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

Pal

Actually both Mr Chips and EdInvestor are "wrong". The point of early retirement reductions is to make payment of the pension cost neutral to the scheme, and that is not achieved through paying the same amount over a longer period of years.

The early retirement factor does take account of the longer expected period of payment, but mainly it takes account of the fact that the scheme will not be earning any investment return on the money that is being paid out in advance of when expected. This is by far the biggest impact.

As a result it is highly likely that many early retirees, even those who live beyond average mortality, will NEVER catch up with the total amount of money that they could have been obtained if they had retired at normal retirement date.

In the current world of low investment returns, early retirement reductions are actually falling. 5% per year is actually quite high now (4% would be closer to neutral for most schemes), so the original poster is probably losing out quite a lot through retirement at 50 instead of 55.

EdInvestor

Let's say his pension at 55 was 20k. He takes it at 50 so it's reduced by 25%. It seems it would take 15 years before he would start to benefit from taking the higher pension later?

Older people have a tendency to think they might be dead by then This may be
irrational, of course.

I think I've read that the index linked annuity starting from the lower base takes around 17 years to catch up with the level annuity? Regarded as "poor value for money" in many quarters I have heard.

Pal

EdInvestor wrote:

Let's say his pension at 55 was 20k. He takes it at 50 so it's reduced by 25%. It seems it would take 15 years before he would start to benefit from taking the higher pension later?

Yes, depending on your RPI assumption (the higher inflation, the more advantage to taking the pension early). In a "low inflation environment", it is worth waiting if you expect to live for a reasonable amount of time post retirement.

Older people have a tendency to think they might be dead by then This may be
irrational, of course.

Apparently most people do not think they will live very long after 65, and almost everyone underestimates how long they are likely to live. This is because people do not bother reading mortality statistics and tend not to have had any first hand experience of death.

I think I've read that the index linked annuity starting from the lower base takes around 17 years to catch up with the level annuity? Regarded as "poor value for money" in many quarters I have heard.

This depends entirely on what assumption you use for inflation. In a low inflation environment, particularly if Index linked Gilt Yields are low pushing up the purchase cost, then flat rate annuities are worthwhile. However predicting that inflation will remain low for up to 30-40 years in the future and purchasing a flat rate annuity might be seen a foolhardy, unless the purchaser also has another index-linked income to fall back on. After all, what was inflation 30 years ago?

I guess the state pensions are there for most people to fall back on, and they are index linked. Not ideal though.

In the end an index linked annuity is a form of insurance policy, guaranteeing a fixed level of real income in the future. Half of the people buying an index linked annuity might lose out if inflation remains low and/or they do not live very long, Half of the people buying will gain if they live longer than average and/or inflation increases above current low levels.

In the end it is a gamble - people just have to decide whether inflation is a threat that they think they need to protect themselves against.

EdInvestor

In the end it is a gamble - people just have to decide whether inflation is a threat that they think they need to protect themselves against..

Having lived through the 1970s ( great if you were buying a property, horrible if you were on a fixed income) I'm thoroughly convinced that inflation is a threat I need to protect myself against.

However I don't think topping up the index-linked state pensions with an index-linked annuity is the ideal way to go about it.