Help Needed Re Early Pension Drawdown

LizLeonard

To clarify, it is a final salary scheme.

The £13k is my preserved pension calculated on my pensionable salary which was much higher - can't remember exactly but i had 22 years service. So I think the £13k is calculated on 22/60ths of my final salary.

All you r advice is much appreciated

regards

liz

EdInvestor

Redoing the sum on the basis of 800k net saved a month @4%, the capital sum you would have after 10 years would be 117,741.:) [I would actually "invest" some of this, but in bonds/gilts or commercial property, perhaps both, so as to shelter it all from tax via ISAs : you can get 7k in an ISA a year that way, with 3k in cash, 4k in the other low risk investments.)

Is there any index linking with the pension?

LizLeonard

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%

EdInvestor

Sorry Liz, I meant after it is in payment.

Debt_Free_Chick

LizLeonard wrote:

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%

In which case I think the figures are "about right".

I assume that the preserved pension of £13,000 was the value when you left in 1998. If so, then this will have grown to about £17,800 by now.

I also assume that your Normal Retirement Age is age 60 so, if you took the pension at age 50, you would be retiring 10 years early.

The penalty for 10 years early retirement is 40% - leaving you with 60% of £17,800 which is just under £11,000.

When doing my rough calculation, I simply assumed inflation at 3% for each year and applied this to the pension excluding the GMP. In practice, inflation was probably more than this in the earlier years, which would account for the inaccuracy of my figure.

But ... it looks about right.

The comment about the penalty for each year between the date you leave and age 50 is a bit misleading. That reduction only applies if you leave before age 50 AND take the pension at that time i.e. when you leave, you take the pension immediately.

If you don't take the pension until later, then the penalty is simply based on the date the pension begins, compared with your normal retirement age.

HTH

LizLeonard

RPI capped at 5% although the trustees can pay more if inflation is higher and the actuary agrees

EdInvestor

Liz

If I were you I would take these figures off to an accountant (not an IFA) and have him work out the tax situation, which I suspect might be the key factor.

It seems probable to me that if you can get all the money sheltered in ISAs over the 10 years when you want to take the income later, the total amount received (lower pension plus tax free income from ISAs) might be much the same as what you would receive from the higher pension if you lefty it, which will be taxed at your highest rate.The other advantage being that you would have a large pot of capital as well.

But the various tax allowances at various ages come into this too, so it really needs someone to sit down and work it out for you in detail.

Be interested to hear the result.

dunstonh

I havent got time to do the figures now but I think you are wrong Ed.

Taking it now will result in around a 40% penalty and loss of increase of between 5 and 6.25% p.a.

The idea of "banking" 10 years worth of income may look attractive but you may well find that the tax free lump sum alone in 10 years time is more than you would have banked taking it early. Then you have the difference in the income which is likely to be significant. Working on DFCs figures, you are looking at 6k before indexation. Indexation within the scheme being double before payment compared with after.

EdInvestor

Liz

Just one other thing - if you think there's any chance you will take the pension immediately, then it would be very sensible to open accounts NOW to use your ISA allowances for this year before they expire next month.

You can just put a token amount into the accounts initially, but make sure you open this years' ISAs by the deadline.You can then open another 2 for next year after April 6.

That would get 14k's worth of pension money tax protected straight away to be paid in in the future .