Final salary pension deferral

LarjWej · 12 May 2017 at 10:03AM

i intend to retire at 55 and have the option of taking a final salary pension at that point

if i do not take this straight away and defer drawing it to a later point the pension payment increases by 5% per year (index linked)

i have other savings that i could live off and so do not need this money straight away

is it generally considered good value to defer in this situation (and eat into savings) - assuming good health and 30+ years life expectancy?

i am not sure whether to defer the pension or take it straight away and continue to invest my savings in funds/property etc

thanks

L

mgdavid · 12 May 2017 at 11:05AM

what is the NRA of the final salary Scheme?
Is there an Actuarial Reduction _(a percentage per annum) for taking it earlier than NRA?

LarjWej · 12 May 2017 at 11:51AM

hi mgdavid,

thanks for replying

the NRA is 60

there is an actuarial reduction of 5% per year for taking it early - that's the additional 5% i am referring to in my post for deferring

L

Kynthia · 12 May 2017 at 1:42PM

Usually people say not to take a DB pension early, however like most things to do with pensions it is an individual choice.

If you take it early you will get less each year but get that amount for 5 extra years. So things to think about include:

Do you have any reason to think you won't live long enough that that the extra each year will outweigh the extra five years of payment? Remember that the difference between the two annual amounts will be taxed so use the difference in take-home monies in your calculations.

Will you be able to comfortably live long term on the reduced pension?

If you use savings to live on for five years will that deplete them, and leave you with no capital for any large expenses, holidays, house repairs, new boiler, etc until you can save up again once you get your pension?

Can you borrow cheaply to enjoy the next five years and then repay the loans once you get your pension?

Do you have other pensions or firms of income and will you end up being a higher rate tax payer at any point, such as when your state pension comes in?

Generally we spend more on enjoying retirement until we reach a certain age where our health or desire to travel and do expensive hobbies reduces. So sometimes people choose more money earlier on even when it's not the decision that leaves them with the most money over their lifetime. As long as that leaves them enough to live comfortably in the future I'm not going to say it's wrong. Although cheap borrowing now to be repaid gradually or later, such as with the pension lump sum or when the state pension us received, could give the same benefit without costing as much over the lifetime. So perhaps remortaging with a 15 + year affordable repayment could be an out of the box suggestion and allow you to enjoy the next few years more.

jamesperrett · 12 May 2017 at 1:46PM

Deferring and using other savings or DC pensions between retirement and NRA is usually best. It may be worth checking that the reduction for early payment really is 5% per year. This sort of figure is often bandied about but the real figure is often different (although it is still usually best to wait for NRA before taking it).

LarjWej · 12 May 2017 at 4:29PM

thanks kynthia and jamesperrett for the replies

@jamesperrett - yes i have checked the 5% and it is definitely correct

@kynthia - interesting point about the cheap borrowing - although i have enough in reserves to avoid that

i think deferring is the correct choice for my circumstances

L

kidmugsy · 13 May 2017 at 11:50AM

If taking it early means that it will wholly or largely tax-free until your State Pension begins, it might be worth considering.

Have you any objective reason to believe that your life expectancy will be unusually short or long? Are you married - would taking it early reduce the Widow's Pension?

jamesd · 13 May 2017 at 2:17PM

Five percent higher for life for each year of waiting is a big reward for not taking it. Pretty easy decision when you can afford to wait. It should significantly increase the total income you can take from pensions and savings combined.

The tax effect is largely irrelevant because by avoiding a five percent a year reduction you can get an income that is 33% higher for life. That can cover the tax cost or fund you doing a bit of VCT buying to help to eliminate your whole income tax bill every year.

33% not 25% because a 5% reduction is more than a 5% increase so 100% unreduced divided by 75% reduced is 33% more.

LarjWej · 13 May 2017 at 7:57PM

thanks kidmugsy and jamesd

interesting point about the tax angle - i will be drawing on a SIPP and earning casual income whilst deferring and so the final salary pension would all be taxed if i took it straight away

i agree that deferring does seem the best option

L

kidmugsy · 13 May 2017 at 8:09PM

LarjWej wrote: »

so the final salary pension would all be taxed if i took it straight away

In which case deferring until 60 is the way to bet.

BobQ · 13 May 2017 at 10:21PM

LarjWej wrote: »

i intend to retire at 55 and have the option of taking a final salary pension at that point

if i do not take this straight away and defer drawing it to a later point the pension payment increases by 5% per year (index linked)

L

When you say increases by 5% (index linked) are you sure? 5% is a fixed increase not an index.

If you stop work at 55 and draw the pension it will (usually) be actuarially reduced (5% is often quoted for this). If you defer payment to NRA you will not (usually) get a 5% increase but the value of the pension may be index linked to preserve its value (inflation linked). As James says that would be very generous.

This may be what you mean but I would be surprised if your pension increases by 5% a year if you stop work. Unless of course you have a very generous redundancy deal.

So my question is Are you sure?

Final salary pension deferral

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