Should I defer my DB pension?

jerrysimon

Camster wrote: »

I suppose the question comes back to whether it worthwhile to give up the 18 months of gross pension income of around £33,750 by deferring the pension until 60, or to take the hit on the 6% p.a reduction and take the pension now.

I've estimated that by waiting until 60 I would have a pension of about £24,500, which would then increase by the rate of inflation up to a maximum of 2.5% a year. I think it would take around 12 years to make up for the pension income lost by not taking it early, and I'm not convinced that this is worth it.

Exactly the same as what I am faced with taking my DB ension worth 20K at 60 reduced to 17K by taking it 3.5 years early at 56.5. I have decided to take it given it would take 15+ years dependant on annual inflation increases to get the 59.5K back (17 * 3.5) before I am in credit having waited until 60 to draw it at the 20K rate. The added bonus is even if I was to die my wife would get 50% i.e. 10K of the unreduced 20K figure.

Of course I dont have the savings to fund the 3.5 years anyway. Even then If I had 59.5K in the bank I still think I would keep that and draw the pension early, I dont know maybe not, anyway I dont so its not an option. Some have recommended I burrow the money but maybe its just me, in that I think that just seems worse as you then have to start paying it back at some point.

My wife has a small DB pension worth 3K at 60 but although she has given up full time work she does still earn around £200 a month, so in her case we have decided to leave the pension another 5 years (she is 55) or at least while she is earning the same as she would get by drawing a reduced DB pension of 2K.

We never realised she had this pension so in some ways see it at a bonus, that makes up my pension by taking it early

Both have lump sums which will provide the buffer we may need until we draw SPs at 66.5/67.

Jerry

jamesd

jerrysimon wrote: »

Of course I dont have the savings to fund the 3.5 years anyway. Even then If I had 59.5K in the bank I still think I would keep that and draw the pension early, I dont know maybe not, anyway I dont so its not an option. Some have recommended I burrow the money but maybe its just me, in that I think that just seems worse as you then have to start paying it back at some point.

You do have to pay it back, unless you go with equity release and choose not to. But what it does is shift money from later in life when all pensions are being paid to earlier when some aren't, letting you have a more even income throughout retirement. And/or a higher one if it allows you not to be compelled to draw the DB as early, but still pay yourself as if you didn't. It's not as nice as having the money to do it without borrowing but it can still get the job done.

The severity of the actuarial reduction also matters. The 6% a year here is quite high, so there's a pretty big reward for avoiding it. Sometimes it can be as low as 1% a year and that's much less painful.

jerrysimon

James I can see this but you could look at it another way.

Draw my 17K reduced DB and use the lump sum in my case 54K the next ten years i.e. 5.4K (tax free) to top my pension up i.e. 17 + (5.4K + 20%) making an effective pension of 23.48K (my wife is also earning £200 a month tax free so that adds another 2.9K before tax) making that 26.38K effective before tax.

At 60 my wife's tax free 3K + 3K lump sum pension would have also kicked (she will probably not be working then so the 23.48K will rise to 27.08K before tax.

Of course at 66/67 we would have used up all our emergency lump sum money but would have anouther 13K (again my wifes 7K part tax free) SP making a total of 35K before tax.

Of course all those effective salaries before tax come with NO NI payable

This is why I thinks its easier to look at monthly net pay rather than annual salaries and comapare with net monthly pay currently before taking retirement.

For the next 8 years I do have access to 120K mortgage equity via mortgage based oneaccount which is paid off, but again dont really want to use that as it would need to be paid off.

House is worth 500K and we could move out of it later from a major city into a town closer by and draw out 150K plus whilst retaining the same size house.

As I said if you knew the future in terms of health and life expectancy these descisions would be much easier. I retire 31/3/17 with first retirement pay due 30/4/17 so I am at the point of finanlising the decision to draw DB pension earlier and will certainly need to sign on the dotted line in the next few weeks!

Jerry

soulsaver

You could also ask for a Cash Equivalent Transfer Value and toy with the permutations. A £24k pa DB is likely to be in the range of £700k plus currently, maybe £800k.

Camster

I've had a another look at my pension figures using an excel spreadsheet. I'm not an expert in using excel, so I hope my calculations are correct.

For the sake of the calculation, I've assumed a 2.5% annual increase in the pension regardless of when it is taken. So although I have a 6% reduction per year for taking it early, because the pension taken earlier also gets an annual increase of 2.5%, the reduction is effectively 3.5%.

I compared the difference in the pensions from age 60 based on both continuing to increase by 2.5% a year.

Based on a 3.5% annual difference in what I would receive by deferring the pension, It's indicating that I would be between 93-94 years old before I made up the pension lost by deferring.

jerrysimon

Camster wrote: »

Based on a 3.5% annual difference in what I would receive by deferring the pension, It's indicating that I would be between 93-94 years old before I made up the pension lost by deferring.

Yep as you say its gaining annual increases (sometimes more than those still in work get) even though you take it early. No matter how I look at it, knowing I can have 17K+ pension going into the bank every year for 3.5 years just does not make sense to defer. I have waited 40 years already (started at 16) for this and I dont want to put off claiming pension any longer.

soulsaver wrote: »

You could also ask for a Cash Equivalent Transfer Value and toy with the permutations. A £24k pa DB is likely to be in the range of £700k plus currently, maybe £800k.

With public sector DB pensions, the window to cash them in closed within 6 months of them changing the law to allow you to do that.


Jerry

jamesd

Camster wrote: »

For the sake of the calculation, I've assumed a 2.5% annual increase in the pension regardless of when it is taken. So although I have a 6% reduction per year for taking it early, because the pension taken earlier also gets an annual increase of 2.5%, the reduction is effectively 3.5%.

A deferred pension also normally gets inflation increases, often the same as one that is being taken. Same for the lump sum.

Camster wrote: »

I compared the difference in the pensions from age 60 based on both continuing to increase by 2.5% a year.

Based on a 3.5% annual difference in what I would receive by deferring the pension, It's indicating that I would be between 93-94 years old before I made up the pension lost by deferring.

That's too long for the numbers to be right. Probably at least partly due to the higher lump sum and skipping of inflation increases in deferral but there might be some other issue as well.

Camster

I've double checked my figures, and I made an error with one of the initial amounts. I've now changed this and the payback period is now reduced to being between 85-86 years old.

Does that seem nearer to what it should be?

If it's correct, it still seems a very long timescale to catch up on the pension you have lost out on by deferring.

jamesd

That's more like it but it still seems too long. Did you also adjust for the higher lump sum and the inflation increases while deferring?

Camster

I estimated the figure based on the last annual quote I had. I have requested a new quote and will see how that works out when I receive this.