Retiring at 55 & Occupation Pensions

tigerspill

zagfles wrote: »

You do usually lose, because the reduction factors are rarely actuarially neutral. An actuarially neutral rate would be approximately the rate of an index linked annuity - typically under 3%. It's like commutation rates, these are rarely anywhere near actuarially neutral.

So if you're in a scheme with a 5% early retirement factor you are likely to lose if you take the pension early. Unless of course you have short life expectancy - but then a better option would likely to be to transfer out.

Of course there are other issues like tax, and the lifetime allowance, which could swing the equation.

I guess this depends on the age you use for defining actuarially neutrality.
What age were you using in making this statement.

When I worked it out for me, at 5%, it took until 74 before delaying was better; and at 3% it was 91. This assumed an additional 60K tax free income form 5 years between 55 and 60; and assumed no other taxable income.
For me it is actually better than this in that in payment I get RPI rises but CPI in deferment.

zagfles

tigerspill wrote: »

I guess this depends on the age you use for defining actuarially neutrality.
What age were you using in making this statement.

Around NPA, eg 60/65. As an example, to be actuarially neutral, say NPA is 60, and there's a 5% reduction for taking it a year early at 59. The pension is £10,000 at NPA or £9,500 if you take it at 59.

If it was actuarially neutral, then if you take it at 59 and don't spend the £9500 you get paid in the first year, instead saving it and when you get to 60, use that £9500 to buy an annuity with the same indexation as applies to your DB pension, then to be actuarially neutral and put you in the same position as if you took the pension at 60, you'd need to get an index linked annuity paying £500 a year for £9500, ie over 5.2%. Unlikely to be able to get that!

It gets even worse if you retire earlier, as ERFs are not usually compounded which means the 5% (or whatever) reduction is added rather than compounding (a compounding reduction is obviously better than a simple reduction - the opposite to increases).

So if you retire at 55, you'd get £7,500 a year, save that up over 5 years is £37,500, if you assume growth in line with scheme inflation increases making it neutral, you'd need a £2500 annuity for £37,500, ie 6.67%, good luck even getting a level annuity at that rate never mind index linked!

Of course no-one would actually do the above, but it gives a guide as to how fair the reduction rates are and whether it's worth considering. Other factors will obviously apply - eg tax, LTA, and if you need the money at 55 it's probably better than a high APR loan.

When I worked it out for me, at 5%, it took until 74 before delaying was better; and at 3% it was 91. This assumed an additional 60K tax free income form 5 years between 55 and 60; and assumed no other taxable income.

So probably same ballpark - tax will make a bit of difference. 3% is probably reasonable, 5% isn't.

For me it is actually better than this in that in payment I get RPI rises but CPI in deferment.

That's unusual. We get RPI for both revaluation and indexation in payment, but revaluation is capped at 5% for the entire pension, whereas in payment indexation is partly capped at 3% (pre 97 service) and partly at 5% (post 97).

The other issue, which I think applies to most/all DB pensions, is that revalution is capped over the entire period of deferment, whereas indexation in payment is done on an annual basis. This means that if inflation is low for a while then shoots up above the cap, you'd still get the full inflation increase in deferment even if inflation is above the cap some years, provided the average increase over the period of deferment isn't above the cap.

So in my case, if inflation is 10% for a few years (quite possible with the political chaos at the moment, which could lead to economic chaos), my pension would revalue at 10% for those years, as it'll be within the 5% pa cap over the period of deferment.

There is a downside, if inflation is negative revaluation in deferment can be negative but pensions in payment can't AIUI. But I think that's a less likely scenario than 5%+ inflation.

Muscle750

I just wish id of not had my DB pension ripped from under my feet some 12 plus years aqo im now nearing 56 and only wish i could have a income of £17.5k a year from my DB pension. Been loyal to same company 30 years now and the pension forecast is poor to say the least . As it stands im going to have to keep going till NRA .

marlot

jamesd wrote: »

If you're planning to take all of those early you're probably making a bad mistake, The better way to do it would normally be to transfer one to a personal pension, draw on that pot then take the others closer to their normal pension age.

Similar if you're planning to take lump sums. The commutation rate for a lump sum may be around 16:1 while the CETV is likely to be twice that.

Thanks for the warning. In the interests of brevity I omitted to say that I'm above my LTA, which sways the figures massively.

jamesd

Indeed it does, thanks!

theoldgreychap

For those fortunate to have larger DB pensions it!!!8217;s worth comparing the effect after tax and the impact on the crystallation test from drawing your pension(s) early.

Specifically taking an actuarially reduced pension & reduced lump sum reduces the % of LTA used (or protected LTA if relevant). This is currently calculated as 20 x (reduced) annual DB pension plus (reduced) PCLS. If you are close to or above the LTA this may allow you to reduce/eliminate the amount of pension subject to the excess tax charge. The lower annual pension payable may also reduce any amount subject to higher rate tax in payment and make the actual reduction & early commencement very tax efficient.

Final point- if the unreduced projected pension payable exceeds the Pension Protection Fund maximum then taking an actuarially reduced pension may reduce or even eliminate the !!!8216;haircut!!!8217; you might suffer should the scheme need to be !!!8216;rescued!!!8217; by the PPF - of note if the scheme viability is a consideration. As I understand it the PPF income cap applies per pension scheme - so choosing to take the largest pension(s) early would in theory provide the best mitigation against this risk.