Suggestions for early retirement planning

enthusiasticsaver

My husband is considering taking retirement earlier than planned. Our plan always was for him to go in October 2018 round his 60th birthday but due to his company asking him to work longer and longer hours and more weekends we are now looking for him to go this October instead so 2 years early. It looks like his pension will reduce from around £25k per annum to around £21k but this is affordable alongside my salary, our savings and eventually my pension which will come in 2020.


Today we have emailed his pensions department asking for accurate pension projection quotes for October 2016 and October 2017 and are considering paying an IFA to go through options - ie how much lump sum to take etc etc. We know how much we spend monthly as I have been recording that over the last year. Beyond paying an IFA and getting accurate quotes from the pension provider is there anything else we should be looking into?


My husbands pension is slightly complicated in that he has a protected Defined benefit scheme frozen in 2007 but his annual statements show benefits built up so far and the current scheme he is in is Defined contribution and his pensions website has come up with a projection for that. We are also checking with the pensions department as to whether our figures are accurate. Normally how much of a hit on the pension would it be to go at age 58 rather than 60?

greenglide

Four thousand pounds per year, every year, for the rest of his life seems a high price to pay.

Do you not have savings or other pensions that will cover the two years?

Start saving now and maybe leave at 59 and fund the gap of 1 year from the savings?

Does the DB pension come with a lump sum? If so is it automatic or is it funded with another chunk of the annual pension?

enthusiasticsaver

greenglide wrote: »

Four thousand pounds per year, every year, for the rest of his life seems a high price to pay.

Do you not have savings or other pensions that will cover the two years?

Start saving now and maybe leave at 59 and fund the gap of 1 year from the savings?

Does the DB pension come with a lump sum? If so is it automatic or is it funded with another chunk of the annual pension?

We do have savings which would just about cover 2 years so that is another option and something we would talk about with the IFA. The DB pension and the DC pension both come with a lump sum but this means sacrificing a lump of the pension but as he will still be paying tax my thinking is that it is better to take the lump sums and reduce the annual pension to minimise tax and NI contributions until 60.

Daniel54

enthusiasticsaver wrote: »

reduce the annual pension to minimise tax and NI contributions until 60.

When working out net income from pensions,do bear in mind that NI is not payable on pension income

enthusiasticsaver

Daniel54 wrote: »

When working out net income from pensions,do bear in mind that NI is not payable on pension income

Thanks for clarifying that. I thought NI was payable until age 60 so that will make a difference. What I find strange is even though his gross salary now is around £45k and his pension will be around half that I have worked out his monthly pension will only be around £500 less per month due to his tax payments being so much lower and of course no pension payments to make.

Daniel54

enthusiasticsaver wrote: »

Thanks for clarifying that. I thought NI was payable until age 60 so that will make a difference. What I find strange is even though his gross salary now is around £45k and his pension will be around half that I have worked out his monthly pension will only be around £500 less per month due to his tax payments being so much lower and of course no pension payments to make.

Confirmation here:

http://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/do-i-pay-ni-on-my-pension

If you use advance options on the MSE income tax calculator you can tick a box for no NI -which I have found quite handy

http://www.moneysavingexpert.com/tax-calculator/

Triumph13

Can the DC funds be linked with the DB ones when it comes to calculating how much he can take as a tax free lump sum? This varies from scheme to scheme and can be a big advantage.
Definitely think about transferring the DC funds to a provider that will let you use drawdown and living off them for a few years to avoid taking the DB scheme early.

atush

I would open a separate DC pension, and contribute to it heavily. use this, and some savings to cover the 2 year gap.

Dont take the DB pension early/reduced, and dont reduce it by taking a lump sum

jamesd

enthusiasticsaver wrote: »

even though his gross salary now is around £45k

Has he paid a full 45k gross into a pension yet this year, including the amount for the company pension?

He's at least 55 years old so he can take out pension money whenever he wants. He can pay in and get at least basic rate income tax relief. Then he can take out a 25% tax free lump sum and, perhaps more slowly, the remaining 75% taxable. The 25% tax free lump sum alone means that on say 40k of pension contributions he can make a tax gain of £2,000 in a few weeks.

The calculation: pay in 32k net and basic rate relief is added to gross it up to £40k. Take 25% tax free lump sum of £10k then more slowly to stay in basic rate band the 75% taxable at £30k x 0.8 = £24. Gain is £10k + £24k - 32k = £2k.

Can potentially do the same in the first week of the next tax year and make £4k in say eight or so weeks. The potential gain is so good that borrowing would normally make sense to get it done.

After taking out any of the taxable part his annual pension contribution allowance will be reduced to £10k and carry forward will not be allowed.

jamesd

Taking the DB scheme early is unlikely to be a good deal. Probably cheaper to borrow instead, via mortgage, equity release, 0% for purchases credit cards or whatever else.

Whether DB lump sums make sense depends on the commutation rate, how much lump sum is obtained per Pound of income given up. Public sector schemes are likely to use an undesirable 12:1 and some schemes are even worse than that. Good rates are 20+. Again it'd usually be a better move to borrow to get a lump sum and repay from the higher income.

jamesd

The projection for the defined contribution part is likely to be daft and worthless. It'll probably assume he's foolish and buys an inflation-linked annuity that would pay out less than half of what he'd get for the money by deferring his state pension.

However, defined contribution pensions have a major positive feature: the commutation rate is always superb and it's available from age 55.

If no other way of funding things can be found he can just put the defined contribution pension into drawdown and draw from that capital pot as required to meet income needs. The work scheme probably won't offer this facility so he'd need to transfer it to do it, an easy process.

100% lump sum from the DC and 0% lump sum fro DB is likely to be the best overall deal. Of course don't take out the DC in one lump but instead over time for tax efficiency, 25% tax free first then whatever is doable either tax fee or at basic rate.