Should I take a pension early?

philbert

I'm nearly 60 and due to receive a couple of final salary pensions this year. They will be enough to live on (I have retired) but I have a couple of other small pensions due when I'm 65. The question is whether to take them now with the associated actuarial reduction. According to my calculations, the break even point (when the extra pension gained from not taking the pension till 65 cancels out the extra pension that would be gained from the 5 extra years of receiving the pensions if I take them early) comes at about the age of 75. This is not taking tax into account Tax seems to increase the break even point to more like age 80.
Obviously life expectancy is a factor but I would be grateful if people would share their views on other factors to bourne in mind. I'm trying to decide if it's sensible to wait for the full pension at 65 as I don't desparately need the money immediately, though it would be useful?

Little_Mo_70

philbert wrote: »

I'm nearly 60 and due to receive a couple of final salary pensions this year. They will be enough to live on (I have retired) but I have a couple of other small pensions due when I'm 65. The question is whether to take them now with the associated actuarial reduction. According to my calculations, the break even point (when the extra pension gained from not taking the pension till 65 cancels out the extra pension that would be gained from the 5 extra years of receiving the pensions if I take them early) comes at about the age of 75. This is not taking tax into account Tax seems to increase the break even point to more like age 80.
Obviously life expectancy is a factor but I would be grateful if people would share their views on other factors to bourne in mind. I'm trying to decide if it's sensible to wait for the full pension at 65 as I don't desparately need the money immediately, though it would be useful?

As nothing is guaranteed anymore, and no matter what you are promised in 5 years time, I would take them now. Goal posts are changing all the time and who knows what's round the corner. Good luck with whatever you decide.

LindaMary

Enjoy them now, life can be short

philbert

Thanks Little Mo. That had occurred to me. Glad to know it's not just my paranoia.

Little_Mo_70

philbert wrote: »

Thanks Little Mo. That had occurred to me. Glad to know it's not just my paranoia.

Being savvy is not paranoia Phil. For the likes of you and I
(you being just a mere youth compared to moi:rotfl:) we have seen the end of honesty, integrity and continuity as we knew it. Now it's something else.

My philosophy therefore - trust no one.

What a sad era we have entered.

philbert

Sad indeed. Certainly trust no one in the field of finance.

dunstonh

Most legislation on changes happens after consultations lasting years. It doesnt often happen overnight. Even the quick legislation changes give you enough time to get things in place before they come into affect.

Tax seems to increase the break even point to more like age 80.

Are you factoring in the age allowance increase at 65 and 75?

philbert

Good points dunstonh. The personal allowance increase would bring the break even point down. I'm not so confident about the speed with which goalposts can be moved though. The government did bring in the change from RPI to CPI for pension increases pretty damn quickly.

atush

Personally, if you don't need it (and it will be taxed), don't take it. Taking income you don't need above your personal allowance isn't really wise. And if you have a spouse, and uncrystalised pensions will be inherited by them outsode your estate.

Even if you wait say 2 years and take it at 62 it will be more, and you will at least know if youc an live w/o it or not.

Loughton_Monkey

Your key questions should be (a) do I really need the extra money, and if not, what would I do with it if I took it early?, and (b) looking at all my assets [ignoring pensions already in payment] am I invested in the correct mix of cash/equities/property etc. to suit my needs?

I, too, am in a similar position as yourself. Early retired. Taking two or three pensions. More to come when I choose. My net pension income does not totally cover my spending. To make up the difference, I therefore have to 'dip into' cash savings. Alternatively, I could invoke those extra pensions now, but I look upon the whole thing as simply managing my total pot of investable assets. As such, by far the best home for 30%/40% of it is in equities. And within equities, there are no better vehicles than pension funds. So it's a no brainer to keep them untapped - not least since they would revert 100% to my wife upon my early death. Indeed I continue to contribute my £2,880 for each of us since I never look a gift horse in the mouth!

If your current income is £20K plus [or wait until your state pension, if that will take you 'over'], then you have the added advantage of being able to take your pension funds at whatever rate you choose under the 'Flexible Drawdown' rules.

Any attempt to calculate a 'break even' scenario [leave to 65, or take lower amount now] would be a bit futile. You don't know how long you would actually live. So you can only assume your 'actuarial' lifespan based upon your current age. As a general rule, you should consider that the market quoted rates are offered on a 'neutral' basis. Their actuaries are far more mathematically savvy than you or I could do on a spreadsheet! In any case, a true comparison would need to allow for the [real] possibility of dying between now and your proposed vesting date. By taking the lower pension now, any early death [earlier than your 'due time'] makes your immediate pension a 'loser'. By leaving the funds alone, early death [before you vest them] makes that strategy a 'winner' - although being dead you wouldn't be here to realise that! But I say that since one should always consider the surviving spouse [if exist].

If knocking on the door of higher tax bands, different reasoning might apply. If, by leaving them alone for now, it means continued equity exposure above that with which you are comfortable, then again you might want to take them now. I just consider my pensions in a similar way to my S&S ISA's. They are equity investments, plain and simple. Even when I wish to divest myself of some of the equities, I will probably cash in a bit of the ISA before the pensions.

philbert

Thanks LM.

In case it makes a difference, my pensions add up to something closer to £10K than £20K (and the state pension won’t take them over £20K) and the ones under discussion only amount to a bit over £1Kpa if I take them now. Also, I have no spouse. I do have reasonable savings (mainly in an ISA & NS&I certificates currently) which I can dip into. What you’re saying, if I understand you correctly, is that leaving these funds in a pension is as good a way of investing them as I’m likely to get so if I’m not going to spend them, I would be best advised to leave them in the pension.

The other issue I’ve got (for all my pensions) is how much to take as lump sum. Would the above logic apply here too? If I don’t need or intend to spend any lump sum, I should maximise the pension as the best way of investing the funds?