is it best to take a deferred pension early

bikebandit

I am 55 yrs old and have a BT fully index linked deferred final salary pension payable at 60 yr (£14000 + RPI for 5 yrs and a lump sum 3 x pension of £42000 + RPI ). I have left BT last year and have the opportunity to receive my pension at a reduced rate of 5% per year for each year I draw early (at 55yrs will be £10500 and £31500)
Is it better to leave my pension until I am 60 or take a hit of 25% to draw it now or sometime between the two.
I am in good health and do a part time job so am not desperate for the money.
Me and many thousands of ex-BT people would welcome you response

dunstonh

Depends on your personal financial circumstances, tax position, spending habits, health etc both now and what you anticipate in retirement.

A general rule of thumb is that if you dont need it you dont take it as you are suffering a penalty and it could push you into higher rate tax wiping out a lot of the benefit of the income. However, there are some exceptions to that.

Rupert_Bear

I read in the Mail on Sunday that one thing the government may be considering is taking away the tax free element of the lump sum. So this is something I would be aware of if you decide not to take pension early. Also I do not know how quicky this would come into being.

dunstonh

I read in the Mail on Sunday that one thing the government may be considering is taking away the tax free element of the lump sum.

That has appeared in the media at various times for the last 20 years. It hasnt happened. The Mail on Sunday is highly unreliable as a source of financial news.

There is no logical reason to remove pension commencement lump sum. Indeed, the ability for it to reduce consumer debt and increase capital spending in the short term helps the Govt.

Also I do not know how quicky this would come into being.

The last amendment to pension commencement lump sums took place in April 2006 and we knew the changes that were coming about 2-3 years before it. With such a major change, it would almost certainly require primary legislation and consultation. It could not be an overnight change.

property.advert

bikebandit wrote: »

I am 55 yrs old and have a BT fully index linked deferred final salary pension payable at 60 yr (£14000 + RPI for 5 yrs and a lump sum 3 x pension of £42000 + RPI ). I have left BT last year and have the opportunity to receive my pension at a reduced rate of 5% per year for each year I draw early (at 55yrs will be £10500 and £31500)
Is it better to leave my pension until I am 60 or take a hit of 25% to draw it now or sometime between the two.
I am in good health and do a part time job so am not desperate for the money.
Me and many thousands of ex-BT people would welcome you response

Ignoring increases due to RPI and saving interest on the first 5 years money invested, you would receive £2800 a year less in retirement than if you waited 5 years. On a simple net basis, you have to wait until the 24th year before your total receipts from waiting 5 years are more than your total receipts from taking the pension and lump sum now.

That takes you until you are 84 years old and if you die before then, you lose out for sure.

I don't think there is an argument. Take the money and either bank it or save it but just see whether you can live on £808 a month instead of 1,041 a month. If you have some in the bank from the first 5 years, then you'll have interest on that.

Your situation will be individual. But if you need a car or want a holiday of a lifetime, then why wait ? If you really need the £1041 a month then ok, you wait but if you have no debts, I'd have the cash now.

Year 0

0

31,500

Year 1

0

9,695

Year 2

0

9,695

Year 3

0

9,695

Year 4

0

9,695

Year 5

0

9,695

Year 6

42,000

9,695

Year 7

12,495

9,695

Year 8

12,495

9,695

Year 9

12,495

9,695

Year 10

12,495

9,695

Year 11

12,495

9,695

Year 12

12,495

9,695

Year 13

12,495

9,695

Year 14

12,495

9,695

Year 15

12,495

9,695

Year 16

12,495

9,695

Year 17

12,495

9,695

Year 18

12,495

9,695

Year 19

12,495

9,695

Year 20

12,495

9,695

Year 21

12,495

9,695

Year 22

12,495

9,695

Year 23

12,495

9,695

Year 24

12,495

9,695

Total

266,910

264,180

Goldwing1

I've bitten the bullet and signed my papers to take my BT pension early (I'm 53). As has been said earlier, can you live on the income you will receive? Only you know the answer to that one. I've been running a spreadsheet of all my outgoings for a number of years now. It's the little things like club memberships that can get forgotten.

