Retire at 55 :)

Dunree

Hi Guys,

I'm new here and I wonder if you could give me some advice on my future pension.

I'm hoping to retire at around 55 years old, I'm currently 49.

My pension, as it stands at the moment, will pay out the following:
Opt 1 Pension of £17212 p/a
Opt 2 Pension of £12099, plus a lump sum of £80660
Opt 3 Pension of £19660 p/a reducing to £14331 from Nov 2028
Opt 4 Pension of £13934 reducing to £8606 p/a from Nov 2028, with a lump sum of £90322.

Am I correct in assuming that the reduction is when the state pension would kick in?

I'm very soon going to be in the position of having around £100-00 a month to spare from my salary, and I'm not sure whether or not to invest it or add it to an AVC. Which would be best?

I do realise that I am in a very fortunate position, but I have been paying into my pension for 25 years.

Any suggestions as to what to do with would be gratefully appreciated.

Regards,

Dunree

Zelazny

The reduction in these schemes is usually set to happen when the state pension kicks in, but bear in mind that if they move your state pension date, the reduction will not be moved so you may face a few years with a significantly diminished income.

I can't really comment on what's best to do with regards the options or the extra £100 a month, as it all depends on your personal circumstances.

Bob_the_Saver

Waiting until you're in your 50's to retire, what a terrible thought.

jamesd

Assuming you're male and in generally good health you should plan to live until you're at least 86 years old, roughly the age at which half of 65 year old men today will live to, it'll be a bit higher for those of your age. That's around 31 years from age 55 so that can help you to work out if the lump sum is a good idea. It almost certainly isn't a good idea.

AVCs are just another form of investing, with pension tax relief. Check whether your scheme is one that allows you to take AVC money for a lump sum instead of reducing the main scheme pension income level, such deals can be very good ones.

With £100 a month I'd be inclined to use stocks and shares ISA investing rather than more pension, unless it's the type of AVC I've described above.

You should also investigate the effect of delaying taking the work pension until you're older than 55. That can pay off very well, depending on how much it's reduced for each year early it's being taken. Things like setting up an offset mortgage and living on money gradually drawn form that or from savings can provide very good and guaranteed returns from the higher pension income that is being obtained by delaying taking the pension and living on the alternative money for a year or five.

Assuming that you've been in a contracted out work pension you wouldn't get any additional state pension (the SERPS/S2P part), just the basic state pension. The reduced income levels correspond to about the income you'd get from the state pension. It's probably a good idea to take one of those income plans because that will smooth out your income before and after retirement.

Assuming good health the lump sums aren't likely to be a good idea. They may be useful in part if you go the route of using a mortgage to delay taking the pension income. Then you could repay the mortgage in a lump out of the increased lump sum from delaying.

fairleads

Dunree wrote: »

Hi Guys,

I'm new here and I wonder if you could give me some advice on my future pension.

I'm hoping to retire at around 55 years old, I'm currently 49.

My pension, as it stands at the moment, will pay out the following:
Opt 1 Pension of £17212 p/a
Opt 2 Pension of £12099, plus a lump sum of £80660
Opt 3 Pension of £19660 p/a reducing to £14331 from Nov 2028
Opt 4 Pension of £13934 reducing to £8606 p/a from Nov 2028, with a lump sum of £90322.

Am I correct in assuming that the reduction is when the state pension would kick in?

I'm very soon going to be in the position of having around £100-00 a month to spare from my salary, and I'm not sure whether or not to invest it or add it to an AVC. Which would be best?

I do realise that I am in a very fortunate position, but I have been paying into my pension for 25 years.

Any suggestions as to what to do with would be gratefully appreciated.

Regards,

Dunree

Give us a clue mate, how much income do you require if you were retiring today - your minimum income need, for example.

Ranger8

Bob_the_Saver wrote: »

Waiting until you're in your 50's to retire, what a terrible thought.

Yep don`t believe everything you read, its hell !

FLAPJACK

Take heed of what Zalazny has pointed out regarding the "Levelling Option" reduction.

