I will be hale and hearty for decades to come?

As I write this an image of Woody Allen in his directoral debut has just sprung to mind. You have probably seen the film. It's called Take The Money And Run.

Ged Dale Head of pensions administration, Greater Manchester Pension Fund

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