Help Needed Re Early Pension Drawdown

LizLeonard

I left my previous employer in 1998 due to ill health and part of the deal was that I could draw a pension aged 50. The big 50 is approaching and they have written to me and offered a pension of £11.2K p.a. or a tax free lump sum of £51k with a reduced pension of £7.7K p.a.

Now the bit I don't understand is that I was given the option of receiving my pension at any time after my 50th Birthday, with a preferential rate of early retirement reduction being applied. The reduction applied on my 50th equates to 4% for every year that I left prior to my 50th birthday. The reduction then decreases by .33% for every month the pension remains unclaimed after my 50th.

As I left 7.5 years ago, do I have to wait until I am 57.5 years old to get a full pension or should I cut and run now or should I leave it until I need it.

The pension is apparently split into 2 components a GMP of £2.2K that grows at a fixed rate of 6.25% and the remainder that grows at RPI capped at 5%

I am a real novice at this and would welcome any advice. At the moment I do not need an income as hubby provides, but of course that can always change!

Can anyone make sense of this for me.

Regards

Liz

Debt_Free_Chick

LizLeonard wrote:

Now the bit I don't understand is that I was given the option of receiving my pension at any time after my 50th Birthday, with a preferential rate of early retirement reduction being applied. The reduction applied on my 50th equates to 4% for every year that I left prior to my 50th birthday. The reduction then decreases by .33% for every month the pension remains unclaimed after my 50th.

This calculation doesn't make sense. There should be NO reduction between the date you left and the date you draw the pension.

The calculation should be ..... your pension at date of leaving plus increases since then i.e. 6.25% on your GMP and inflation on the excess. That gives you the value of the pension at age 50. Now then ... if you do nothing, that amount will be paid to you at the normal retirement age (age 60?) - so it's that figure which is reduced to get the early retirement pension.

The reduction is based on the number of years (and pro-rata months) between the date you actually draw the pension and the normal retirement date. A reduction of 4% pa would be classed as "generous" - a cost neutral reduction factor would be at least 6% pa

Ask the administrators to explain how they arrived at your pension and post back here.

LizLeonard

I think I may have misled you in my interpretaion of the relevant paragraph, so here it is as it is written.

Under the terms of your departure you were given the option of receiving your pension at any time after your 50th birthday, with a preferential rate of early retirement reduction being applied. The reduction applied to your pension on your 50th birthday equates to 4% for every year that you left the company before your 50th birthday. The reduction then decreases by .33% for every month (4% per annum) that the pension remains unclaimed after your 50th Birthday

The preserved pension when I left was £13000.

Thanks for your help

dunstonh

In other words, the longer you leave it after your 50th birthday, the lower the penalty they will apply. This is fairly normal.

Hopefully Pal will be along soon as he is the occupational pension guru on the boards.

However, if you dont need the income you dont take it. You have a 4% a year penalty and betweeen 5 and 6.25% indexation. You could look at that as around 10% a growth each year. Why pay a penalty and take a lesser income for the rest of your life and dont need it when delaying it will give you more at a time that you will probably be more likely to need it.

EdInvestor

Why pay a penalty and take a lesser income for the rest of your life and dont need it when delaying it will give you more at a time that you will probably be more likely to need it.

Then again the poster had an ill health early retirement, and a bird in the hand is worth two in the bush

If it were me I would tend to take the money - once you've actually officially started getting a company pension, you are safe: it's those who haven't started their pension yet who get stung if there's a drama.[Yes I know we now have the PPF, but after Maxwell we had the MFR and look what happened.... and of course the Government won't pay up as we saw this week.:( ]

Then I'd invest the money for later. 10% is not that difficult a challenge with a fairly low risk portfolio.

LizLeonard

The Pension is from RBS. Am I foolish to think it is probably safe?

Also for someone who is financially naive getting 10% would be a real challenge. I would end up with -10%!!!

Based on what I have heard I think I would be better off leaving it where it is unless anyone has any other bright ideas.

dunstonh

Then I'd invest the money for later. 10% is not that difficult a challenge with a fairly low risk portfolio.

Please provide an example of a guaranteed 10% return?

Also for someone who is financially naive getting 10% would be a real challenge.

You cant get 10% guaranteed and a cautious portfolio should only be expected to perform around 5-7% with a little volatility. They have been doing better recently with portfolios with property funds in and 10% has been achievable. However, Ed works on the basis that things always go up and stay the same. That is not the case. Hence why the lower 5-7% average is much more sensible.

EdInvestor

LizLeonard wrote:

The Pension is from RBS. Am I foolish to think it is probably safe?

Probably not.But you can never say never. RBS is the owner of Natwest, which nearly went belly-up in 1974 and had to be bailed out by the Bank of England. :eek:

Nobody looks after your money like you do.:)

EdInvestor

LizLeonard wrote:

The preserved pension when I left was £13000.

Do you know how much you would get if you took it now?

Say it's 1000 quid a month net of tax, and you put this in the bank every month @4% interest.

After 10 years you would have a fund of 147,176 pounds at age 60.

If you leave the money, you will draw a higher pension income, but how long would it take you to make up that income you've lost by not taking it?

dunstonh

Can you confirm whether the £13,000 was your pesionable salary that they are basing the calculation on or whether the £13,000 was the projected income if pension was taken at certain age (in todays terms - as it was then)?

My guess (and it is only guesswork until you confirm otherwise) is that the £13,000 was the pensionable salary and that is the figure before the reductions take place and your years in service are applied to it.

I feel it is appropriate to comment that much of the information being posted here is based on your incomplete data and please do not act on what you see here. We do not know enough about your scheme. We do not know what figures apply to where and are only answering with possible options based on possible information that may be incorrect or taken out of context and without other information available.

For example, Ed has used£13,000 as your actual pension income. Whereas my guess is that it will be much lower than that if you take it early due to the penalty and how many years of service you have within the scheme. That also assumes that you are in the final salary version of the scheme and not the money purchase version. Too many assumptions being taken all round.

LizLeonard

They have written to me and offered a pension of £11.2K p.a. or a tax free lump sum of £51k with a reduced pension of £7.7K p.a.