Early Retirement: strategy

View_From_the_Fen

I am in the fortunate position of having a final salary pension that pays out when I am 60. For various reasons I am thinking of taking early retirement when I am 58 in March 2015. The value of the pension is £40,000 PA. If I take the pension in March 2105 it will be reduced by around 10% (36,000 PA). I can see the following options:

1. I can buy out the reduction - this would cost around £75,000.

2, I can leave the pension untouched for two years, claim it when I am 60 and live off my savings for 2 years (possibly supplemented by some part time work income).

3. I can take the reduction and have a pension of £36,000, noting that I will get the state pension when I am 66.

My instinct at the moment is to go for option 2, whereby I live fairly modestly on my savings for a couple of years while my pension increases by inflation rate. In summary, I can live on £40,00 for 2 years and in return I get from age 60 an extra £4000 PA indexed linked for the rest of my life. Clearly I don't know how long I will live, but it appears that I would break even in less than 10 years.

I am married, children grown up and mortgage paid. My wife has only a small pension to look forward to. Does my strategy seem sensible?

madeinireland_2

I'd like to know the answer as well.

I don't have the buy out option but I am aiming to retire at 54 so will have to go 6 years on savings before getting my pension at 60. I will then have to wait a furtHer 7 years for state pension to kick in - but I reckon I can do it and I'm budgeting £30k per year - when tHe pension kicks in I will get about £34k per year and £200k lump sum as a result of AVC savings.

kidmugsy

View_From_the_Fen wrote: »

I am in the fortunate position of having a final salary pension that pays out when I am 60. For various reasons I am thinking of taking early retirement when I am 58 in March 2015. The value of the pension is £40,000 PA. If I take the pension in March 2105 it will be reduced by around 10% (36,000 PA). I can see the following options:

1. I can buy out the reduction - this would cost around £75,000.

2, I can leave the pension untouched for two years, claim it when I am 60 and live off my savings for 2 years (possibly supplemented by some part time work income).

3. I can take the reduction and have a pension of £36,000, noting that I will get the state pension when I am 66.

My instinct at the moment is to go for option 2, whereby I live fairly modestly on my savings for a couple of years while my pension increases by inflation rate. In summary, I can live on £40,00 for 2 years and in return I get from age 60 an extra £4000 PA indexed linked for the rest of my life. Clearly I don't know how long I will live, but it appears that I would break even in less than 10 years.

The extra £4k p.a. might presumably end up paying higher rate tax, especially once your State Pension begins: are you keen to avoid income tax? Sometimes, of course, the best thing to do about tax is just to stump up.

View_From_the_Fen wrote: »

My wife has only a small pension to look forward to. Does my strategy seem sensible?

Then it might be wise to buy her more pension, if she would otherwise have Personal Allowance going to waste. That really would be tax-efficient.

greenglide

I can buy out the reduction - this would cost around £75,000.

So live on the £75,000 for the two year gap?

kidmugsy

greenglide wrote: »

So live on the £75,000 for the two year gap?

Policies 1 & 3 both start the pension into payment in March. Policy 2 is a bet that there will be no retrospective change in the age for beginning the pension during the two years after that. In that sense policy 2 is the least certain.

jackyann

Seems reasonable to me.
A lot of my friends in this position look for casual or part-time work. There are ideas on the over 50s board - very interesting ways of earning a little and keeping active. The favourite at the moment is film extra work - I spot them all over the TV!

reeves100

Yes option 2 does seem viable but there are further considerations apart from level of income and indexation.

1. Death Benefits
2. Tax free cash

With your current scheme pension there is likely a spouses pension. How important is this to you?

You also have a fourth alternative which would be to transfer a cash equivalent transfer value to a personal pension. The changes in drawdown rules are very important and a tax free lump sum on death for your family may be more valuable to them than a spouses pension.

Your wife would still be able to draw an income from the fund and a large sum of money could then be left to your family when you are both gone. You are very clear on your options and this should be considered too.

Obviously you appreciate the value of a Final salary pension, do you know how much the equivalent transfer value of your pension would be?

rpc

Is that £75k for the buy out before or after tax relief?

Given the choice between living off £80k savings or spending £75k to buy out the pension, I'd probably go for the option 1.

Option 3 could be topped up with your savings until the state pension arrives.

Id be going with option 1 or 3, probably 3 as the money spent on the pension could provide an extra pot to drawdown on as needed. Or put the £80k in your wife's pension for maximum tax efficiency.

But the big question is how much money do you need in retirement? How much money does your wife need if, as might happen, you pre-decease her?

View_From_the_Fen

Thank you very much for your replies. To answer some of the points:

1. I appreciate my preferred option takes me close/over the higher tax rate. However I could consider commuting some of the pension into a lump sum to avoid this, although the 1:12 rate is not that generous.

2. My wife will have a small LG pension c. £5,000 PA and in due course her state pension.

3. If I go before her, she will get a lump sum and a pension of around £15,000 PA which would be in addition to the LG pension and state pension.

4. I am unclear how I could increase my wife's pension significantly (she is 55) and is likely to stop work as well and in the near future.

5. I don't really understand the technicalities of pension transfers but I am not that bothered about leaving money when I/we die.

As regards the amount we need to live on when retired I think that for both of us £24,000 PA (rising by inflation) is sufficient. My strategy will provide this and also enable us to save some money for the future.

In the 2 years gap I envisage living on £20,000 PA, supplemented by some part time work, austerity measures:) and saving money from not have to spend £3,000 PA on commuting costs.

kidmugsy

View_From_the_Fen wrote: »

2. My wife will have a small LG pension c. £5,000 PA and in due course her state pension. ...

4. I am unclear how I could increase my wife's pension significantly (she is 55) and is likely to stop work as well and in the near future.

The two options that stand out are (i) buying extra state pension, if she isn't likely to have her full 35 years of NICs. But that won't be any help till she reaches state pension age. Or (ii) contributing (more?) to a personal pension for her now, with the intention that she draw it out again in the gap before her state pension begins.

reeves100

I would still suggest as part of your decision making obtaining a Cash Equivalent Transfer Value. This should be obtainable for free as most schemes will give one annual free calculation.

This is certainly worth knowing and may be very large for you, and may still influence your decision. Pension drawdown could offer you a higher initial income and higher tax free cash lump sum as well as significant death benefits to your wife and family.

You should certainly get this, and the key issues are easy to understand once you have the facts.