Checking my pension decision before I do it!

Excel_2

Hi there, I’m about to make quite an important financial decision but before I do so, I’d really appreciate some independent feedback on what I’m planning to do.

I’m 57 years old with a deferred occupational pension that will pay me £29,500 p.a. at my NRD which is 31/12/2015 (age 59 years and 10 months).

I’m self employed and work has almost dried up completely overthe past 2 – 3 years so I’ve been living off my savings rather than take an early pension as I want to achieve the maximum annual income when I retire. However I’m now starting to think it would be better to take early retirement.

I’ve just got a quote for retiring at age 58 (10 months away). This was for £24,802 p.a.with no lump sum or £19,264 p.a. with a lump sum of £128,428. I’ve decided to go with the option of retiring at 58 instead of 60 without the lump sum and here is my logic:

1. My aim is to achieve the highest possible monthly income. I also want a stable monthly income rather than have to worry about investments and fluctuating interest rates in my retirement.

2. Unless I tied the £128k into long term investments I would be hard pushed to make up the shortfall of £5,500 p.a. with savings interest.

3. It’s too late to buy an annuity as I’ll need an income from it straight away and in any case the rates are unattractive at the moment.

4. I’m single with no children so I don’t need toworry about having a lump sum to leave in my will.

5. If I retire 2 years early I will be able to hold on to my savings rather than deplete them completely by age 60.

6. Once in payment, 97% of my pension will increase by 5% per annum so on that basis I have calculated that my annual income will increase to £27,345 by age 60. That’s around £2,000 p.a. less than I wouldhave received had I hung on to age 60 but I’m happy with that.

7. Between ages 58 and 60 I will have received roughly £50k in early pension payments so I’m better off for the first 25 years.

I did speak to a financial adviser a couple of years ago and when I suggested that I might retire without taking the tax free sum I thought he was going to have a heart attack! He made me feel that it was a very bad decision yet my personal circumstances tell me it’s right for me.

I’m not asking anyone here to give me financial advice but just to open my eyes to additional options (if indeed there are any) that I might be unaware of and that I can investigate myself. For example, I hear that most people do take their tax free lump sum but how do they earn sufficient income from it to make it worthwhile?

Also do my pension projections in points 6 and 7 look about right to you?

I know that you can get better annuity terms by pleading shorter life expectancy. Does this work with occupational pensions too? I’ve been a (Type 1) diabetic for 40 years and I also have high blood pressure. Would that have any effect on the sums offered by my ex employers? I think perhaps not but it’s worth asking.

How soon before your required early retirement date do you put in your application? I was thinking of formally requesting 6 months before, i.e. say early September 2013 for a retirement date end of February 2014.

To those of you have bothered to read this far – thanks, and to those of you who reply with answers – many thanks!!

SeekTruth

Sorry, not prepared to offer advice, but am prepared to seek further information.

Is the value at NRD of £29,500 pa being revalued every year? If so, what is the mechanism, e.g. RPI.

Can you confirm that once in payment the pension really does increase at a fixed rate of 5% pa and not, for example, at RPI capped at 5%.

Excel_2

Thanks for replying so quickly. Here is how the company explains their mechanism "For the purposes of illustration only the figures quoted at NRD assume an increase of 2.75% on the Post 98 Pension over GMP, a fixed rate of 5% on the Pre 98 pension over the GMP and a fixed increase of 6.25% on the GMP element."

At the time I left in June 99, the figures were £770.96 (post 98)/£10,816.37 (pre 98)/£1,869.40 (GMP). These figures are projected to be £1190/£23,611/£4641 by NRD, not by me but by my ex employers. All of the revaluation figures seem to be fixed rate.

Once in Payment they state "Subject to Inland Revenue limits, your pension will be increased annually by

1. Pension attributable to service prior to 1 August 1998 - This part of your pension will increase by 5% per year.

2. Pension attributable to service after 1 August 1998 - This part of your pension will increase in line with the increase in the Retail Prices Index, subject to a maximum of 5% a year" This part is £1190.

RichandJ

Again, not advice but a general comment on your point 6. Do you know what the pension increase date for the scheme is ?

Could be germane because a lot of schemes only give pro rata increases, depending on how long the pension has been in payment at the increase date. This could be based on days, complete months or (rarely in my experience) weeks.

Might throw your calcs out but the administrator should hopefully be able to answer the question easily.

RichandJ

Excel wrote: »

Thanks for replying so quickly. Here is how the company explains their mechanism "For the purposes of illustration only the figures quoted at NRD assume an increase of 2.75% on the Post 98 Pension over GMP, a fixed rate of 5% on the Pre 98 pension over the GMP and a fixed increase of 6.25% on the GMP element." At the time I left in June 99, the figures were £1,869.40 (GMP), £10,816.37 (pre 98), £770.96 (post 98). These figures are projected to be £4641/£23,611/£1190 by NRD, not by me but by my ex employers. All of the revaluation figures seem to be fixed rate.

