What would you do in this scenario?

enthusiasticsaver

I know advice is not allowed on this forum so I am looking for opinions and we will also be seeing an IFA and a pension wise advisor re my husbands' pension as he is retiring this October when he is 58 (7 years early). We have always overpaid into his pension with the eventual aim of him finishing early and for various reasons we have decided this year is the year for him. I had great advice on this a few days ago but my head is a little clearer now on the quotes he has been given so thought I would ask you with more specific and hopefully accurate details this time.


He has four pots in his pension scheme all with the same benefits scheme but all separate as far as we can see. The main pot is a DB pot due to the fact he had this from 1982 until 2007 and this was protected when the company pension moved to a DC scheme and offered incentives for increased company contributions which we took up.


We have been told by most people the reductions are steep if we draw on the DB scheme early but we do not feel they are that bad considering he will get the pension for up to 7 years more if he takes it this October which we are leaning towards. If he takes the DB pension this October when he is 58 he has been offered £16818.48 per year, in October 2017 it would be £17,819.48 per year, in October 2018 it would be £18,917.04 per year and in October 2023 (NRD) it would be £20,885.94 per year. Do you feel the reductions are too steep and he would be better leaving this part of his pension? There has been no offer of a lump sum on this part of the pension to reduce the annual pension but I am sure this is a viable option to take 25% out of the pot but the lump sum has been offered from the DC pot instead. He will obviously be paying tax if we take the option offered and will have no other income apart from his pension. Index linking seems to be rpi + 2% although I am still checking on this.


The second main pot of his pension is the DC pot which has been offered as a tax free commencement lump sum of £134,335 alongside the DB pension. This is the pot in its entirety at the moment although obviously this may differ by October due to continued contributions and the disinvestment values are known. I was under the impression only the first 25% was tax free but the quote says the whole pot is so I need to check on that too.


The third pot is an AVC pot which my OH contributed to for a few years until a booster scheme started on his old DB scheme. It only has £22,105 in it and they have offered him £950 per year from October 2016 with spousal protection. No offer has been made so far as to whether this can be taken as a lump sum. The quote to take it at October 2017 instead is just £970 per year so I can see no advantage in delaying taking this and we are inclined to ask for this as a lump sum. Anyone agree or is there something we have not considered?


The final pot is a Protected Rights pot due to the fact that OH opted out of SERPS many years ago on the old DB scheme until it changed again and he opted in again to pay into a booster scheme. There is £49,495 in this pot and again with spouse protection they have offered £2,075 per year and a lump sum of £1,240 alongside the DC pot tax free. If he delays taking this by one year to October 2017 he would get £1899.36 per year and the lump sum increases to £6,247 but I am not sure why the increase is so much by delaying by just one year. Anyone else know why this should be the case with this pot?


He will receive his state pension in 2024 and according to the new valuation we did last night online it will be £165.33 per week.


Just for background we have savings and investments of around £110k in my name as I am a basic tax payer and he is higher but this is earmarked for my early retirement as my pensions are much lower and we would definitely benefit by delaying drawing on these until I am 60 or maybe in the LGPS 65. If need be we could access some of this but a large chunk (50%) is in a stocks and shares isa which I would rather leave untouched for now. One of my private pensions is a Barclays GMP pension which pays out in 2020 and one is a LGPS FS scheme which I can take in 2020 or delay until 2025. At some point I will look into that but that is not relevant at the moment. My state pension will be £155 per week from 2026. My private pensions (Barclays and LGPS) in 2020 will be £9400 per year so as my salary is only £11k we will be able to cover this with my savings as well.


We will still have my part time wage for at least one more year but this is not enough to cover our outgoings comfortably so we do need to draw on some part of his pension initially so we just need to decide whether to leave the DB part for a few years, maybe until 2018 and live off the DC pot and AVC pot maybe? We also need to consider the tax implications as we want to minimise his tax. I use my allowance on my pt job so cannot transfer my allowance.


We need an income of at least £25k net per annum to live as we are now and my income is £11k so the shortfall is £14k per annum. This could be covered by the DB pot and we could leave the DC pot invested for now and do drawdown as and when? I am sure this is probably not the most tax efficient way of doing it though as he will still have to pay tax if we take the whole DB pension as it is.


Sorry about the lengthy thread. Any ideas/opinions?

AnotherJoe

Theres a lot going on here and you definitely need to spend some time working it through but my back of a fag packet calculation says that if he waits the 7 years to take the full pension, he'd need to live about 30 years from that point to come out better, eg to age 95, so you'd be best taking the 16.8k now. (my reasoning is simply he get 7 years at £16.8k which then needs to be compensated for by the 4k difference each year of the £21.8k after year 7.

Plus, you get the money to spend now for 7 years rather than be waiting. And that £16.8k goes along way to your £25k target.

Plus you have more money coming in around 2020 onwards so the extra £4k for the "full" DB pension will perhaps be less useful then than the £16.8k will be useful right now.

enthusiasticsaver

AnotherJoe wrote: »

Theres a lot going on here and you definitely need to spend some time working it through but my back of a fag packet calculation says that if he waits the 7 years to take the full pension, he'd need to live about 30 years from that point to come out better, eg to age 95, so you'd be best taking the 16.8k now. (my reasoning is simply he get 7 years at £16.8k which then needs to be compensated for by the 4k difference each year of the £21.8k after year 7.

