Am I missing something?

Kynthia

Apologies if I've misunderstood but I don't think you are comparing like with like. If you take your pension early you will get £40k now but you will pay an extra 20% tax on it than you will on the additional £2k a year you are giving up. So that's really £32k. Plus you are losing £3.3k of your lump sum giving you £28.7k in exchange for losing £2k per year of your retirement .

Therefore in simple maths does that not mean you'd have been better off not taking it early once you reach just over 14 years into your retirement?

You might decide it's worth it if you have plans for that £28.7k as we don't always spend our whole retirement able to get full enjoyment of our money. However you might also decide that the additional £2k a year is needed and go for whichever option gives you the most out of your whole likely retirement period. So there isn't necessarily one best option for everyone.

Shimrod

MrRee wrote: »

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

This is only going to happen if the company goes under. If they are only just planning on closing a pension scheme with a generous NRD of 60, that does not sound likely to me or it would have closed the scheme some time ago. Is the company making a profit? Is the company dependent on a single large contract which it could imminently lose?

If the company is financially sound, and your fear of the PPF is the primary driver for drawing early, you might be best leaving the pension until you are ready to retire.

You might want to reconsider the calculation of your cross over point - you won't be getting £20K because 40% is gone in tax, and you have not allowed for any indexing of the sacrificed £2K over the 20 years.
(Edit: I see Kynthia has done the actually maths while I was very slowly typing)

LXdaddy

MrRee wrote: »

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.

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.

I think you've missed a couple of things.

For the moment let's ignore any growth that you could get by investing money and any impact of inflation on the numbers.

£22,000 reduced by 10% is £19,800 now
£66,000 reduced by 5% is £62,700 now

Take 40% off £19,800 = £11,880 nett now
Two years of that is £23,760
Add the TFLS of £62,700
two years from now you will have £86,460

Compared to the TFLS at 60 of £66,000
so you will have £20,460 more funds if you take the money early (and have neither invested nor spent any of it)

In retirement

Take 20% off £19,800 = £15,840 nett
Versus 20% off £22,000 = £17,600 nett
Difference £1,760
That would take 11.625 years to recover the £20,460. So before you are 72 years old is the cross over point.

As well as ignoring investment gains and inflation this ignores any increases that you are due once the pension is in payment.

To answer your original question the significant points you were missing are

• the difference in the tax rate
• the difference in the lump sum

MrRee_2

This is excellent, and just what I wanted ..... someone to look at the numbers and point out where I am missing something.

I do not need the money now, or the income - I would rather leave it where it is ..... but, if my 20 years crossover was right then I was going to take the money and run - despite paying 40% tax rather than 20% - and taking the GAD Factor hit.

I'm going to look through the numbers again carefully, taking all that's said above. I do thank you all for taking the time to answer me.

As for the viability of the Company, it is an odd situation .... I am employed by a Company X plc which has no assets whatsoever (it is this Company which runs the Pension Fund). There are 3 Companies which operate this Company without owning it, the UK Government has a Golden Share in X plc.

If the 3 Companies lose their contract, or the UK Government pulls the contract, then X plc has ceased to be ..... albeit with the UK Governments Golden Share. I have been in talks with the UK Government to get assurances for the Pension Trustees that they will step in as the final assurance to save the fund if X plc fails - they refuse to do this. They seem very willing and happy for the PPF to take it over if required. Hence my serious worry and desire to collect and stop the stress.

Going into the PPF would mean that I wouldn't be able to collect my pension (90% of it) until 65. This is something missed above - if it does go into the PPF then I will have lost 5 years of retirement and 5 years of pension at the reduced amount ................ and, probably, most of the lump sum.

So, you can see my dilemma! Made all the worse if the crossover point is, in fact, just 12 or 14 years ........

atush

Why not take it early, but contribute it to a DC pension (either the work one, or a PP or Sipp)?

Or at least all your income over the HRT threshold?

that way you are drawing the pension, but saving the 40% tax paid on it.

After all, you dont need the money now as are still working. You just want to start taking it in case the company fails (and what is the likelyhood of that?)

They are closing it because it is too expensive so as to be less of a drain on t he company. This should make your company stronger (not weaker)

Why do yo think your company will fail int he next 2 years?

zagfles

MrRee wrote: »

This is excellent, and just what I wanted ..... someone to look at the numbers and point out where I am missing something.

I do not need the money now, or the income - I would rather leave it where it is ..... but, if my 20 years crossover was right then I was going to take the money and run - despite paying 40% tax rather than 20% - and taking the GAD Factor hit.

I'm going to look through the numbers again carefully, taking all that's said above. I do thank you all for taking the time to answer me.

As for the viability of the Company, it is an odd situation .... I am employed by a Company X plc which has no assets whatsoever (it is this Company which runs the Pension Fund). There are 3 Companies which operate this Company without owning it, the UK Government has a Golden Share in X plc.

If the 3 Companies lose their contract, or the UK Government pulls the contract, then X plc has ceased to be ..... albeit with the UK Governments Golden Share. I have been in talks with the UK Government to get assurances for the Pension Trustees that they will step in as the final assurance to save the fund if X plc fails - they refuse to do this. They seem very willing and happy for the PPF to take it over if required. Hence my serious worry and desire to collect and stop the stress.

Going into the PPF would mean that I wouldn't be able to collect my pension (90% of it) until 65. This is something missed above - if it does go into the PPF then I will have lost 5 years of retirement and 5 years of pension at the reduced amount ................ and, probably, most of the lump sum.

So, you can see my dilemma! Made all the worse if the crossover point is, in fact, just 12 or 14 years ........

Why won't you get it till 65 if it goes into the PPF? Isn't the NPD of your scheme 60?

http://www.pensionprotectionfund.org.uk/Pages/Compensation.aspx

MrRee_2

The NPD of my scheme is 65 - BUT - I have a right through TUPE to take unreduced at 60.

Therefore if it goes into the PPF I will not get paid until 65 as I read it.

I could take the Pension and contribute £40,000 into the replacement DC Scheme .... this would drop me out of the HRT giving me most, if not all, relief at 40%.

The replacement DC Scheme looks like the Company pays in 10% and I 6% ..... the Company says this is what I would do to get Tax Relief at source, any higher and I will have to alert the tax man to get the other relief on the balance to £40,000 back ... which seems fraught with danger and complications to me!

I am hugely risk averse by the way! Hence my problem with risking my DB Scheme ... I am tempted seriously into collecting now and taking my chances if I live beyond the cross over point .. at that point I will have my state pension to take up the slack.

There's a lot to ponder besides the basic maths ... I do thank everyone for their valuable contributions - why is it all so complicated?!

MrRee_2

By the way, I don't understand what the GMP has to do with a choice to take early?

I did ask what the DMP was and was given 2 figures ... an amount for some date in the 90's and an amount after that date.

The figures were very small, about £2500 and £3500 if I remember right - I would have to check.

But I have no idea what effect these would have on my pension and taking early? In layman's terms?

My Company operate a salary sacrifice scheme too - I opted OUT of that for the DB Scheme as I didn't trust the reduction in pensionable pay to be used as the payment calculator (I told you I was risk averse!)

atush

and I will have to alert the tax man to get the other relief on the balance to £40,000 back ... which seems fraught with danger and complications to me!

It is really a matter of a phone call. How is that fraught with danger and complications?

MrRee_2

Will I then be required to complete a tax return?