leveling option db schemes

I assume this is where you take a higher pension from a scheme to 65, then pay for it with a reduction at 65.

The theory is that the state pension then replaces the difference and you get a smooth pension through retirement.

If so, advantages are:

1. Higher income when you're younger, and some pensioners like this as they can travel, be more active while they are healthy, etc, and do things they don't expect to be able to do later in their retirement.

2. Certainty of income (as your total retirement income, plus your state pension, is designed to be at a fixed level throughout retirement).

3. You clearly profit from the scheme if you die before 65, as you obviously don't have to repay the extra back after 65.

4. It can smooth out any differences in income from retiring at 60 if you have been made redundant or lost your job and are facing a shortfall of income just from your retirement income.

5. Good for people who have a family history of early deaths or are in very poor health, as the scheme does not take individual health/family history into account in any offer.

6. It doesn't normally affect any widows benefits payable, but check this with the scheme before accepting.

7. Any extra funds could be invested or saved for the future.

Disadvantages are:

1. If you live to a great old age, then this probably would prove to be a mistake.

Its quite common in schemes that provide this option for complaints to come in from older pensioners who complain the scheme is profiting out of them and want the option stopped/reversed. What is pointed out to them is that taking this option is a gamble, and that even if they have paid back more, they have to remember those who died before 65 and who made a profit from the scheme. The schemes are designed to broadly balance out those who gain/those who don't to keep the scheme cost neutral, so not cost is met by those who don't take such an option.

For this reason, no scheme will ever confirm a "break even" point.

2. Lower total income later in retirement.

As at 65, the state pension is just replacing the pension reduced, rather than being additional income.

3. The deduction is often based on an estimate of you receiving the full basic state pension, with the value of this estimated at your date of retirement.

If the actual state pension you get is lower then the reduction applied this could end up higher than your actual state pension, meaning the state pension may not replace the pension you have lost at 65.

The same applies if state pension ages change, with this not affecting any reduction.

4. Tax issues - very tempting to take the higher income early, but if you are working as well, this may not be tax efficient, so consider it very carefully if you do not need the extra income now.

5. Do you know your date of death? Probably unlikely unless you have a terminal condition, so be careful about assuming early death from past family experience/health.

6. If you think you need higher income in your later retirement (for care homes, health care, lifestyle) then this option may not be a good idea.



The best thing to do with such an option is to sit down with your spouse/partner and work out what income needs you expect throughout your retirement.

If you accept it though please remember any reduction at 65 will be permanent, and non reversible.