Take pension while staying in employment

klaatu

I am taking early retirement in September 2016 at age 57. I have two company pensions; the first was a final salary scheme which was closed to further contributions a few years ago, and I am currently paying into a defined contribution scheme.

I was intending to take both of these when I retire, but it seems I have the option to take the final salary pension now, while staying in employment. It appears that I would get about 4.75% less now than I would in September 2016, but once I start taking the pension, it increases by 3 to 4% per year. So by the time next September comes around, the pension wouldn't be much lower than I would have been getting anyway.

So it seems that I can get 18 months of 'extra' pension payments now for only a very small reduction in my future pension.

I realise that I will have to pay tax on the entire extra income if I take it now, and that if I live long enough I will end up receiving less in total. But are there any possible issues with this proposal that I'm not seeing?

Steve

atush

Well one thing you are not seeing is that sure, take the DB pension, but then put the equiv income into your DC pension.

Will get you your tax back, and mean a bigger pot and tax free sum once you really retire?

klaatu

Thanks - good suggestion.

Steve

greenglide

but once I start taking the pension, it increases by 3 to 4% per year

Are you sure it is this much?

That is a very generous indexation? Not impossible but rare.

Dunnit

There certainly has been a good case for anyone in a DB pension who was not receiving any pay rises to take their pension if they could as inflation balanced out any reduction for early payment. With inflation likely to be nil this year you would have to ensure that the 3-4% rises were not linked to inflation.

klaatu

It's guaranteed to increase by at least RPI, but the company adds discretionary increases. The last five years have been 2.4, 4.8, 4.8, 3.1, 2.7.

I suppose with RPI low the increase may not be so much in the near future. That may be the flaw in my plan.

Steve

Loughton_Monkey

I was in a similar position nearly 10 years ago. My own 'rule number 1' was to leave the FS pensions untouched since (having worked in the industry) I know that 'actuarial reductions' are always calculated using assumptions deemed to be heavily in favour of the scheme rather than the employee.

As to other considerations, it comes down to optimising your tax position and harvesting your cash/pension resources carefully. In my case, I deliberately took an immediate pension from one of my pots primarily to "use" my annual tax free limit. Not doing so is a massive waste of money.

I also continued to use the £3,600 pension contribution allowance, and can use current pension flexibility to good effect. E.g., taking my state pension at 65 would have put me on 40% tax. By deferring it, not only does it build up at a 'healthy' 2½%, but I can, meantime, drawdown my pension pots to "fill" my 20% tax band - until such time as I want the state pension lum sum, when I simply reduce drawdown that year [to remain an inch below 40% tax rate] and the whole state lump sum is taxed only at 20% despite (theoretically) taking me miles into the 40% bracket.

Meanwhile, if not already done, it is important to throw the full whack of ISA/pension allowances into tax free wrappers, to minimise any future tax on savings/investment income.

greenglide

It's guaranteed to increase by at least RPI, but the company adds discretionary increases. The last five years have been 2.4, 4.8, 4.8, 3.1, 2.7.

RPI is generous. A company actually paying discretionary increases, especially in times of low inflation, must be unheard of.

The scheme must be very well funded. I am not certain that contributing members would see it that way unless they are generous with their salaries!

Triumph13

The one bit of information missing is how much is the OP's pension increasing by at the moment while it's in deferment? If it increases at the same rate as the pensions in payment do then that destroys the logic of netting these increases off against the actuarial reduction. If it increases in line with salary then what are his expectations of pay rises over the next 18 months?

atush

klaatu wrote: »

Thanks - good suggestion.

Steve

Thanks, but that isn't how we thank people here lol

klaatu

Part of it is increasing at RPI and part of it at a fixed rate. I cannot find the information at the moment which tells me what that rate is, or how much of it increases at that rate.

However, I have now found the information which tells me why my plan probably doesn't work. It seems that if I take my pension while still employed by the company, I would get significantly less than I would if I retire - the early retirement reduction is much greater.