Take a final salary pension early or wait

happyhero

I realise I am diving in head first here with my question but I just want to check how this will work either way.


I didn't realise at the time but I now realise I have been very fortunate to have worked in BT for 30 years and so have a final salary pension. This pension stopped being added to in 2005 when I left. I am 57 now.


I want to ask the question whether it is better to take my pension now or wait until 60 which is the date this pension will pay out on. I had a few print outs over the years recently of what it will be worth and so have been able to do rough projections of what it may be worth when I am 60. I tried looking at a 20 year and a 30 year period which would work out a 23 or 33 year period to calculate until I'm 80 or 90 if I started now, and every time it seems to work out I will get hold of more money if I take it now but then I will have to live with a slightly smaller pension and lump sum. I had always thought if I take it earlier I would get less per year and that it is the end of the story, I had never considered that taking it earlier could mean more money overall, maybe I was being a bit nieve.


Maybe I am looking at this all wrong but I see it like this, and please correct me if I have it messed up, if I take it now I will be able to look back at 80 or 90 and say how much more money I got out of the system than I would have, (This seems mainly down to the money I would have taken over the next 3 years, if I took it early). But if I wait till 60 or more (although I was told a while back buy someone who had taken their money that it's not very beneficial holding on past 60 which seems odd to me) I would feel the benefit of getting more money every year, i.e. taking it early seems better maths wise but I won't notice it but taking it at 60 allows me to feel a benefit every year.


With my very rough projections it seems that I will be better off by about £30,000 over the 23 years and by £20,000 over the 33 years taking me to 90 so I might have to get to over 100 before it turns around.


I'm trying to look at this lets say how an accountant would and don't want to include what I actually need now or then, and so to concentrate purely on how to maximise this pension. Taking it early seems the obvious choice mathematically as I've noticed that over a year the difference doesn't seem much at all that I would be down on what I would have got if I had waited until I was 60.


Here are the figures I have got over the last few years and the dates I got them. Also I was born in January so it won't actually be a full 3 years but not far off.


8 September 2011 total pension £15,460.99 lump sum £46,382.96


11 March 2016 total pension £17,276.89 lump sum £51,830.68


19 July 2017 total pension £17,449.50 lump sum £52,348.49


So using these figures to do rough projections would you take it now or wait until 60 and why either way?


Hope I've made sense above.


Any help/guidance appreciated.

Dox

Got a crystal ball? Do you know when you're going to die? It really. is that sort of question, I'm afraid!

Much depends on how much you need cash now/whether it would affect your tax rate if you draw the pension early/whether you are in good health/longevity runs in your family....

System

How much is the actuarial reduction if you take the pension early?

Bravepants

How much does your pension actuarially reduce per year that you take it early? It could be 5% per year, but you should check.

Also, do you need to take the lump sum? What is the commutation rate?

I wouldn't base it on how much money you would have had in total over 20 or 30 years from now. Typically people spend a lot less as they get older and older, because they slow down, don't get out much to spend etc.

I would base it on the amount of cashflow you would be happy living with? Can you retire now and do all the things you want to do NOW. Or would you be better having slightly more income from 60, which will give you the spending power to do what you want? Perhaps for example if you took the pension now, you couldn't travel as much or as far, than if you waited until 60.

Linton

Are you looking at these numbers correctly? Are you sure that they arent projections of what you will get at 60 being increased by inflation? If so they say nothing about what you will get if you take the pension early.

GSP

Just to throw something else into the mix, have you been able to obtain a transfer out CETV figure. May potentially leave you with more money p.a. and money to pass onto to kids. Will also leave you with a drawdown pot to manage and all that entails!
Maybe a lot to weigh up depending on circumstances.

Edit: Also no penalty applies if you transfer out now and drawdown.

happyhero

Linton wrote: »

Are you looking at these numbers correctly? Are you sure that they arent projections of what you will get at 60 being increased by inflation? If so they say nothing about what you will get if you take the pension early.

Hello Linton, not 100% sure but it has this line above the figures "The value of your benefits as at the date of this letter, are as follows:" so I think tthat means that is what I would get at the date of the letter, how do you read that, it seems obvious but then I start doubting myself?

happyhero

GSP wrote: »

Just to throw something else into the mix, have you been able to obtain a transfer out CETV figure. May potentially leave you with more money p.a. and money to pass onto to kids. Will also leave you with a drawdown pot to manage and all that entails!
Maybe a lot to weigh up depending on circumstances.

Hello GSP, yes I thought about this and this seems to be becoming more of an option as time goes on so I will ask for this figure this year. But if you did this and gave up a DB pension what would you do with the lump that would be better than the DB pension?

I assume it would be a fair bit of money looking at what it will pay out, not sure how much though or if you can calculate it roughly, any idea?

I am into investing in shares and funds a fair bit and do ok so this could be an option but what would worry me is that it was now all down to me whereas at the moment I can generate an income through my investments and will get a pension even if investments drop in a bad market, so eggs are not in one basket.

happyhero

Bravepants wrote: »

How much does your pension actuarially reduce per year that you take it early? It could be 5% per year, but you should check.

Hello Bravepants, see my reply to Linton and let me know what you think please.

happyhero

Economic wrote: »

How much is the actuarial reduction if you take the pension early?

Hello Economic, see my answer to Linton and let me know what you think please.

Linton

happyhero wrote: »

Hello Linton, not 100% sure but it has this line above the figures "The value of your benefits as at the date of this letter, are as follows:" so I think tthat means that is what I would get at the date of the letter, how do you read that, it seems obvious but then I start doubting myself?

As its a DB pension with a Retirement Age of 60 I believe it means the value you would get at 60. Its almost certainly not the value you would have got had you retired at the date of the letter - presumably you couldnt have retired in 2011 as you would have been too young. And actuarial reductions for taking a DB pension early are normally much larger than the 1-2%/year indicated by your numbers.