Bridging a Gap

Takedap

A bit of background. Bit long so please bear with me.

I am in a final salary pension scheme which has always had a provision for retiring at age 60 with no reduction in benefits. There is now a proposal to close the scheme & to end the early retirement agreement. The new proposal is that any retirement before 65 would incur a loss of 5% per year so finishing work at 60 would now reduce the final salary by 25%

At 60, I will have had 40 years service so would have earned the full 2/3 pension.

I am now 55 & looking to bridge the 5 year gap & have the retirement that I have planned for.

I also have a small secondary personal pension which was initially started to save HRT & a "reasonable" amount saved in ISAs & cash. In fact, I have a higher percentage of cash holdings than what would usually be recommended. So, on to the questions.

To try to bridge the gap, is this a workable plan?

Would it be a good idea to make a large lump sum investment into the SIPP ,possibly up to the maximum allowable & then start making higher contributions in the new tax year, until there is £60k+ in the fund. Then, at reaching 60, give up work on my terms, take the 25% tax free lump sum from the SIPP & start drawing down the rest, knowing that I will still have my final salary pension & the state pension just a few years later. Would I be right in thinking that I could keep below the basic tax rate if I kept the drawdown below my personal limit but could also "top-up" by taking from the ISAs as these are tax free & not declarable?

Also, having already passed 55, I could always get at the money if I needed it or there was any impending major change in the tax/pension legislation.

Or is there a better way?

kidmugsy

Takedap wrote: »

I am in a final salary pension scheme which has always had a provision for retiring at age 60 with no reduction in benefits. There is now a proposal to close the scheme & to end the early retirement agreement. The new proposal is that any retirement before 65 would incur a loss of 5% per year so finishing work at 60 would now reduce the final salary by 25%

At 60, I will have had 40 years service so would have earned the full 2/3 pension.

I am now 55 & looking to bridge the 5 year gap & have the retirement that I have planned for.

I also have a small secondary personal pension which was initially started to save HRT & a "reasonable" amount saved in ISAs & cash. In fact, I have a higher percentage of cash holdings than what would usually be recommended. So, on to the questions.

To try to bridge the gap, is this a workable plan?

Would it be a good idea to make a large lump sum investment into the SIPP, possibly up to the maximum allowable & then start making higher contributions in the new tax year, until there is £60k+ in the fund. Then, at reaching 60, give up work on my terms, take the 25% tax free lump sum from the SIPP & start drawing down the rest, knowing that I will still have my final salary pension & the state pension just a few years later. Would I be right in thinking that I could keep below the basic tax rate if I kept the drawdown below my personal limit but could also "top-up" by taking from the ISAs as these are tax free & not declarable?

Also, having already passed 55, I could always get at the money if I needed it or there was any impending major change in the tax/pension legislation.

Or is there a better way?

Your way sounds a good one. Since you are already 55 you aren't taking on inflexibility by contributing to the personal pension. Since you have lots of spare cash you could presumably contribute like mad, using up all of your earnings each tax year (minus the increase in value of the final salary pension each year). I haven't myself had to deal with the caveat in brackets, so I don't know how quickly your occupational pension people can give you the info you need to make your max contribution in this tax year. Presumably next tax year you'll be able to sort things out in plenty of time. What I do know is that you mustn't confuse "the increase in value of the final salary pension" with the amount you happened to contribute to it.

ermine

Takedap wrote: »

I am in a final salary pension scheme which has always had a provision for retiring at age 60 with no reduction in benefits. There is now a proposal to close the scheme & to end the early retirement agreement. The new proposal is that any retirement before 65 would incur a loss of 5% per year so finishing work at 60 would now reduce the final salary by 25%

Are you absolutely sure that this is retrospective? You pension is deferred pay, it seems surprising that your employer can suddenly steal 25% of your accrued rights, and this sounds highly irregular to me. Somethign similar happened to me, but the vast majority of my DB pension is predicated an an age 60NRA - the reduction will only apply to the three years I accrued post the change, and I'm happy to let 25% of that go

The parallel DC pension sounds like a good idea and is exactly what I am doing, for similar reasons.

