Take pension early and carry on working

malcolmfowler

Hello Experts, any thoughts on this scenario.

I am 57 in April 2015 and have a final salary pension which would pay £27k from my birthday or £31k if I wait until I'm 60.

The pension scheme rules allow me to draw my pension early and carry on working. So, I am thinking about taking my pension, carry on working for a couple of years and putting all my salary into a SIPP for the purpose of building up a large lump sum.

I know all the advice is never to draw your pension early, in my case I have an actuarial reduction of about 5% per annum, but I feel this is an opportunity to build up a good lump sum.

The attraction for me is an opportunity to create a pot of money that we could use for a new car or other major purchase in a year or so without having to consider a loan.

Does anyone have any comment of the pro's / cons of such a plan? Has anyone done this?

PeacefulWaters

Does your current scheme offer a lower pension in return for a lump sum on retirement?

malcolmfowler

yes, every £1 of pension provides £16.67 as a lump sum

tigerspill

malcolmfowler wrote: »

Hello Experts, any thoughts on this scenario.

I am 57 in April 2015 and have a final salary pension which would pay £27k from my birthday or £31k if I wait until I'm 60.

The pension scheme rules allow me to draw my pension early and carry on working. So, I am thinking about taking my pension, carry on working for a couple of years and putting all my salary into a SIPP for the purpose of building up a large lump sum.

I know all the advice is never to draw your pension early, in my case I have an actuarial reduction of about 5% per annum, but I feel this is an opportunity to build up a good lump sum.

The attraction for me is an opportunity to create a pot of money that we could use for a new car or other major purchase in a year or so without having to consider a loan.

Does anyone have any comment of the pro's / cons of such a plan? Has anyone done this?

Would recycling rules apply here?

xylophone

Would recycling rules apply here?

There are rules relating to recycling PCLS but this is not what the OP is proposing.

Because he will have his pension income, he will be less dependent on his earned income - as I understand it, he is proposing to pay some of his earned income up to the value of his pension income into a SIPP.

http://www.hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

Aletank

If your 57 and taking £27k per year & you get a 5% rise per year, that gives you over £31k when your 60 anyway.
Which would give you 3 years of £27k+ that you never had.

patanne

So you are giving up £4k plus increments for the rest of your life, which is likely to be well over 20 years (so absolute min £80k) for £81k short term. You can buy cars now on interest free loans. That would seem a better bet.

I guess you just have to place a bet on your lack of longevity!

jamesd

malcolmfowler wrote: »

I have an actuarial reduction of about 5% per annum, but I feel this is an opportunity to build up a good lump sum. ... The attraction for me is an opportunity to create a pot of money that we could use for a new car or other major purchase in a year or so without having to consider a loan.

Do you really think that your cost of borrowing will be higher than the reduction in income for the remainder of your life? The pension route cost is £4,000 a year for life, regardless of how long the loan would be and how long the items purchased last.

How does that compare to the sorts of rates you can get on a mortgage, a credit card 0% plus fee deal or a personal loan?

I'll be shocked at how bad your credit record is if borrowing is not far cheaper than your current plan.

malcolmfowler

Thanks for the responses so far, I'm still thinking that this is a good opportunity to create a lump sum that would not otherwise be possible.

PeacefulWaters

malcolmfowler wrote: »

Thanks for the responses so far, I'm still thinking that this is a good opportunity to create a lump sum that would not otherwise be possible.

It's certainly an opportunity.

I feel that the cold maths is more against it than for it.

But if you can comfortably live off the £27k before state pension kicks in, then it's an option.

Out of interest, how much will your firm pay into a DC scheme if you carry on working?

jamesd

malcolmfowler wrote: »

Thanks for the responses so far, I'm still thinking that this is a good opportunity to create a lump sum that would not otherwise be possible.

Two cheaper ways to get a lump sum quickly:

1. Take out a standard mortgage so that the annual repayment cost is the £4,000 difference, for say a ten or fifteen year term. Use part of the proceeds for paying the mortgage until the £4,000 higher income starts.

2. Use an equity release mortgage and repay it from the £4,000 a year higher income.

In each case the total cost is lower and the lump sum is available faster than your plan, with you getting to keep the extra income once the borrowing is repaid.