GMPs ceased wef 5/4/97, not sure why they're using 98, unless it's a scheme specific benefit change date. By definition, there is no Post 97 (or 98) excess over GMP, it's just Post 97 (or 98 ).

ETA, ah your edit makes it clearer, obviously a scheme specific benefit change date.

sandsy

The quotation confirms the revaluation basis but doesn't confirm the 5% increases after retirement, as far as I can see.

There is one other option which I'm normally loathe to suggest as it's not normally in people's best interests. However, your very specific circumstances would suggest that it's something you may want to at least consider and then possibly ignore. It's driven by the fact that you are both single and have health issues. A pension from a defined benefit scheme normally assumes that (a) you have a spouse and (b) you're of average health compared to other members in the scheme.

For people who don't have a spouse, the benefit provided by the pension is worth less than if they did have a spouse (as no spouse's pension is payable on your death). However, if you were to obtain a transfer value from the scheme, the transfer value would assume you did have a spouse and could possibly enable you to buy an annuity in the open market which is higher than that on offer in the scheme. Further, as many annuities these days are underwritten based on health, someone with worse than average health can often obtain better annuity rates. A DB scheme pension will take no aco!!!! of your health.

However, it can be hard to obtain good advice in this area. As you are so close to retirement, however, the comparison becomes easier than for people further away from retirement who would need to invest a transfer value for a good number of years first (at uncertain returns).

As I said, just another option.....

Excel_2

"There is one other option which I'm normally loathe to suggest as it's not normally in people's best interests. However, your very specific circumstances would suggest that it's something you may want to at least consider and then possibly ignore. It's driven by the fact that you are both single and have health issues."

Yes, you're right Sandsy, I did look at this option about 5 years ago just before the financial world went belly up but I didn't take it up as the quotation offered at the time was less than the amount I was due to get through my occupational pension, also there was no increase each year - it was a flat rate. Plus, if I'm really honest I didn't really understand the details of the quote - it scared me off!! Perhaps I should have looked at this option when I was a bit younger.

You also answered one of my other questions, that an occupational scheme doesn't take into account the state of your health. I'm actually in good health but statistics say otherwise!!

Excel_2

RichandJ wrote: »

Again, not advice but a general comment on your point 6. Do you know what the pension increase date for the scheme is ?

Could be germane because a lot of schemes only give pro rata increases, depending on how long the pension has been in payment at the increase date. This could be based on days, complete months or (rarely in my experience) weeks.

Might throw your calcs out but the administrator should hopefully be able to answer the question easily.

Yes, this is another point I wasn't sure about. I don't know if my pension "year" runs from the date of leaving, my birthday or the scheme's "renewal date". If it's the scheme's own date then I guess it would be 31st December each year as my NRD starts on 31/12/2015 even though I won't be 60 until the end of February 2016.

However the quote for retirement at age 58 starts on my 58th birthday in February. Can you ask to retire at any time of year of your own choosing or does it have to be on your birthday?

This is something I will have to check with the company before I apply so thanks for raising the point.

RichandJ

Excel wrote: »

Yes, this is another point I wasn't sure about. I don't know if my pension "year" runs from the date of leaving, my birthday or the scheme's "renewal date". If it's the scheme's own date then I guess it would be 31st December each year as my NRD starts on 31/12/2015 even though I won't be 60 until the end of February 2016.

However the quote for retirement at age 58 starts on my 58th birthday in February. Can you ask to retire at any time of year of your own choosing or does it have to be on your birthday?

This is something I will have to check with the company before I apply so thanks for raising the point.

You should be able to ask for any retirement date you want. Another 'be careful' though - some schemes may only allow you a certain number of quotes a year, as it does cost someone's time & money to do them.

Vast majority of pen inc dates in my experience, & I speak as someone who does a lot of these exercises, are 1st April, although some schemes do still use anniversary of retirement. Those that do, like to get away from it & move to a single set date though as anniversary increases are administratively complex, or a PITA as it's technically known.

jamesd

Excel wrote: »

This was for £24,802 p.a.with no lump sum or £19,264 p.a. with a lump sum of £128,428. I’ve decided to go with the option of retiring at 58 instead of 60 without the lump sum

That's a commutation rate (lump sum to income given up) of 23.25:1. It's one of the best commutation rates I've seen. About twice as good as some of the public sector deals. It means that to replace the income given up you need to make only 4.29% plus whatever inflation-related increases are included.

Are those increase guaranteed to always be 5% or is it up to 5%? If it's always 5% that'd help to explain why the commutation rate is so good.

Excel wrote: »

My aim is to achieve the highest possible monthly income. I also want a stable monthly income rather than have to worry about investments and fluctuating interest rates in my retirement.

