Taking pension early...am I missing something?

Marine_life

I have an old frozen defined benefit pension scheme in the UK which has the following terms.

The value was fixed at 2001 (when I left the scheme).
The pension payable increases in line with RPI.
Once I start taking the pension the sum payable increases by 5% per annum.
I can take the pension early with a predetermined actuarial reduction.
The normal pension date is 63.

So, if I take the pension 10 years early I would only get 60% of the amount payable at 63.
However IF (and this is a big IF) I take the pension early then it will increase by 5% per annum compared to RPI which might average 2% (or less) for the next 10 years.
So the amounts are as follows (in sterling):

- Current value 11,700 (per annum)
- Estimate in 2017 at age 53 12,450
- Estimated value at age 63 15,000
- Reduced penson value (60% x 12450) 7,472
- Total drawings over the first 10 years 94,000 (assuming 5% per annum increases)

At age 63 I assume there would be an approximate 3,400 difference between the projection assuming 2% RPI and the annual amount of the early pension given the 5% growth (if that make sense).

Given i would have already taken 94,000 it would then take around 27 years to make delaying taking the pension a bad decision.

Clearly the variable here is RPI but I also assume I will be a higher rate taxpayer in my 60's so taking a lower pension and taking it earlier seems to make sense.

What am i missing?

Linton

One other factor you may wish to account for is that money taken earlier is more valuable than money taken later because in principle you could invest it in the meantime (or equivalently use it to reduce the money drawn down from your investments). This would move the break even point even further out.

kidmugsy

You are allowed to take it at 53, are you?

UPDATE You could lay off your bet on RPI by stocking up on Index-Linked Gilts in your ISAs or SIPPs.

atush

I gotta say, you have been SO very prepared for retirement I am really really surprised this has not come up before? In your preparations? Of course such a reduction could be chickenfeed to you lol.

However, in all seriousness, you need to keep this preserved and not take it early.

So, you could live off interest and income (although if you didn't plan this and have already put in for retirement where you are- a problem.)

Or you could, right now try to open a pension as a non earner( but given the time you have been out this might not be possible but will on your date of return) put in 2880 w year for each of you which will be boosted to 3600 by TR.

Or should either of you work at all, even casual/PT as long as is taxable income, if over 3600 your could put all your income into pension. Which could then be taken from age 55 to help you stave off taking that DB pension early.

Basically taking a DB pension early (or extra early as you propose) should in general be a last option as it is much better value to take the full benefits at normal RA.

something to think about?

Marine_life

Linton wrote: »

One other factor you may wish to account for is that money taken earlier is more valuable than money taken later because in principle you could invest it in the meantime (or equivalently use it to reduce the money drawn down from your investments). This would move the break even point even further out.

Yes - that's a good point as well

Your_Hero

Just to check, the pension in payment will definitely increase by a fixed 5% escalation per annum, and that it's not a cap of 5% (e.g. increased by RPI/CPI capped at 5%)?

xylophone

You mention taking the pension at age 53- normally, a pension cannot be taken before age 55 but perhaps your Scheme has special arrangements?
http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm03106000.htm

http://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/
might be worth a look.

Do you have pre/post 88 GMP?

sandsy

It would be more normal for the pension in deferment to have revaluation limited to 5%.

Marine_life

Your_Hero wrote: »

Just to check, the pension in payment will definitely increase by a fixed 5% escalation per annum, and that it's not a cap of 5% (e.g. increased by RPI/CPI capped at 5%)?

I have looked at the manual and that seems to be what is says unless I am misinterpreting the paragraph (and of course I would check that) but that's my main reasson for thinking this is not such a bad idea as, assuming the RPI stays low, then actually the penalty of taking the pension early would erode over time. If i have misread it and actually both change in line with RPI then the "payback" period would be 15 years (excluding other factors like tax).

Marine_life

xylophone wrote: »

You mention taking the pension at age 53- normally, a pension cannot be taken before age 55 but perhaps your Scheme has special arrangements?
http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm03106000.htm

http://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/
might be worth a look.

Do you have pre/post 88 GMP?

The booklet says that someone can retire before age 50 on the grouds of ill-health and after age 50 on any grounds. However, I don't know whether the rules of the scheme have been adjusted subsequently (or indeed whether they would be allwoed to do so).

The GMP I assume is post 88 but actually the GMP part of the pension is tiny.

Marine_life

sandsy wrote: »

It would be more normal for the pension in deferment to have revaluation limited to 5%.

You are right, the pension in deferrment increaes (according to the rules) in line with RPI which is capped at 5%. However, the booklet clearly states that once the pension is being paid then it will increase by 5% per annum compound.