Taking a DB Pension Early

amandajc

I have been hard at work saving into a SIPP for the last year intending to grow it as much as possible, transfer in an old FSAVC and use it to fund retirement at 58 (in 2 years' time) whilst leaving my LGPS pension untouched till 65.

Recently I've started questioning this as the best policy mainly because my husband is 6 years older than me and it would be good to get the LGPS lump sum and associated AVCs sooner rather than later - as things stand he will be 71 before I would receive them. We have no debt at all and he is retiring in 3 months time having been working part-time in flexible retirement for the last 18 months. We used his lump sum to pay off the mortgage on our small rental flat, repair the roof and replace the car so all the "boring" things have been sorted. We have an emergency fund of £20,000 and S&S ISAs of around £70,000.

To my reckoning the figures come out like this:

Pension if I take it at 65 - £9,300 (LS £13,000)(This would be partly subject to 20% tax as I have a small amount of rental income plus state pension would become payable at 66).

Pension if I take it at 60 - £7020 (LS £11,500)(Tax free until 66 as I intend to pay myself just enough out of my SIPP to take me up to the PA).

I have worked out that as I would get the pension for 5 years longer, I will actually start to go into a "loss" at age 75 when I will be £2,300 pa worse off so I suppose I could be down by as much as £35,000 if I live to 90. But from 66 onwards we will have more than we need with both pensions, State pensions and rental income all in payment (along with a small income from the ISAs). Added into the mix is the benefit from having the lump sums from both the SIPP and the LGPS earlier so that at least some of it could be invested.

I know received wisdom is never to take a DB pension reduced if at all possible but the more I think about it the more it makes sense to me. I have to make a decision on this fairly soon as if I continue to keep paying into the SIPP I will be in danger of having more in there than I can use tax efficiently. Changing over to paying more into the LGPS AVCs and therefore increasing the LS would seem the better policy if I go ahead and decide to plan to take the pension early.

I would be very interested to hear any thoughts people have on this - is there something I have missed? Thanks in advance.

PeacefulWaters

How much would you get without the lump sum? The lump sums you quote seem small to me.

How much is in the FSAVC?

Another option might be taking the pension a little later without a lump sum. Use the FSAVC or S&S ISA to fund the interim.

amandajc

It's a compulsory lump sum - £13,600 at 65, reduced by 14% for taking 5 years early. The LGPS only had a lump sum till 2008 I think. I believe I have to take it at the same time as the main pension. The AVCs were started before new scheme rules came in in 2014 and can all be taken tax free to "make up" the lump sum. I currently only have about £2,500 worth but would be looking to make that up to about £10,000 - £12,000 with further contributions if I stop paying into the SIPP.

The SIPP is £15,000 and FSAVC £20,000

kidmugsy

(i) If the present interest rates on current accounts continue, your early lump sum at 60 would be worth more than your standard lump sum at 65!!

(ii) Ignoring the tax benefit for the moment, and neglecting point (i), consider yourself at age 65. You can either have taken a total income of £35,100 before that birthday, and have forgone a future £2280 p.a., or you can have eschewed the earlier income and now get full pension. Break-even is fifteen years away, which gets you to 80. Your life expectancy is (on average) currently well into your 80s, so you must expect to lose a bit. But you may find that the convenience for you far outweighs that.

One thing: is it a deferred LGPS pension, or are you still an active member?

amandajc

Yes, the convenience, earlier access to lump sums and a less "risky" feeling due to a big chunk of my income between 60 and 65 coming from the LGPS rather than being managed by myself via a SIPP all add up for me.

Also I am thinking that there might have to be more changes for the LGPS as the schemes are apparently underfunded by an average of 21% at the moment and the number of staff paying contributions is going down all the time. "A pension in the hand ...." :-)

I'm still an active member and will be until 58 (unless I get made redundant).

jem16

amandajc wrote: »

I know received wisdom is never to take a DB pension reduced if at all possible but the more I think about it the more it makes sense to me.

There is no hard and fast rule as it all depends on each individual's circumstances.

As you say it will suit you both to have the pension earlier, then I would go with that.

Mr_Prudent

Finally having been told on numerous occasions I’d be mad to take my DB pension early it seems some are seeing the benefit of doing so. This constant mantra that if you take it say 5 years early you would lose 25% simply does not take into account that the 5years worth of early payments means the 25% loss is a nonsense, indeed as pointed out by Kidmugsy investment of the lump sum could achieve an even better return than waiting. As I have said many times there is no right or wrong decision, just the one that you’re comfortable with.

kidmugsy

amandajc wrote: »

Yes, the convenience, earlier access to lump sums and a less "risky" feeling due to a big chunk of my income between 60 and 65 coming from the LGPS rather than being managed by myself via a SIPP all add up for me.

A last thought: have you checked the effect of taking it early on your widower's pension if you should die first?

amandajc

Mr_Prudent wrote: »

there is no right or wrong decision, just the one that you’re comfortable with.

This is very true. Maximum money does not always equate to maximum benefit. It depends so much on individual situations and preferences.

kidmugsy wrote: »

A last thought: have you checked the effect of taking it early on your widower's pension if you should die first?

Thanks kidsmugsy. I'm afraid this is still a little unclear to me because the LGPS documentation just says "For your spouse or civil partner, the survivor's pension is 1/160th of your pensionable pay multiplied by the total membership you would have built up to your Normal Pension Age." - and doesn't mention what happens if you have decided to take your benefits early. Still, even with a very cut down survivor's pension I think my husband would be OK and statistically he has a lower life expectancy than me having had a kidney transplant over 15 years ago. Time is pretty precious :-)

kidmugsy

He's retiring in 3 months' time: are you tempted to make a bolt for it at the same time? The other question is whether you will have enough income when your husband dies.

saver861

amandajc wrote: »

I'm still an active member and will be until 58 (unless I get made redundant).

Is there any chance of getting redundancy? Obviously if you can get it then you will have the pension and lump sum without reduction - a much better position.

If not, and you are thinking of retiring anyway, you could always float the idea of redundancy to them - nothing to lose but lots to gain.

I recently spoke with someone who was going to keep leave his pension and spend his capital until he reached the pension maturity age. When I pointed out to him how long it would take before he gets to the loss crossover - and taking into account the benefits of getting the lump sum early etc, he redone his calculations and took his pension with the reduction straight off.

It usually takes in the region of 15 to 20 years before reaching the 'loss' crossover, by which time you are well established in retirement and with a state pension etc.

So, unless there are specific tax reasons for not taking it, taking it early is often a good option.

If you live to be a 100 then you might think .... darn it.