Taking a deferred final salary pension early

Kedi

I am 50 this year and have a deferred final salary pension which I can take early, rather than waiting until I am 62.

If I wait until I am 62 my estimated annual pension is £13,695 - assuming I don't take a lump sum.

If I take my pension this year a reduction of 48.7% is applied and my pension would be £7,025. Or £4,939 if I take the maximum lump sum of £39,164.

I am not working and live abroad.

I really am not sure what to do for the best. The pension would be handy now but I don't want to make a stupid mistake by loosing out later. I am concious that if I wait and take the full amount at 62, I will have to pay tax on. But if I take the lump sum and smaller pension now I will likely fall under that tax threshhold.

I know the estimated pension at 62 but will the lump sum be bigger then too? Or will it still be £39,164?

Any advice would be much appreciated.

mjm3346

You generally cannot get at a pension before you are 55 (used to be 50). For civil service pensions a reduction is applied to the lump sum as well as the pension although it is not exactly the same percentage for both.

Kedi

Thanks for your reply. I am assured by my pension scheme that I am allowed to take it this year, at 50. They have even sent me all the forms. This is not a civil service pension.

MikeJones_2

Before 6th April 2006, some specific pension schemes were permitted to have a retirement date lower than 50, reflecting the nature of their members’ occupations (such as some professional sportsmen).

This needed the prior approval of the (then) Inland Revenue’s Pension Scheme Office, who produced the Occupational Pension Scheme Practice Notes which laid down the regulations of approved occupational pension schemes.

If you had this right to retire before age 50, and it was an ‘unqualified’ right – that is, it does not depend on you being able to get final approval from the Trustees of the scheme or your employer for instance – then you may be able to continue with this as a right after 6th April 2006.

Given that this right existed to pre age 50, I would assume that it might also extend to a few schemes in similar circumstances for age 50-55. However, I'd check it out and get it confirmed in writing from the administrators of your scheme.

From 6th April 2006, much more flexibility has been introduced into pension legislation, and your Scheme Rules will determine your minimum and maximum pension age.

The current regulations (in plain English can be found here- HMRC):

RPSM08200000 - Member Pages: Pension age: Contents

Pension age: Contents
RPSM08200010 What is meant by “pension age”?
RPSM08200020 When can I take my benefits?
RPSM08200030 What benefits can I take?
RPSM08200040 Do I have to “retire” before I can take my benefits
RPSM08200050 Can I take my benefits earlier?
RPSM08200060 Can I protect my low retirement age?
RPSM08200070 I am suffering from ill health. Can I take my benefits earlier?
RPSM08200080 What happens if I return to good health?
RPSM08200090 What do I have to do if I want to take my benefits
RPSM08200100 When is the latest I can take my benefits?

Hope that helps?

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.

RichandJ

MikeJones wrote: »

Before 6th April 2006, some specific pension schemes were permitted to have a retirement date lower than 50, reflecting the nature of their members’ occupations (such as some professional sportsmen).

This needed the prior approval of the (then) Inland Revenue’s Pension Scheme Office, who produced the Occupational Pension Scheme Practice Notes which laid down the regulations of approved occupational pension schemes.

If you had this right to retire before age 50, and it was an ‘unqualified’ right – that is, it does not depend on you being able to get final approval from the Trustees of the scheme or your employer for instance – then you may be able to continue with this as a right after 6th April 2006.

Given that this right existed to pre age 50, I would assume that it might also extend to a few schemes in similar circumstances for age 50-55. However, I'd check it out and get it confirmed in writing from the administrators of your scheme.

From 6th April 2006, much more flexibility has been introduced into pension legislation, and your Scheme Rules will determine your minimum and maximum pension age.

