Early Pension Option, How do I "Claim"/Initiate?

waterstar

Background: Period of employment ended just over 10 years ago. Have "final salary" deferred pension which I can claim from age 50, which is in 6 months time.

Researched/assessed/decided some years ago that it was more beneficial to remain in the scheme rather than transfer out etc, so that is not the question/issue.

Rather question is how and when do the pension trustees typically liase with me or vice-versa should I initiate and liase with them as to options, including tax free lump sim possibilities etc and what sort of time scale is "normal" - e.g. is 6 months before entitlement date "too early".

I appreciate probably there are no hard and fast rules just looking for any thoughts/guidance/etc from others on MSE.

Thanks in advance.

dunstonh

Rather question is how and when do the pension trustees typically liase with me or vice-versa should I initiate and liase with them as to options, including tax free lump sim possibilities etc and what sort of time scale is "normal" - e.g. is 6 months before entitlement date "too early".

There will be no automatic contact until before the scheme normal retirement date. If you wish to contact them, you could do so 6 months before.

I appreciate probably there are no hard and fast rules just looking for any thoughts/guidance/etc from others on MSE.

Be sure this is what you want to do. You can lose a lot of money by commencing pensions early. The combinations of penalties and loss of annual increases could have a significant impact.

EdInvestor

I think you can contact them any time to ask what you might get if you took "early retirement" from aged 50, assuming the schmeme rules allow it.

You're certain to find that your pension will be very substantially reduced (ask for the "commutation factor") if you go so early, and it may also effect any entitlement to a lump sum.

If you are determined to extract the pension from 50 perhaps you should also look at taking a transfer value rather than a pension , especially if you are confident about your ability to invest the funds yourself.Again, this could be reduced substantially on what the fund would be notionally worth if it stayed within the scheme.

There is considerable confusion at present about transfer values and who is in charge of the rules.So you might as well ask - though heaven knows how long it will take before they produce anything substantive for you to analyse.:rolleyes:

JackyF

Instructions on what to do should be on your annual statement (if you get one) or on the Statement of Benefits you received when you left the scheme. You will probably have to contact the scheme administrator who will put your request to the trustee (assuming it is a defined benefit scheme - which has trustees) at their next meeting.

Pal

EdInvestor wrote:

(ask for the "commutation factor")

The "commutation factor" is the rate at which pension is converted into lump sum. Waterstar wants to ask for details of the early retirement reduction.

Worth noting that most final salary schemes are contracted out, and commonly member's benefits do not meet the minimum level required to allow retirement at age 50.

All you have to do is write to the scheme's administrators and ask them for an early retirement quote at age 50. They will then send you the relevant quotation and forms, or alternatively, an explanation as to why you cannot take the benefits at that time.

MrChips

Not sure if Waterstar is aware, but for his (and others) information if early retirement is allowed from age 50, he should expect his scheme pension to be cut by roughly 50%!

The exact reduction amount will depend heavily on the Scheme's "normal retirement age" (a NRA of 65 will lead to a bigger reduction at 50 than a NRA of 60).

Pal also raises an imporant point in that most contracted out defined benefit schemes are obliged to pay a "guaranteed minimum pension" to males from 65 (females from 60). If your early retirment means that your pension has to be reduced to such an extent that when you hit this age your pension will be below this GMP, you will in all liklihood not be allowed to take early retirement.

EdInvestor

Bear in mind the "catchup" factor of course: if you go at aged 50 you will receive 15 years X the lesser amount, compared with going at age 65, where you will receive a larger amount, but won't have those earlier payments already in the kitty: how long will it take you to catch up, and will you be dead before you do?

It's a similar sort of calculation to the one you have to make between the level versus inflation-linked annuity.The level almost always wins because it takes the index linked one so long to catch up.

MrChips

True Ed - but the clever actuaries will have worked out the reduction amount so that the amount you receive via either route would be expected to be identical (or near enough) given their estimate of life expectancy, inflation and future investment returns.

So in theory, you won't be losing out either way - my post was just intended to highlight the actual level of reduction to expect just in case anyone was thinking of retiring this early and expecting the pension to be only reduced slightly! A good rule of thumb is about 4% or 5% for each year before the normal retirement age.

Not sure I quite agree with you about level vs inflation-linked annuities though!

EdInvestor

True Ed - but the clever actuaries will have worked out the reduction amount so that the amount you receive via either route would be expected to be identical (or near enough) given their estimate of life expectancy, inflation and future investment returns.

Not that the actuaries are famous for getting it right, of course
Remember AIDS?:o

waterstar

Thanks to all for your replies and for the interesting points you have collectively raised.

I am currently sending off an enquiry letter to pension trustees.

Meanwhile my vagueness in my previous posting has perhaps started debates/comparisons, so for clarification, as perhaps the original information I provided may have been a little lacking:

The normal retirement age in the section of the pension scheme I was in was 55.

Further, the section of the scheme I was in provided that pension could be taken earlier, from age 50 onwards, subject to a reduction of 5.0% of the deferred benefit for each year earlier it was taken.

The maximum increase in the deferred benefit from date of termination of employment until date of retirement was effectively “capped” and would be 5.0% p.a., or a lesser amount “if the average rate of inflation over the period (to my date of claiming retirement benefits) was less than 5.0%”. (A situation where the rate of inflation over the last 10 years since I became a “deferred pensioner” of the scheme has been very fortuitous in that the “real value” of the deferred benefits have not declined.)

HOWEVER, the scheme offered me that I can elect to take retirement benefits at any time from attaining age 50 with a reduction for early retirement at a rate less than the 5.0% p.a. rate generally applied to members of the scheme. N.B. I have a specific reduction fixed rate. However unless there is some technical issue that I am failing to see, it seems to me that it is a bit of a “no-brainer” that it is definitely beneficial to take the “early retirement benefit”.

Once again thanks for all your responses.

waterstar

Some further thoughts I would offer as a general response to the debate over whether it is beneficial to take “early pension” subject to a reduction are, in terms of my understanding, as follows:

If we assume, as has been suggested, that there is a quantitative neutrality in taking the early pension: i.e. payment for longer versus lower amounts, as MrChips says

“but the clever actuaries will have worked out the reduction amount so that the amount you receive via either route would be expected to be identical (or near enough) given their estimate of life expectancy, inflation and future investment returns.”

Then I suggest two “qualitative” benefits of commencing taking the pension earlier are:

1) the “inflationary cap” on pension increases is 10.0% p.a. after retirement or from date of taking early retirement; whereas increases in “deferred benefits” are capped at 5.0% p.a. This is not an issue if, or whilst, the Bank of England maintains inflation at 2.5% p.a. or thereabouts but it does give some protection against the risk of future higher inflation.

And
2) In the extreme situation of a pension fund “failing” (not that I am anticipating this in my particular circumstances, although there is a significant deficit) then, as I understand it I have better protection if I am receiving a pension than if I am a “deferred pensioner”.

I offer these thoughts just to add my specific thinking to the general discussion/debate.