Am I missing something?

MrRee_2

This is so simple (to me) - but Pensions Expert doesn't understand my logic .... so, over to you to either show me the error of my thinking or to confirm that I understand what I'm doing!

I'm in a DB Pension Scheme.

This scheme is about to close to future accrual.

I am able to draw on the Pension now if I wish - with it being reduced by the GAD Factor. This basically means that I will lose around 10% off my pension and around 5% off my Lump Sum if I draw down now - 2 years early.

A pensions expert I am talking to cannot understand why I would want to while still working ..... I agree with him, IF the scheme was to remain open. BUT, if it closes to future accrual all I will be losing by drawing early is the GAD factor mentioned above.

Therefore, let's take some round numbers to illustrate my thinking.

Annual Pension of £22,000 has been built up in the scheme to date. A tax free lump sum of £66,000 is also payable at that time.

Taking my pension now, 2 years early, means that (using the above round numbers) I will receive £20,000 per year instead of £22,000 applying the GAD factor. The tax free lump sum will reduce to £62,700.

Now, this is my thinking ...... I will receive £20,000 x 2 = £40,000 extra money from the pension as I am drawing 2 years early.

This 'costs' me £2,000 per year for life.

If I have received £40,000 more from the fund by leaving 2 years early then the crossover point where I am worse off jumping out 2 years early is £40,000/£2,000 = 20 years.

Is this right or have I missed something - my logic can be flawed sometimes! As in 20 years time I doubt I will care if I am losing £2,000 a year from that point on - as I will be dribbling down my vest in a care home somewhere probably!

I am aware of the tax position - I will be paying 40% tax on every single penny of the early pension.

Again, using the above figures, I have an option to take £20,000 a year and tax free lump sum of £62,700. OR about £16,000 and a £105,000 tax free lump sum. This sum results in a crossover point 12 years hence so maybe taking the larger income is better than the larger tax free lump sum? But the tax position makes that less interesting while I continue working.

The biggest reason for drawing early is peace of mind in case the fund is put into the PPF ...... which I seriously worry about.

So, my question is simple ...... is the above correct? Mainly the 20 years it takes to make taking the pension early a mistake?

sandsy

How old are you?
Will you still be a 40% tax payer in two years time and thereafter?
Is there any fixed rate revaluation GMP in deferment?
What is the pension increase in payment pattern?
What is the funding level of the scheme?

MrRee_2

58 - retirement age 60 ..... although I can work on of course.

40% taxpayer now without the early pension and will be as long as I work.

20% taxpayer when pension in payment if not working.

GMP ... there is a small amount - if I understand the question.

Pension will increase by cpi while in the closed scheme, I think.

Funding level ... I pay 10% Employer pays 26% - but that's irrelevant if it closes. Employer state they will have to continue to pay 13% into scheme to fund the deficit of £400 million on around £2 billion assets.

Is my 20 years maths above correct? If I lose £2,000 per year for life, yet receive £40,000 more as I collect early ......... this means that it takes 20 years to make the early collection a mistake?

kidmugsy

MrRee wrote: »

As in 20 years time I doubt I will care if I am losing £2,000 a year from that point on - as I will be dribbling down my vest in a care home somewhere probably!

Without googling for it, just tell us what you think the life expectancy of the average 58 year old male is.

MrRee_2

80 ........................

MrRee_2

BUT, that's different to ACTIVE life!!

Generally an 80 year old has slowed down, has less desire to do things and needs less money.

In addition, I will receive my state pension at 66 .... so, in 8 years time I get topped up by far more than the £2k lost on my DB Scheme.

Is my 20 years maths correct?

xylophone

GMP ... there is a small amount - if I understand the question.

https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

How would your GMP revalue in deferment if you chose not to take it?

Have you obtained a new state pension statement?

If you continue to work for this employer under the new DC scheme, will salary sacrifice be a possibility?

Will you be able to sacrifice or contribute enough into the DC scheme ( or a SIPP perhaps) to bring you down to basic rate tax?

Be a little careful here if you draw your DB early- http://adviser.royallondon.com/pensions/technical-central/information-guidance/contributions-and-tax-relief/recycling-of-tax-free-cash/

Do you have the choice of not taking the PCLS or is it compulsory?

Happier_Me

I am no expert so this is a question really to those on the board that know far more than me!

But would it possible for the OP to take the pension and then pay into a personal pension to reclaim the 40% tax back? I know there are certain rules around doing this which I am expect someone could clarify.

zagfles

Look up index linked annuity rates for a 60 year old, with 5-year guarantee and spouse benefits, which DB schemes usually have. These are around 3% or so.

Why do you think you'd get better protection from the PPF drawing it early? AIUI the protection gets better at NPD of the scheme, not the date you draw it.

Apodemus

I think you are underestimating the cross-over date since you don't factor in any return on the lump sum (which I am assuming you might invest). Also as mentioned above, you could use that lump sum to put back into another pension over the next couple of years and reduce your income tax for these years quite considerably, again extending the cross-over point.

AnotherJoe

Therefore, let's take some round numbers to illustrate my thinking.

Annual Pension of £22,000 has been built up in the scheme to date. A tax free lump sum of £66,000 is also payable at that time.

Taking my pension now, 2 years early, means that (using the above round numbers) I will receive £20,000 per year instead of £22,000 applying the GAD factor. The tax free lump sum will reduce to £62,700.

Now, this is my thinking ...... I will receive £20,000 x 2 = £40,000 extra money from the pension as I am drawing 2 years early.

---

But you won't, will you ? Because you will I understand be paying 40% tax now but 20% if you wait. So You'll pay 40% tax on that. So you'll receive £24k extra money. For that you are giving up £1600 a year (£2k - 20%) which will take 15 years to pay back. So that's age 73 is the crossover. Not sure if that makes any difference to you but it is a closer run thing than you initially calculated

So, i think the different taxation rates is what you missed.

I guess the other thing you've missed is, what is your plan for that money? If you don't plan to spend it until you retire it's not really buying you anything to take it now.