Pension at 55 or 60?

greyspur

Hi All
There have been questions asked before similar to the questions I am asking below, but I hope some of you would not mind giving your opinions on mine.

I am 55 years old in June and have received two requested estimated statements for taking my pension at 55 and 60 from my deferred final salary pension.
There are a few reasons why I want to take the pension early, one being that my former company has been taken over and the pension scheme has been transferred to their scheme and I am concerned that I may lose benefits in the future, also I want to pay the least tax possible on retirement income at 65, so does that mean getting funds out now? and put into Isas.

My accrued benefits as of July 2009 are: £10,800 total preserved pension.

Estimate for taking at 55 are: Full pension £8900 or £6700 with £45,000 lump sum.

Estimate for taking at 60 (unreduced pension) are: Full pension £13000 or £9700 with £65,000 lump sum.

The pension if taken will not increase that much until I am 65 the only part that will increase is the pension arising from the scheme from 6th April 1997 to when I left the scheme end of 2002
After state pension age the pre 88 GMP will increase with the basic state pension and the post 88 GMP will increase in line with RPI up to 3% maximum.

I expect to carry on working until 65 and will have two smaller pensions that will give £1000 year between them at 65

My wife will also have a full basic pension and an estimated company pension of £3,500 a year

What effect will inflation (say 2% year) and tax (20%) before and after 65 has on my pension benefits including basic pension state pension.
Should I take pension now or wait 5 years, or somewhere in between, I have no mortgage or debts.

Thank you

hugheskevi

There are a few reasons why I want to take the pension early, one being that my former company has been taken over and the pension scheme has been transferred to their scheme and I am concerned that I may lose benefits in the future,

If the scheme is underfunded and the employer becomes insolvent, it won't matter whether you have taken the pension or not, either way the scheme will be taken in by the Pension Protection Fund and the benefits you receive will be the same.

also I want to pay the least tax possible on retirement income at 65, so does that mean getting funds out now? and put into Isas.

If you want to minimise tax, concentrate on ensuring that you are taking full advantage of income tax allowances.

That means making sure you don't push yourself into higher rate tax prior to 65 by taking an income from the pension. After 65, you pay a higer rate of tax on income between about £22,900 and £30,000 as the higher personal allowance is withdrawn. So ideally you would try to structure the pension payments so your post 65 income is a bit under £22,900 without driving yourself into higher rate tax prior to 65 by lump sum/timing of taking pension, etc.

Remember that you can defer drawing your State pension (choosing a higher income or a lump sum with interest) which might help.

Work out how advantageous the lump sum option is to you - just because it is tax free does not mean it is automatically sensible to take the full amount as in some cases it can be better to choose a higher (taxed) income than the tax free lump sum, depending on the factors the scheme uses.

Basic State Pension is likely to increase by prices in the next few years, then earnings, so the value will be protected against inflation. Your final salary pension may well not be fully inflation protected - it depends on how your scheme revalues deferred benefits.

Hope some of that helps - without more detail, and especilly what you expect to earn between now and age 65 it is hard to be any more specific.

Crabby

If the scheme is underfunded and the employer becomes insolvent, it won't matter whether you have taken the pension or not, either way the scheme will be taken in by the Pension Protection Fund and the benefits you receive will be the same.

If you take the pension early, and you are still under normal pensionable age when your employer becomes insolvent and the PPF take over your scheme, you will lose 10% of the pension in payment. Also only pension accrued after 1997 will be subject to increases upto 2.5% PA.

greyspur

Some more detail, my salary is under £20,000 and my only other income is some interest on cash Isas.
I am concerned that the new company can change my benefits(main one unreduced pension at 60) to 65 the same as there employees.

I could have around £100,000 in Isas by 65 taking pension at 55 by using both our Isa allowances. Would I gain by doing this.

hugheskevi

I am concerned that the new company can change my benefits(main one unreduced pension at 60) to 65 the same as there employees.

The company cannot alter accrued rights by law, so you don't have to worry about that at all.

It looks like that at age 65 the most you will have is about £19,000 in today's prices (£13,000 pension if you waited to age 60 and didn't take lump sum), £1,000 other pensions and about £5,000 of State pension (although you might have more than this - well worth getting a State pension forecast if you don't know how much State pension you will get).

That should be comfortably below the £22,900 threshold I mentioned earlier, so there doesn't seem to be any pressing need due to that to reduce the amount of pension paid by choosing early access or lump sum commutation.

Equally, you are in no danger of driving yourself into higher rate tax by taking early access.

Which means that from the perspective of minimising tax, it doesn't really matter what you do - either way you will end up paying 20% income tax on the money received.

Your wife's also got income in retirement that should be at or about the income tax threshold for over 65s. When she is closer to 65 you might want to check exactly what her income will be and if it is below the threshold, put enough into a pension to exploit the allowance fully.

You are in a position where there isn't much you can do to arrange your affairs over the next few years to maximise your total pension value between yourself and your partner.

So I'd just focus on whether you think the early access terms and lump sum terms are good value and select accordingly. My personal choice in your situation would be to take the pension at age 60 with a lump sum, witht the caveat I haven't done any of the maths necessary to be definitive about that.