I was retired at 49 due to ill health, I took the LO... now 5 years later I find that my income for one year will drop by over 3k until I'm 66....if you take the LO at least you will be in a situation that you can make the best of a bad job and have a number of years notice of this reduction happening.

I took the LO at my age as it could be that I don't last until 66 anyway so every penny counts.

Dunree

Thanks for the replies guys, and the info is fantastic.
A few things to note.
I work in the public sector, present salary just under £47,000. This will obviously increase over the next few years following a recent pay deal.
55 is the age I've set myself, but if circumstances dictate otherwise, then I will stay on.
I am very fortunate in another way, in that, we live rent and mortgage free due to my partners father having left her the family home when he sadly passed away.
Please believe me when I tell you that up until 18 months ago, things were extremely tough. It is only recently that we have come up trumps.
With regards to living to a ripe old age, on my fathers side, cancer and heart attacks are the order of the day, on my mothers side, they all lived well into their 80's and 90's, so I'm not sure what sifde of the line I'll fall on
We are planning on selling in the next two years, and may possibly need a mortgage, won't know until then, but chances are as the home is in a good area of London, we won't be looking at a big mortgage.
If I retire at 62 then options are:
1 Pension of £24976
2 £16840, lump sum of £112270
3 £28597 reducing to £23268 at state pension time.
4 £19282 reducing to £13953 lump sum of £128547.
This will be a lot of money for us in the future, and I think if we did go down the mortgage route, then the lump sums would pay it off.
After years and years of struggling, we can finally see financial security, hence the "spare" £100-00.
This £100 will increase over the next few years, and it's this that I'm not sure what to do with. ISA's, AVC's, or just stick it in a bank.
Never having been in this position before, I'm at a loss as to where to put the money.

PS, JAMESD: I'm in a final salary pension scheme if that helps/makes a difference.

xylophone

In your position, I think I'd contribute the £100 a month into a stocks and shares ISA.

jamesd

S&S ISA still looks best but do check what happens to the AVCs - I seem to dimly recall that some of the public sector schemes offer good deals for them, not sure though. Would need to know exactly which scheme and then maybe someone familiar with the rules of that scheme could comment.

Final salary looks good particularly with the prospect of salary increases. You seem to be one of those who is in a position to benefit greatly from the way final salary schemes increase based on later in life earnings.

The mortgage or living on other money optimisation still applies. Just need to know how much you get taking it at the originally planned date and how much by delaying, then that will give you an effective return on investment from waiting that you can compare to the costs of borrowing or other ways of supporting yourself.

Using a pension lump sum to pay off a mortgage can be a good deal but it typically works better with defined contribution pension schemes. With final salary types you tend to have to give up too much ongoing income for taking the lump sum to pay. But it might be worth it if you delay using mortgage money and then clear that extra mortgage - the higher pension from delaying may compensate for the reduced pension from taking the lump sum.

However if you look at the income levels, no lump sum gets you £9,315 a year extra income. You can do a lot of mortgage paying with that and it won't run out if you do live a long life.

The lump sum:income commutation rate between choices 3 and 4 is 128547 / (23268 - 13953) = 13.8 to one. That's not a good commutation rate and typically means that someone with reasonable life expectancy is better off not taking the lump sum. Can't tell with your family history but even ignoring inflation-linked increases it only takes 13.8 years for that to pay back and good health means living more than twice as long as that.

My favourite option for this sort of thing tends to be an offset mortgage where you just park unneeded money in the offset account until you draw it to live on. Then you do the reverse once it pays to take the pension. You use life assurance to protect the spouse from the consequences of dying before it's cleared.

Offset is also good if you end up accumulating cash. But it's not best long term, investments are best for that.

Dunree

Wow, I wasn't expecting such detailed replies at this time of the morning, thank you very much guys

The mortgage is at least a couple of years away, so I'll worry about that then, the £100-00 on the other hand is now.

It looks like a stocks and shares ISA it is then

Once again, thank you guys