Draw DB pension now or defer a while?

baj25

I can start drawing pension from my 2 DB schemes shortly. Please can I check what factors to consider before I start drawing? DB1 is c.5K p.a. and DB2 is c.10K p.a. at age 55. They are with different schemes so I have the option to start either, both, or neither. If I defer until 56, I’ll be about 66 before break-even (compared to starting to draw at 55). I’ve gone self employed so have the choice about how much salary to take from my company, and will have untaxed dividend income as well, so I don’t need the pension to live on now. I have other savings so am OK when I finally stop work as well. I recall the general advice though from many years ago that it is better to take pension as soon as you can, and if you don’t need it then, save it for later in retirement. I’ll obviously make sure my income uses full personal allowance, but keeps me below 40% band. Any pointers gratefully received.

kidmugsy

For each, can you tell us the scheme's Normal Retirement Age, and the annual actuarial reduction for drawing the pension earlier?

baj25

Both are 65. I got forecast figures for starting to draw at 55 and 56, I did ask for the reduction factors for all ages between 55 and 65, but they were very reluctant to provide them (refused in fact, too complicated). I didn't push it as I expected to start drawing at 55 or 56 anyway. I am currently a deferred member btw, so no chance to increase 1/60ths.

xylophone

Why not leave the pensions to NRA and live on your employment/dividend income?

And are you currently contributing to a pension?

jamesd

The general advice for defined benefit pensions is to try not to take them until the normal pension age of the scheme. That's because the actuarial reductions for taking this type of pension early are often excessively high, particularly when it's ten years early. The drops typically vary from around 2% to around 5% for each earlier year. Breaking even in only ten years implies a pretty big reduction each year and that waiting until NPA is likely to be a good move.

While they might not be able to get very specific for you they should be able to provide approximate actuarial reductions at least.

Another fairly common defined benefit mistake is taking the maximum lump sum. The general rule is DB take the standard lump sum only, DC take the maximum lump sum. This is because the income reduction - commutation factor - for converting DB income to lump sum is usually poor and the reverse commutation one to use the standard lump sum to buy more income is usually even worse. But there are exceptions.

DC have no commutation factor and not taking max tax free lump sum from them just throws away a tax saving. Again there can be exceptions like guaranteed annuity rates or guaranteed minimum pension that can make no lump sum a better deal.

If you had some need for the money a good approach might be to transfer the lower paying one to DC then aim to draw that down over the years until the other one reached its NPA and then you reach your state pension age. That can help to provide a level income throughout retirement. This assumes that the CETV transfer values per Pound of income are about the same for the two pensions and they could be very different, with the higher income one offering the better transfer deal. If that was the case then transferring the bigger one and planning to defer your state pension to get back the guaranteed income might be the better move.

kidmugsy

baj25 wrote: »

If I defer until 56, I’ll be about 66 before break-even (compared to starting to draw at 55).

I agree with jamesd: that's probably the clincher. The actuarial reduction is just too expensive. Unless you have objective reason to believe otherwise you might be wise to assume you'll live into your mid-eighties. Needlessly reducing your income for a couple of decades is probably the wrong way to bet, especially if it also reduces your widow's pension.

Pension transfer is a different matter, but without quotes for your CETVs there's not much that can be said beyond jamesd's points.

baj25

Thanks for replies. I'm not currently contributing to a pension. I will probably make a modest pension contribution from my company for tax efficiency though.
Instead of asking for actuarial reductions I've now asked for a forecast for every year up to 65, which they seem to be able to do, I'll report back figures when I get them.
Does it always make sense to live off savings while deferring drawing pension, are any other factors involved? i.e. rate of growth of deferred DB pot vs growth of investments. 15k p.a. from savings is do-able, is there ever some break point prior to NRA when it becomes worth starting to draw and if so how is it determined? Thanks again.

jamesd

Sometimes the actuarial reduction is small enough not to matter. Sometimes taking it early is desirable to reduce or avoid a lifetime allowance penalty. Sometimes there are no savings or not enough to pay the desired income for as long as needed.

baj25

Update on DB1, 5,100 at 55, 5,500 at 56, 6,100 at 57, 8,290 at 60, 12,350 at 65. Don't think I will be starting to draw this year based on those figures.

jamesd

That does seem to be towards the high end of the actuarial reduction range. That also implies that a transfer offer on it is likely to be bad.

It's the sort of level where standard mortgage, equity release or, closer to NPA, 0% for purchase credit cards look like better value for money than taking the pension early.

baj25

Thanks again for all comments and replies.