Plus, you get the money to spend now for 7 years rather than be waiting. And that £16.8k goes along way to your £25k target.

Plus you have more money coming in around 2020 onwards so the extra £4k for the "full" DB pension will perhaps be less useful then than the £16.8k will be useful right now.

Yes that was exactly our reasoning as when we calculated the 7 years of the pension and divided by the difference between what he would get at 65 and at 58 it came out at around 28 years which to be honest we do not anticipate living to actively. We would rather have it now while we are active and busy and doing lots of stuff and as you say our state pensions kick in after 8 years so with the DC pot and my pensions too we would rather not struggle initially when we are likely to be most active and need a larger disposable income.

kidmugsy

enthusiasticsaver wrote: »

He has four pots in his pension scheme all with the same benefits scheme but all separate as far as we can see. The main pot is a DB pot due to the fact he had this from 1982 until 2007 and this was protected when the company pension moved to a DC scheme and offered incentives for increased company contributions which we took up.


We have been told by most people the reductions are steep if we draw on the DB scheme early but we do not feel they are that bad considering he will get the pension for up to 7 years more if he takes it this October which we are leaning towards. If he takes the DB pension this October when he is 58 he has been offered £16818.48 per year, in October 2017 it would be £17,819.48 per year, in October 2018 it would be £18,917.04 per year and in October 2023 (NRD) it would be £20,885.94 per year. Do you feel the reductions are too steep and he would be better leaving this part of his pension?

That's an actuarial reduction of less than 3% for each year early he goes. It's good value for him: I'd be tempted to take it.

enthusiasticsaver wrote: »

There has been no offer of a lump sum on this part of the pension to reduce the annual pension but I am sure this is a viable option to take 25% out of the pot but the lump sum has been offered from the DC pot instead. ... The second main pot of his pension is the DC pot which has been offered as a tax free commencement lump sum of £134,335 alongside the DB pension. This is the pot in its entirety at the moment although obviously this may differ by October due to continued contributions and the disinvestment values are known. I was under the impression only the first 25% was tax free but the quote says the whole pot is so I need to check on that too.

What's probably happening is that, because the two schemes are associated, they are adding the value of the DC pot to the nominal capital value of the DB pension, and concluding that 25% of the result is more than the value of the DC pot. Thus the whole DC pension can be withdrawn as a tax-free lump sum covering the contribution of the DB and DC sections. Trebles all round!!

enthusiasticsaver wrote: »

The third pot is an AVC pot which my OH contributed to for a few years until a booster scheme started on his old DB scheme. It only has £22,105 in it and they have offered him £950 per year from October 2016 with spousal protection. No offer has been made so far as to whether this can be taken as a lump sum. The quote to take it at October 2017 instead is just £970 per year so I can see no advantage in delaying taking this and we are inclined to ask for this as a lump sum. Anyone agree or is there something we have not considered?

I don't know what's happening here, but one possibility is that it too has been added into the DC and DB schemes to calculate the total TFLS that your husband can take. If he takes it all from the DC scheme (which would be a flukey bit of arithmetic and therefore perhaps this isn't a good guess) then the AVC scheme would be left without a TFLS of its own. The annuity offered is equivalent to 4.4% p.a. which isn't too bad, partially index-linked, for a 58 year-old. Does it too carry a widow's pension?

On the other hand, it's worth asking whether instead the AVC could be transferred to a SIPP/Personal Pension, which would make it easier for you to use it to bridge the gap before your state pensions begin.

enthusiasticsaver wrote: »

The final pot is a Protected Rights pot due to the fact that OH opted out of SERPS many years ago on the old DB scheme until it changed again and he opted in again to pay into a booster scheme. There is £49,495 in this pot and again with spouse protection they have offered £2,075 per year and a lump sum of £1,240 alongside the DC pot tax free. If he delays taking this by one year to October 2017 he would get £1899.36 per year and the lump sum increases to £6,247 but I am not sure why the increase is so much by delaying by just one year.

The deal for delaying one year is that he'd accept a lower pension (no chance of a typo here?) but get an extra £5k as TFLS. Perhaps that is, indeed, unattractive.

The modesty of the TFLS makes me wonder if this pot too has been combined with the other three to get the total TFLS available, resulting in his being offered the whole DC pot plus this last £1,240 as total TFLS for the lot. That guess would explain the apparent fluke referred to above. Again, an alternative would be to consider transferring to a SIPP or PP.

enthusiasticsaver wrote: »

Just for background we have savings and investments of around £110k in my name as I am a basic tax payer

I suggest you give urgent consideration to opening a SIPP/PP for yourself while you are still earning. If you want to start in this tax year get on the phone today to (say) Hargreaves Lansdown, telling them your earnings for the tax year and the size of your other pension contributions. They will presumably tell you the size of net contribution you can make: use part of your savings to make it. Don't invest the money in the pension yet; just leave it sitting as cash while you take stock of your position.