Take pension now or leave it til retirement date

jonestom

I am asking this question for a friend and wording the question as though he is writing it.

About 6 years ago our company was taken over when we were on a FSS pension, anyone over 50 was given the opportunity to take their pension abated at 5%.

Everyone then had to join the company CARE pension scheme, and the FSS pensions were frozen for those who hadn't taken it.

We were taken over again 2 years ago, and now the new company has offered everyone over 50 to take both the FSS and CARE pensions, both abated by 5% and start a new Stakeholder pension.

So the choice is to leave both the FSS and CARE pensions frozen until retirement date or take them now.

If taken now the abatement equates to approx 33%.in my case

We still remain on a good salary and I don't need the pension money, but of course it would be nice to have.

Some workmates are taking up the company offer and taking their pension now, rumours are flying around that financial advisers have recommended they take it now.

I'm not sure, I think if you can afford to leave it, do so, as it will grow while you're contributing to the stakeholder pension, until retirement day comes along. in my case about 6.1/2 years.

Any advice or comments would be appreciated.

jh2009

I think this post is about taking early retirement from a either a CARE or final salary scheme?? And an offer has been made to take early retirement, with a 5% reduction per year for each year below 65?

Its a personal decision really whether to take early retirement. The nearer you get to 65, the lower the reduction, but the reduction rates could change in the future (and possibly will given longer life expectancy in recent years) so beware of keeping the 5% figure in your head if thinking of early retirement at a future date.

Its also unclear if the 5% is a special early retirement reduction, which would not apply say in 6 months time if you applied then. Im sure your company can confirm this to you.

No one on here can advise anyone to take early retirement or not, and i doubt any financial adviser could recommend blindly that everyone accepts an offer as we all have different circumstances (health, income, retirement aims, savings, etc) so it will suit some and not others. You have however dropped a big clue by saying the income isnt really needed from your pension suggesting you are happy on your current salary. If so maybe theres an argument not to take the pension early, as taking it may mean extra income now you dont need but will simply reduce retirement income later, which may be a longer term problem down the line when you do retire.

Give any thing you consider serious thought in terms of income now, income you wish to receive throughout retirement, benefits payable in death such as widows pensions, etc. If you are unsure, then you should seek financial advice. www.unbiased.co.uk lists advisers in your area.

novice-saver

Just be careful that your pension and your earnings together don't put you into the realms of high rate tax - both are taxable.

From personal experience I can say it also upsets the tax man somewhat, to claim a decent pension and still be employed (with a different employer in my case), and you are likely to want to nominate your pension as your main account for tax purposes - as it should be paid until death.

Also, consider that the financial advisers maybe after 25% of your pension to invest on your behalf (a cynic might say touting for business).

If you don't need the 25% cash, it will probably give better returns in the pension - provided the pension is index linked, provided you live long enough, provided the scheme doesn't go bust..


All in all, probably impossible to answer your question.


All IMHO, and I might be wrong.

jonestom

Early retirement is not on offer.

I have a FSS frozen 6 years ago plus a CARE scheme that started after the new company froze the FSS.
The new company are about to freeze the CARE scheme and start a new scheme.

Therefore this new company have offered everyone over 50 the chance to take either one or both frozen pensions now, abated at 5% for every year under the age of 65.

And join the new pension scheme.

So the choice is take either one or both frozen pensions now abated at 5% staying employed with the company and joining a new pension scheme,
Or..
Leaving the pension(s) frozen, joining the new pension scheme while still being employed with the company.

These companies have a long standing track record for abating at 5% therefore I don't really see that changing in the future, although you can never say never.

Thank you for your inputs, I know I was asking the impossible really, as you say it's all down to personal circumstances. I was just wondering if I was missing something that you chaps might pick up on.

I was thinking that if I leave the pensions and take them when the investment funds improve, then my pension will better if taken later rather than how, but, if I don't take the pensions now, and the business closes will I not get as lucrative an offer.

It's a tough one.

EdInvestor

jonestom wrote: »

So the choice is to leave both the FSS and CARE pensions frozen until retirement date or take them now.

Of course they will not be frozen but adjusted to match inflation.

We still remain on a good salary and I don't need the pension money, but of course it would be nice to have.

There seems little point in taking a reduced pension then.There appears to be no risk to the funds.

MikeJones_2

Hi Tom,

jonestom wrote: »

I was thinking that if I leave the pensions and take them when the investment funds improve, then my pension will better if taken later rather than how, but, if I don't take the pensions now, and the business closes will I not get as lucrative an offer.

The amount of members' pensions when paid from a 'final salary' or 'CARE' scheme (both types of defined benefit schemes) are calculated by reference to pensionable service and salary.

So, whether the 'investment funds' (which underpin the scheme) improve or not won't directly affect the amount of your pension benefits so long as the sponsoring employer remains able to meets its responsibilities to the scheme.

It is the sponsoring employer that suffers that risk as it has 'promised' to provide members their pension benefits irrespective of market conditions. The risks of scheme members are quantified by a number of other factors (Security and Risk: Preserved Members of Defined Benefit Schemes)

I'm in agreement with the previous responders to your post in that each person's circumstances will be different - so it's impossible to be specific from what you have posted.

For example, with the final salary and CARE scheme benefits now being 'preserved' (since your colleague ceased to be an active member of those particular schemes), the effect of inflation will have an explicit bearing upon the decision whether to take the benefits now or in the future. (Rather timely, the Bank of England has today published its predictions for inflation: Inflation report May 2009).

Preserved pensions (somethimes also called 'deferred’ pensions) typically increase in the period up to Normal Retirement Date. This is called 'revaluation' and is laid down in law.

The amount of revaluation depends upon when a scheme member ceased to be an active member, as legislation has changed over the years.

Judging by your post, I'd expect the preserved pensions to be revalued by RPI up to a maximum of 5% p.a. compound from the date your colleague ceased to be an active member up until his Normal Retirement Date.

The Scheme Rules will determine what month of the year it choose to use for RPI when revaluing preserved pensions. Many, use September, but it could be any of the other months.

And therein lies the quandy. Last September’s RPI (year on year) was 5%, but last month’s had fallen to -0.4% (the year to March 2009).

No one knows for certain what inflation will be in the next 5 years but if inflation is very low that may justify either of the two courses of action:

1. Take the pension now and ‘suffer’ the penalty – in the knowledge that at least he has benefitted from 6.5 years extra income (less tax)
2. Leave the pension until NRD even though the ‘revaluation’ may be very small but there would be no penalty to suffer.

Not an easy decision by any means.

Hope this has given food for thought.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

jonestom

Frozen was probably a bad choice of words now that I've seen some of the comments.

Thank you all for helping out.

I'll pass on the gist of the advice to my work mate and let him decide from there.

One thing that I didn't appreciate was the pension(s) being index linked, I would have advised him not to take the pensions because the stock market was going through a bad patch, so I've learned something.

Also the deferred pensions (frozen as I wrongly put it) are also increasing in line with inflation.

These are facts that I'm sure will help him make his decision, albeit a tricky one.

You guys have so much knowledge on these subjects and are so helpful, it's unreal.

Thanks again

EdInvestor

jonestom wrote: »

I would have advised him not to take the pensions because the stock market was going through a bad patch, so I've learned something.

This applies to the type of pension known as "defined contribution" or "money purchase" - and if your friend had one of these then your advice would be very sensible.

But your friend has a "defined benefit" pension, often known as final salary ( or lately care average salary) pension, so what happens in the markets won't have any effect on him at all.

jonestom

Thanks Ed,
I don't think I'll ever understand it all fully, so it's a good job this site is here.
Regards
Tom