Takedap

ermine wrote: »

Are you absolutely sure that this is retrospective?

I'm not absolutely sure of anything yet. It's the British Steel Pension Fund & it was only announced earlier this month of the company's intention to close it.
However, I believe that the removal of the early retirement provision is part of the proposal. The current rules say that an employee can leave at 60 with no reduction in benefits if they leave with the company's permission. In the past, no-one has ever been denied that permission. In fact, the company has added "free years" to the early retirees at a rate of one free year for every seven years service.
It appears that they now want to stop all this but it's still in a period of consultation with the unions.

ermine

Takedap wrote: »

However, I believe that the removal of the early retirement provision is part of the proposal. The current rules say that an employee can leave at 60 with no reduction in benefits if they leave with the company's permission.

Looks like the pension is predicated on a normal retirement age of 65, in which case they are within their rights to shut down options for retirement earlier than this

A DB pension scheme is in fact only a defined benefit at the nromal retirement age, it is undefined at any lower age and the trend in actuarial reductions is generally up.

Would I be right in thinking that I could keep below the basic tax rate if I kept the drawdown below my personal limit but could also "top-up" by taking from the ISAs as these are tax free & not declarable?

Still much to be said for the SIPP option, and yes, you are right - over 5 years the amount you can take tax-free from a DC pension held as cash in the absence of any other taxable income (ISA income is not taxable) is

£10,600 * 5 plus a tax-free lump sum of a third of the total (which becomes your 25% tax-free pension commencement lump sum)

which is about £71k comprised of £53k to be taken out at 10,600 a year and a PCLS of about £17600 that you can take out at the start.

So hit it before the tax year ends, subject to your annual allowance and LTA.

tigerspill

Surely your existing benefits are protected in that your DB scheme up until closure date will be payable at 60? Yes you may lose a few years. And that it is only the new bit payable at 65 and that if you take this but at 60, you lose 5%ish per year by actuarial reduction.
I don't think they can mess with your pension to date.

xylophone

Surely your existing benefits are protected in that your DB scheme up until closure date will be payable at 60?

The normal retirement age seems to be 65

http://bsps.dev.northbloc.com/media/userfiles/files/Main%20Section%20Handbook.pdf page 18

with the age 60 provision being a concession.

All that would be required is for the employer to refuse consent?

Takedap

The reason that the company want to close the scheme is because they say it is not viable in it's current form.
Does this mean that they have been negligent in the past by NEVER refusing an early retirement request at age 60 AND by also enhancing the pension by giving unearned years to early retirers?

coyrls

Takedap wrote: »

The reason that the company want to close the scheme is because they say it is not viable in it's current form.
Does this mean that they have been negligent in the past by NEVER refusing an early retirement request at age 60 AND by also enhancing the pension by giving unearned years to early retirers?

http://www.employeebenefits.co.uk/compliance/court-rules-ibm-breached-employer-duties-in-pensions-restructure/104515.article

sunnystart

Don't know if the company is negligent, but they seem to be trying to get out of their obligations to pay into the scheme and it is ironic that in the last newsbrief issued in December, the chairman of the trustees Allan Johnston is seen receiving a number of awards including 'Best UK pension Fund' and the gold award for 'Best European Pension Fund'.
Over the years it has been policy for British Steel, Corus and now Tata to leave people retire before they reach the age of sixty and have used the pension scheme to fund job losses and to get rid of the 'dead wood'.
I currently work for Tata myself and cannot think of a better way of demotivating the current workforce, some of which have worked in very unfavorable conditions for thirty to forty years and will be really lucky to live well into old age.

Thrugelmir

Takedap wrote: »

The reason that the company want to close the scheme is because they say it is not viable in it's current form.
Does this mean that they have been negligent in the past by NEVER refusing an early retirement request at age 60 AND by also enhancing the pension by giving unearned years to early retirers?

No one foresaw the changes in life expectancy when the scheme was designed originally nor more recently the unprecedented era of low gilt yields. Outside events that cause changes aren't negligence but are a fact of life. That have to be addressed accordingly.