Help needed re Pension drawing

fjh

I am seeking advice regarding what I should do with regard to my Final Salary pension:-

Draw pension at 58 and carry on working
Draw pension at 63 and retire

I will be 58 in March 2014, I am married wife does not work, 2 grown up children, mortgage outstanding app £65k, savings / shares £15k



I currently have 41.9 years eligible Pension years ( this includes an enhancement of 2.9 years which was given to buy certain rights off me)

The scheme was max 40/60 + any enhancements but has recently changed to a Normal Retirement age of 65

If I do nothing and aim to retire at 63 my pension on current projections will be £37280

If I draw pension at 58 it will be £26330 pa, then I will also receive the 15 % of my salary currently paid by employer into my pension in addition to my salary

I have no health issues at present

My thoughts are mathematically projected say to age 85 drawing Pension at 58 may be of benefit as it will also ‘guarantee’ my pension which would then be subject to annual Inflation rises, I would still get 3 times salary death cover.

Whilst accepting monthly pension would be subject to 40% tax I could pay off addition moneys to my mortgage and my employer scheme would allow me to put 250 pm gross into BAYE shares

I am seeking advice as to pitfalls and your views as to which option would be best for me, my pension scheme have confirmed both options are open to me.

Many thanks

mgdavid

do those pension figures factor in taking any Lump Sum?
How many years left on the mortgage?

jamesd

Taking pension money to pay off a mortgage is usually a poor deal. You invariably lose more in long term pension income than you save in mortgage cost. Better to wait for the higher pension then use that to pay more, if desired.

If you were to take the pension early your best course would probably be to make additional pension contributions into a personal pension. You would have guaranteed pension income of at least £20,000 so you would qualify for flexible drawdown that allows you to take out all of the pension money, the first 25% tax free as a lump sum, the remainder taxed as normal income whenever you take it. After gaining from the tax relief you might then take the extra income for a while once you stop working.

You'd have a pension that is £10,950 a year lower by taking it at 58 instead of 63. Half of 65 year old men will live to age 87 or older so that's an expected cost of 24 x 10,950 = 262,800 plus the inflation-linked increases you'd lose out on.

For the five years from 58 to 63 you'd get 5 x 26,330 + 5 x 15% of pay, 131,650 plus 75% of pay.

That five year income is probably far less than the longer term loss even up to the half of men dying point and it'll get worse if you live longer than that.

It seems that it is unlikely to be to your benefit to take the pension money early. If this was a defined contribution scheme it would be but not for a defined benefit scheme like this one.

If you have money available it's quite likely that using it for contributions to a personal pension would be a good use for it, since you would have the flexible drawdown potential to get a nice tax gain on it. If you're overpaying on the mortgage, ceasing to do that to make pension contributions would probably be a good move.

Alternatively, I wonder about your wife's income situation if you die before her. It might be worth using an spare money for contributions to a pension for her, or earmarking contributions made to a personal pension for you as really intended for her, with you not touching the pension pot but leaving it to be inherited by her if you die first, then she can use it at that time to increase her income.

It's worth wondering about the lump sum commutation rate. Government ones tend to be really bad, about 12:1 (lump sum : income given up) but sometimes with others it can be useful to take a bigger lump sum to reduce income to below the higher rate tax threshold and stay there once the state pensions start. In such cases the extra lump sum could be invested within a S&S ISA to provide ongoing tax free income or used for pension contributions for a spouse or some combination of the two.

fjh

Thanks - no lump sum from main pension, 20k app from an AVC, mortgage is till aged 70
Pension inflation linked at present to RPI

jamesd

RPI linking is great. Makes it an even less good idea to take it earlier than needed.

How are AVCs invested and taken from pay? If taken from pay before tax and NI - salary sacrifice - that'd be a nice way to get pension tax relief.

fjh

Yes AVC's taken via salary, changed Investment 'choice' last year to 'cash'

atush

Ouch, what rate are you getting in cash?

My pensions went way up in the last year.

fjh

for the 'period' in question - max 6 years rather have 'comfort' of having cash than 'risk' - not too greedy already had 40 % discount via tax

fjh

jamesd wrote: »

Taking pension money to pay off a mortgage is usually a poor deal. You invariably lose more in long term pension income than you save in mortgage cost. Better to wait for the higher pension then use that to pay more, if desired.

If you were to take the pension early your best course would probably be to make additional pension contributions into a personal pension. You would have guaranteed pension income of at least £20,000 so you would qualify for flexible drawdown that allows you to take out all of the pension money, the first 25% tax free as a lump sum, the remainder taxed as normal income whenever you take it. After gaining from the tax relief you might then take the extra income for a while once you stop working.

You'd have a pension that is £10,950 a year lower by taking it at 58 instead of 63. Half of 65 year old men will live to age 87 or older so that's an expected cost of 24 x 10,950 = 262,800 plus the inflation-linked increases you'd lose out on.

For the five years from 58 to 63 you'd get 5 x 26,330 + 5 x 15% of pay, 131,650 plus 75% of pay.

That five year income is probably far less than the longer term loss even up to the half of men dying point and it'll get worse if you live longer than that.

It seems that it is unlikely to be to your benefit to take the pension money early. If this was a defined contribution scheme it would be but not for a defined benefit scheme like this one.

If you have money available it's quite likely that using it for contributions to a personal pension would be a good use for it, since you would have the flexible drawdown potential to get a nice tax gain on it. If you're overpaying on the mortgage, ceasing to do that to make pension contributions would probably be a good move.

Alternatively, I wonder about your wife's income situation if you die before her. It might be worth using an spare money for contributions to a pension for her, or earmarking contributions made to a personal pension for you as really intended for her, with you not touching the pension pot but leaving it to be inherited by her if you die first, then she can use it at that time to increase her income.

It's worth wondering about the lump sum commutation rate. Government ones tend to be really bad, about 12:1 (lump sum : income given up) but sometimes with others it can be useful to take a bigger lump sum to reduce income to below the higher rate tax threshold and stay there once the state pensions start. In such cases the extra lump sum could be invested within a S&S ISA to provide ongoing tax free income or used for pension contributions for a spouse or some combination of the two.

My calculations show that taking pension at 63 produces a higher total only from aged 85 onwards, unless I have made an error( I included 2.5% pa for RPI as a estimate) I also don't understand your "75% of salary "in your calculation - please could you expand? Very grateful for your input 'Jamesd'