The current regulations (in plain English can be found here- HMRC):

RPSM08200000 - Member Pages: Pension age: Contents

Pension age: Contents
RPSM08200010 What is meant by “pension age”?
RPSM08200020 When can I take my benefits?
RPSM08200030 What benefits can I take?
RPSM08200040 Do I have to “retire” before I can take my benefits
RPSM08200050 Can I take my benefits earlier?
RPSM08200060 Can I protect my low retirement age?
RPSM08200070 I am suffering from ill health. Can I take my benefits earlier?
RPSM08200080 What happens if I return to good health?
RPSM08200090 What do I have to do if I want to take my benefits
RPSM08200100 When is the latest I can take my benefits?

Hope that helps?

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.

:eek: you sent a civilian to the RPSM ?

MikeJones_2

RichandJ wrote: »

:eek: you sent a civilian to the RPSM ?

Excellent, RichandJ! I nearly choked on my gin and tonic...

Mike

RichandJ

MikeJones wrote: »

Excellent, RichandJ! I nearly choked on my gin and tonic...

Mike

Now we've had our fun though, perhaps an adviser can help with the original query. From a back of the fag packet calc the TFC at 50 seems to be a PCLS (although it seems a touch high) based on a comm factor of 18.77. Over to the IFAs.....

rrf494g

take pension early?

Remember - the only pension you get is the one you draw. The calculations are important, but you are talking about 12 years extra pension. The industry assumes "mortality cross subsidy", ie the people that die (and never get their pension money back) pay for the living pensioners. If your pension has an inflation (up to 5% per year) type of addition then the reasons for delay are even less. I took my pension early (subject to actuarial reduction) and have never regretted it. So, in general, my advice is to take as much as you can, as soon as you can, and pay as little tax as you can. Do the calculations of course, but have a good reason to NOT take early.
regards

MikeJones_2

Hi Kedi,

This is a once-in-a-lifetime choice and not one that should be taken lightly. It's perhaps one of the most complex areas of financial planning as well as one of the most subjective in terms of advice.

You need to have a comprehensive analysis and an IFA that specialises in pension analysis with defined benefit (e.g. final salary) expertise is essential. This is important to make sure you understand the benefits, implications, advantages and disadvantages of the various courses of action that are available to you.

It will be time and money well spent.

Your personal circumstances (your health, hereditary health, your finances, dependants, risk attitudes) make you unique so there is no flow chart that will help you I'm afraid.

Things to consider (a short sample list, not intended to be comprehensive by any means, and merely to act as an example of some of the areas to factor-in the decision-making process):

• Date of joining and leaving employment (potentially important for the tax free cash lump sum where you have service accrued before 6/4/2006)
• Date of joining and leaving pensionable service (important for certain areas of pension increases in deferment and payment)
• Split of your preserved pension (GMP/non-GMP)
• Spouse's benefits on death before retirement (pension/lump sum)
• Spouse's benefits on death during retirement (pension/lump sum)
• Dependants benefits on death before retirement (pension/lump sum)
• Dependants benefits on death during retirement (pension/lump sum)
• Ill-Health provisions
• Details of any pension deduction, step-up pension, State Scheme Offset at State Pension Age
• How your pension will increase if you take it early and whether the method of increase changes at your Normal Retirement Age or State Pension Age
• Security of the sponsoring employer
• Scheme solvency (deficit and if yes, how much - or in surplus)
• Pension Protection Fund benefits

Personally, I have a questionnaire with over 160 scheme questions that I'd want to have answers to before I considered whether or not to draw benefits early (or transfer).

So as you can see, it's not as easy as it might first appear. But don't be put off either - a specialist adviser ought to comfortably be able to furnish you with the appropriate alternatives for you to be able to make up your own mind.

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.

Kedi

Thank you everyone for your replies, especially Mike Jones and RichardJ. Very, very helpful.

I will go back to my pension fund with some good questions.

RichardJ what is TFC and PCLS?

Anyone else out there have a view?

MikeJones_2

TFC = tax free cash

PCLS = Pension Commencement Lump Sum. This is simply the new name given to the cash lump sum anyone takes from their pension arrangement. Many people have speculated that the fact PCLS no longer contains the words 'tax free' is a precursor to any future legislation change that might mean lump sums could be taxed in the future. As I said though, that's pure speculation at the moment.

Mike