As for the lump sum, I'm aiming to invest it, take 3% income pa and let the excess interest/income build up the nest egg.

Be careful of the forms though. I've taken option one but had to tick the box for option three to get it. This is because I also wanted to take my AVC as a lump sum (BT lump sum + AVC lump sum). Get a quote, log a request to speak to a BT advisor or appoint an IFA to work on your behalf.

Also, I'm aiming to do something part time. That will generate income but for budgeting purposes I'm assuming the glass is totally empty.

bikebandit

My part time job pays me up to the tax allowance so if I draw my pension now I will pay 20% in tax on the full amount i.e. £10500 - £2100 (tax) = £8400 (net)
Also I have read somewhere that the experts recommend not to take a RPI pension early due to value of the RPI on the pension. With rumour that inflation is set to rise in the future due to quantitative easing should I bear any of this in mind

The table below I put in a RPI figure of 3% and total pension paid out equalled out at about 71yr
At 60yr, pension taken now +3% RPI would now be £12172.38 but if I left it until I was 60 would be £16229.73
Tax not taken into account, any comment?


Table1
Age- pension- 3% RPI- pension + RPI- pension to date
55 ---10500

---

315

---

10815

---

10815
56 10815 324 11139 21954
57 11139 334 11473 33428
58 11473 344 11817 45245
59 11817 354 12172 57418
60 12172 365 12537 69955
61 12537 376 12913 82869
62 12913 387 13301 96170
63 13301 399 13700 109870
64 13700 411 14111 123981
65 14111 423 14534 138516
66 14534 436 14970 153486
67 14970 449 15419 168906
68 15419 462 15882 184788
69 15882 476 16358 201147
70 16358 490 16849 217996
71 16849 505 17354 235351
72 17534 520 17875 253227
73 17875 536 18411 271638
74 18411 552 18964 290603
75 18964 568 19533 310136

bikebandit

Sorry the tables from the spreadsheet don’t transfer in to the forum pages very well


My part time job pays me up to the tax allowance so if I draw my pension now I will pay 20% in tax on the full amount i.e. £10500 - £2100 (tax) = £8400 (net)
Also I have read somewhere that the experts recommend not to take a RPI pension early due to value of the RPI on the pension. With rumour that inflation is set to rise in the future due to quantitative easing should I bear any of this in mind

The table below I put in a RPI figure of 3% and total pension paid out equalled out at about 71yr
At 60yr, pension taken now +3% RPI would now be £12172(table1) but if I left it until I was 60 would be £16229 (table2) and at 65yr £14111 or £18814 but how long am I going to live?????????
Tax not taken into account, any comment?