You can get a higher income by taking the lump sum. Whether you want the various ways that can be done depends on you, though.

For an annuity do be sure that you check purchased life annuities, not standard pension annuities. The lump sum is outside a pension and among other things this means that a large part of the income is paid tax free.

Excel wrote: »

Unless I tied the £128k into long term investments I would be hard pushed to make up the shortfall of £5,500 p.a. with savings interest.

You certainly wouldn't do it with savings interest but most modern investments don't require tying the money up so you can't get at it.

The investment option that'd probably work best is paying the money into a stocks and shares ISA and taking tax free investment income. You could probably take 6%, tax free once the money is in the ISA, with only very gradual capital value reduction. The tax saving effectively boosts that by 1.25 times to 7.5% compared to pension income. But this is still not high enough to cover a requirement to grow at 5% a year regardless of inflation if that's what the work pension really does.

Excel wrote: »

It’s too late to buy an annuity as I’ll need an income from it straight away.

You'd just use a little of the lump sum to cover the income need until the annuity started paying.

Excel wrote: »

I’m single with no children so I don’t need toworry about having a lump sum to leave in my will.

This also means that you can boost income by deliberately draining investment capital, knowing that your final capital value target is to have nothing left on the day you die.

As well as normal capped income drawdown you'd benefit from the ability to use a "scheme pension". Those will allow taking a higher percentage of the pot as income based on your health and life expectancy as calculated by an actuary. This could pay substantially more than capped drawdown. You do need to ensure the investments will last as long as you live so the allowed amount might be higher than the sensible amount. And of course you do have to pay some attention to investments if you do this.

Excel wrote: »

If I retire 2 years early I will be able to hold on to my savings rather than deplete them completely by age 60.

You'd then use the higher pension income or higher pension lump sum and income to replenish the savings if you wanted to. You'd probably be better off doing this than taking it early, particularly if you can take less than maximum lump sum, just enough to replenish any savings you want to replenish.

Excel wrote: »

Once in payment, 97% of my pension will increase by 5% per annum

Do be very sure whether that's a guaranteed 5% a year or just up to 5% depending on inflation. There's a huge difference between always 5% and inflation but no higher than 5% as targets to beat.

Excel wrote: »

I did speak to a financial adviser a couple of years ago and when I suggested that I might retire without taking the tax free sum I thought he was going to have a heart attack! He made me feel that it was a very bad decision

It's an unusual choice, particularly with such a hugely generous commutation rate. Against this would be the 5% increases, if they really are guaranteed to be 5% every year regardless of inflation.

Excel wrote: »

I hear that most people do take their tax free lump sum but how do they earn sufficient income from it to make it worthwhile?

They don't usually plan to do that. But for commutation rates as generous as yours that is very attractive except for 5% increases tat are guaranteed to happen every year, if they really are guaranteed to happen that way.

Excel wrote: »

I know that you can get better annuity terms by pleading shorter life expectancy. Does this work with occupational pensions too? I’ve been a (Type 1) diabetic for 40 years and I also have high blood pressure. Would that have any effect on the sums offered by my ex employers?

No effect on the occupational pension.

But likely a major effect on annuity rates. I see a potential increase in annuity payout rates of 33% for IDDM, not sure if that is for type 1 or type 2 on insulin or both. And 40 years as type 1 should actuarially reduce your life expectancy for annuity calculations a lot.

With you being single and having two conditions that statistically substantially affect life expectancy you are quite likely to get a far higher annuity rate than a person in normal good health.

Your situation is one where the potential is so great that it's very highly desirable to consider taking the whole work pension as a transfer and using it to buy an annuity. You really do need to find a local IFA who can check the income options available to you on the basis of either just using the lump sum to buy income and also on the basis of doing a transfer.

There is a very significant chance that you can significantly improve your position by getting advice and evaluating alternative options. Lack of spouse and medical conditions both hugely increase your chance of being better off this way and it would be reckless not to get these alternatives professionally evaluated.

Excel_2

jamesd wrote: »

You can get a higher income by taking the lump sum. Whether you want the various ways that can be done depends on you, though.

Wow, thanks jamesd, you've given me a lot to think about.

I'm very cautious about investments and I like the idea of having a regular stable escalating income but perhaps I will look again at investing the tax free lump sum if I can get such a substantial increase because the statistics are stacked against me health wise. That could make all the difference.

Of course my plan will be to beat the statistics for early death but if I get it wrong at least I will have had a slightly more comfortable life !!

My employers were a large financial services company which is why my pension is so good. I worked on the general insurance side so that's why I know very little about pensions but I'm learning fast!

Thank you to all of you who replied and helped me to find some missing pieces of the jigsaw. I'm now going to look at the investment route after all but even if I don't take it up at least I'll know that I investigated it.