Early Retirement Discount Factor

k6chris

Hi all. The itch to quit the job and get back control of my time, is strong and needs to be scratched. I am 53 and plan to take at least a year off before making any income generating decision that would impact that control of my time. Sabaticals etc are not an option so in order to Not Work, I have two options;

1) Deploy my defined benefit pension (previous employer) early, taking an early retirement discount factor (ERDF) hit from the age of 63. I have protecet rights so I could have deployed from age 50.

2) Live off savings until I am 55, then start drawdown of a SIPP I have, which in turn could bridge me to 63.

Both these options would cover my 'number' as I live quite a simple life and any option will leave me as a basic rate tax pay only.

Having been an avid reader of this forum for some time, I know the default advice is not to draw the DB pension early if at all possible, but clearly that decision is a function of the ERDF rate. For example if your DB pension has an annual ERDF rate of (insert stupid example) 0.1% there is a clear benefit in terms of total money you will draw from it over a lifetime of taking it early. If the rate was 25% per annum, it would be so penal to start drawing on the DB pension that the answer would be an obvious NO! Somewhere in between those extremes is an ERDF number, an annual reduction percentage, where the calculation crosses from no to yes and drawing a DB early is likely to be a better decision that delaying and using savings / draw down instead.

What is that number, or at least how to I caclulate it??

marlot

I modelled the options, before and after tax.

In my case, taking the DB pension early helps me keep under the lifetime allowance (LTA) so the options break even (after tax) long after I expect to have departed.

I also found that the main pension I'm planning to take early, bases my spouse's pension on the unreduced amount.

AlanP_2

It's personal as opposed to a generic rule I think.

Work out the payback period until you break-even allowing for an inflation adjustment to the amount in payment for the various options and see what the number of years is before you break-even is what I have been doing.

atush

In general i would go with option 2, but then again as said aboe you have to crunch the numbers.

10 years of actuarial reduction will be a heavy hit on your DB pension.

k6chris

atush wrote: »

10 years of actuarial reduction will be a heavy hit on your DB pension.

As does 10 years of living off savings or DC drawdown, which is why I am trying to find a balance. If only I knew how long I was going to live, what any regulation changes regarding pensions would be and the performance of the stock market over the coming years....it would make planning so much simpler :rotfl:

atush

Surely you must have some basis for a self assessed LE?

Family history of cancer? Heart disease? Personal lifestyle factors? Good health at present?

It would at least give you a nudge one way or another.

Another option is to use savings for 2 years, sipp for 3 then take the pension only 5 years reduced.

jamesperrett

To give you some idea - the Civil Service Classic scheme has a 37% reduction for taking a pension 10 years early. This is intended to be actuarially neutral so that the total sum paid out over the life of the pension should be the same as a pension taken at normal pension age. Is your reduction better or worse than that?

k6chris

jamesperrett wrote: »

To give you some idea - the Civil Service Classic scheme has a 37% reduction for taking a pension 10 years early. This is intended to be actuarially neutral so that the total sum paid out over the life of the pension should be the same as a pension taken at normal pension age. Is your reduction better or worse than that?

Yes, very similar percentage, however just had notification that the actuarially neutral ERDF has been reduced slightly, so have asked for a specifc quote. Other advantages of the early-DB route included baking in a lower calculation for lifetime allowance calculations, as well as the current legistlation that allows a TFLS (to be taken from the DC part of the pension as the DB was wound up for some years before I left employment).

kidmugsy

Is the inflation-protection on the DB pension fully active if you start it at 53?

k6chris

kidmugsy wrote: »

Is the inflation-protection on the DB pension fully active if you start it at 53?

Yes, same terms what ever the age of drawing it.

jamesd

Worth knowing that actuarially neutral is over everyone in the scheme, not you specifically. Your own life expectancy can be significantly higher or lower than that for the whole membership.

Tax free lump sum from the DC part is nice. Good to top that up to get maximum benefit if you can.