Table1
Age---pension----3% RPI----pension + RPI

---

pension to date
55

---

10500

---

315

---

10815

---

10815
56

---

10815

---

324

---

11139

---

21954
57

---

11139

---

334

---

11473

---

33428
58

---

11473

---

344

---

11817

---

45245
59

---

11817

---

354

---

12172

---

57418
60

---

12172

---

365

---

12537

---

69955
61

---

12537

---

376

---

12913

---

82869
62

---

12913

---

387

---

13301

---

96170
63

---

13301

---

399

---

13700

---

109870
64

---

13700

---

411

---

14111

---

123981
65

---

14111

---

423

---

14534

---

138516
66

---

14534

---

436

---

14970

---

153486
67

---

14970

---

449

---

15419

---

168906
68

---

15419

---

462

---

15882

---

184788
69

---

15882

---

476

---

16358

---

201147
70

---

16358

---

490

---

16849

---

217996
71

---

16849

---

505

---

17354

---

235351
72

---

17534

---

520

---

17875

---

253227
73

---

17875

---

536

---

18411

---

271638
74

---

18411

---

552

---

18964

---

290603
75

---

18964

---

568

---

19533

---

310136


Table2
Age---pension----3% RPI----pension + RPI

---

pension to date
55

---

14000

---

420

---

14420

---

deferred
56

---

14420

---

432

---

14852

---

deferred
57

---

14852

---

445

---

15298

---

deferred
58

---

15298

---

458

---

15757

---

deferred
59

---

15757

---

472

---

16229

---

deferred
60

---

16229

---

486

---

16716

---

16716
61

---

16716

---

501

---

17218

---

33934
62

---

17218

---

516

---

17734

---

51669
63

---

17734

---

532

---

18266

---

69936
64

---

18266

---

548

---

18814

---

88751
65

---

18814

---

564

---

19379

---

108130
66

---

19379

---

581

---

19960

---

128091
67

---

19960

---

598

---

20559

---

148650
68

---

20559

---

616

---

21176

---

169827
69

---

21176

---

635

---

21811

---

191638
70

---

21811

---

654

---

22465

---

214104
71

---

22465

---

673

---

23139

---

237244
72

---

23139

---

694

---

23834

---

261078
73

---

23834

---

715

---

24549

---

285627
74

---

24549

---

736

---

25285

---

310913
75

---

25285

---

758

---

26044

---

336957

blackballer

Hi, I am very interested in your post and the replies so far as I am in exactlly the same position having left BT at 36+ years about 18 months ago. I am considering taking my deferred pension in September when I will be 56. My mortgage will be paid off this year from the last of the early leaver payments.

I have done all the calculations to work out that my "crossover" is at about 70, but I still reckon there are some real advantages in taking it early despite the 5% pa reduction.

Not the least of which is that I am now healthy enough to enjoy it and my wife and I can take some great holidays now that my youngest child is about 17. Also will have some money to pay for university fees etc..

so basically, I can use it now, so why not! - who knows what I will need in my seventies but i dont expect it will be much.
I have a small job and the pension I get will not impact on my tax, and I am thinking of putting the lump sum into National Savings certificates and premium bonds to ward of inflation and get some interest.

For me it all seems a no-brainer! - take it now and enjoy it while you can. After "cross-over" it is still a pretty good income for later life

cheers:beer:

dunstonh

I am thinking of putting the lump sum into National Savings certificates and premium bonds to ward of inflation and get some interest.

The problem with taking it early is that you need to be more realistic with what you do the pension commencement lump sum as its going to have to last you for a long time. Index linked certs being part of it is common sense. However, premium bonds are awful. Its akin to putting your money in a savings account, earning interest which you then draw and spend on lottery tickets. The average rate on premium bonds is below inflation. So, you are effectively losing money on premium bonds if you get the average win.

MikeJones_2

bikebandit wrote: »

Also I have read somewhere that the experts recommend not to take a RPI pension early due to value of the RPI on the pension. With rumour that inflation is set to rise in the future due to quantitative easing should I bear any of this in mind.

Sorry bikebandit, I came to this post late it seems.

As the BT Pension Scheme is a defined benefit occupational pension scheme the Scheme Rules lay down the amount and method of pension escalation (that's the term often used for increases granted to pensions in payment).

Hence, you won't usually have a choice as to whether you receive the RPI increases to your pension in payment or not: these are granted automatically if that is what the scheme rules say.

I say 'usually' because some employers have recently written to pensioners and asked whether they would like to give up certain pension increases in payment (those increases that are not required to be given by law) in exchange for a lump sum.

What you have most likely seen is commentary where someone has a pension fund (from say a personal pension plan) and is about to buy an annuity (pension). At that point in time various options are available including whether to buy a pension that increases in payment (and by what rate) or whether to take an intially higher non-increasing pension.

Just thought I'd try to clarify for other readers of this post. There's no right or wrong: it simply depends upon each individuals personal circumstances and situation

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.