Should I stay or should I go?

DeeRzeD

I will be made redundant at age 51. My pension scheme will allow me to take an 'immediate' actuarially reduced (4%pa) pension. Having paid into the scheme for 25 years my pension at 65 would be around 13k. The scheme also pays a lump sum of 3x the pension. I know there are a huge number of variables that I should take into account and I will probably seek advice from someone qualified to give it before deciding whether to wait til I'm 65 to draw my pension or start drawing a reduced pension at 51. However, I just want to sound you out on my crude calculations below:
If I take the early pension it will be 5,720 pa (14 years early @ 4% per early year = 56% reduction) plus a lump sum of 17,160. By the time I am 65 I would have received 14x5720 plus 17160 = 97240.
After 65 I will be 'losing' 7280 pa (compared with if I had waited to take the pension at 65). I would also have missed out on 21840 lump sum ([3x13000=39000]-17160). After about 10 years - ie age 75, I reckon I would 'break even' and every year I live after 75 I would be losing about 7k.
Are these calculations about right and, if so, which option would you take?

kidmugsy

Your calculations make no allowance for the growth over the years of the money you take early. Of course if you plan to spend it all that's reasonable. What do you plan to do with it?

What's the index-linking promised on your pension? If it were an uncapped link to RPI, then in your shoes I'd be loathe to give it up. If it's a link to CPI capped at 2.5%, I'd reckon the link to be much less valuable, and so be less worried about giving it up.

Still, giving up a pension where all the investment risk is borne by the employer is a big deal. Three more questions: how financially sound is the scheme/the employer? What other pension provision do you have? What are your chances of finding new employment in the near future?

And lastly: what is the CETV for the pension? Is it conceivably the best bet to transfer the lot out to a personal pension of some sort?

atush

What are your work prospects and how many years will you work? As if you are wrking you could be paying tax on all of your pension and if you dont need the money then it could be a waste?

What is your health like? And your parents siblings? If any have died, age and condition? Genetic conditions such as some cancer, and HBP can account for some mortality for your LE, but lifestyle (esp smoking/sedentary) will not mean you will suffer the same if your LS is different.

Do you have a spouse, and is the spouse pension based on the full amount at 65 or a % of the reduced amt?

PeacefulWaters

Is the 4%pa reduction higher if you take the redundancy money now but then choose to retire at a later date?

How much is the redundancy payout if you retire and how much is it if you don't retire?

What are your employment prospects?

How would you live off £6k a year?

My instinct would be to defer taking the pension, collect the redundancy money, invest anything over £30k in a DC scheme (AVC) and seek new employment.

Review again when your body or mind is fed up of the new job.

The answers to the questions above will help you reach your own decision. Good luck!

brewerdave

I had a similar quandary @ 50 and again @ 56 -the despair of redundancy made me think about taking a DB pension early -fortunately I managed to find employment on both occasions - in the end I was very glad I'd not suffered the multiple 4% chops -I finally took the pension only one year early after a third redundancy!!

jonperry64

Thank you all for the very helpful replies. A lot of questions there that I hadn't even considered and I will endeavour to find the answers. Regarding index linking I believe the pension was related to RPI but is in the process of being changed to match CPI up to 5% but if the CPI increase is more than 5% but less than 15% the pension will rise 5% plus half the difference between 5% and 15% - ie. effectively capped at 10%. I assume this index linking would apply regardless of whether I took the pension now or waited? Regarding re-employment prospects - I am confident I will get another job but it is likely to be poorly paid compared with my current one (c 7k pa (half time). In this scenario the 5k would be helpful and most of it would not be taxed because my income would be close to the tax free allowance? Not sure about situation re wife - I need to find out. The pension scheme is the USS by the way. Thanks again. Plenty to think about!

jonperry64

Just read the USS consultation document with respect to index linking and it says:
" Increases applied to the pension benefits
you have already built up will be in line with increases
in official pensions on an uncapped basis for pension
benefits earned prior to 1 October 2011, and in line
with increases to official pensions on a capped basis
for pension benefits which have been earned after
that date. For pension benefits earned from 1 October
2011, the capped basis means that the maximum
increase in any year will be 10%. This is applied as
follows: the rate of increase in official pensions will
be applied in full, so long as it is up to 5% a year. If
such increase in official pensions is more than 5% in a
year, the increase would also include one half of that
year’s increase above 5%, up to an overall maximum
of 10%."
I think this means the first 21 years of my benefits will be linked directly to CPI and the last 4 years will be linked to CPI with a cap. Once I start to draw the pension the rate stays the same. On that basis, I suppose I should try and hold off claiming it if at all possible because if I start to use it now, its value in real terms will decrease as prices rise over the next 14 years. I'll just have to hope I can get a job to fill the gap1

kidmugsy

jonperry64 wrote: »

. Once I start to draw the pension the rate stays the same.

(i) Sorry, what rate stays the same?

(ii) My memory is that USS allows (it certainly allowed) you to take a bigger TFLS than the standard by giving up some pension. The beauty of that was that reducing the pension doesn't (or didn't) reduce the widow's pension. If you expect your wife to long outlive you, that's pretty handy. If you do expect that, also look at the possibility of doing Allocation.

(iii) Is the 4% reduction p.a. on the original amount or on the declining balance?

jonperry64

kidmugsy wrote: »

(i) Sorry, what rate stays the same?

(ii) My memory is that USS allows (it certainly allowed) you to take a bigger TFLS than the standard by giving up some pension. The beauty of that was that reducing the pension doesn't (or didn't) reduce the widow's pension. If you expect your wife to long outlive you, that's pretty handy. If you do expect that, also look at the possibility of doing Allocation.

(iii) Is the 4% reduction p.a. on the original amount or on the declining balance?

Sorry I was probably stating ththe obvious. I meant that once I start taking the pension it ceases to be index linked. I don't know what tfls stands for. The 4% reduction is the early retirement factor. I think it applies to the original amount. I have been trying to understand the scheme rules which are quite hard to decipher but I think I have the option of taking the pension at any point before 65. If so this might be the best compromise as I can delay taking it for as long as possible but if I need it I can use it. Every year I delay it by will reduce the erf. Cheers.

kidmugsy

jonperry64 wrote: »

Sorry I was probably stating ththe obvious. I meant that once I start taking the pension it ceases to be index linked.

On the contrary: it certainly stays index-linked; that's the whole point of index-linking.

jonperry64 wrote: »

I don't know what tfls stands for.

Tax Free Lump Sum.

jonperry64 wrote: »

I have been trying to understand the scheme rules which are quite hard to decipher but I think I have the option of taking the pension at any point before 65.

You'd need to be quite certain of that before you acted on it.

kidmugsy

Hold on: index-linking will certainly occur after you draw your pension, but the detail can be tricky. See post 5 at
https://forums.moneysavingexpert.com/discussion/5221387