Taking DB early

Duggo

Update....see figures at bottom of this post.

I’m currently working out our spreadsheet as we want to retire early. I’m currently 48 and the other half is 56. He would like to retire at the end of this year, when he turns 57. I feel a bit too young, and might continue with my part time job for another couple of years.

We are both 4 years short of full state pension (I’ve checked online), although, with this years payments that’s really 3 years.
We have lots of money in isa’s (about £350k) which should easily see us through until his DB pension at 65, however I wondered if there is a case for him taking his DB early for tax reasons?

His statement shows the following: an annual pension of £10,700 plus a paid up pension of £14,900 (this relates to money he transferred in from a DC pension). Add in the state pension and he will be paying a fair bit of tax. I believe the reduction for each year he takes it early is 4%, so I’m not sure if this is a good idea or not?

The other option is a tax free lump sum, although I don’t know what the commution factor is.

And if it helps, our current number is £23k a year. Not big spenders, mortgage paid off, but we seem to like expensive holidays.

Any thoughts?

UPDATE!
Got a forecast. Looks like the reduction is over 6% a year, so not good. Also I’ve no idea how to work out the commotion rate, but it doesn’t look great. Might be worth taking a hit on the tax?. Figures below:
Retire at 60. Pension £16,860
Retire at 65. Pension £24,331, or £17,174 with lump sum of £114,499. (50% widows pension regardless of option taken)

Any thoughts?

Albermarle

A 4% reduction for each year earlier you take the pension is reasonable, so if it will save tax then sounds sensible to take it earlier and just top up from the ISA's. As you will also be taking less from the ISA's then maybe you will also see some more growth in them ( assuming they are S&S ISA's)
Regarding taking the TFLS from the DB pension, you need to see what you are offered and by how much it reduces the pension. This can vary from scheme to scheme so you need to get the figure before working out the nest thing to do.

Shedman

Don't forget that taking it early will almost certainly reduce the spouses pension by a similar % so thats another thing to take into account, given you are 8 years younger than him so potentially will outlive him.

I would also check,when you're getting figures for the lump sum, whether taking the lump sum affects the spouses pension as well (a lot of schemes still give 50% of the pension before reduction for the lump sum as spouses pension but some don't)

Duggo

Good thinking about the spouses pension, which I know is 50%of the pension. Apparently taking a lump sum doesn’t affect the pension, it’s based on the full pension before reduction, so maybe that is a better option?
It’s good to have feedback guys. Thanks

bluenose1

When we have done the sums re taking my DB Pension at 55 it is definitely a strong possibility.
My DB Pension from age 55 is reduced from £6,000 to £4740 per year, a reduction of £1,260.
Between 55-60 I will receive £23,700 if I take it early.
If I divide the £23,700 by the £1,260 reduction it will take over 18 years before I start to lose out -age 78.
I know this is simplistic as doesn't include inflation rises or reduction in lump sum etc but I would prefer the money between 55-60 to help me retire early. Both our SPs start at 67 so we should be cash rich from then anyway.

DT2001

I took my DB pension 9 years before NRA. Considerations were, once drawn I thought my rights were better protected, tax free until SPA as self employed earnings were low, preserved more of our ISA’s and allowed OH to top up pension. So we have rejigged the ISA/pension balance to make most use of tax free allowance and pension inbalance between myself and OH.
So suggest you play with your spreadsheets and look at various options when you know exact figures to see how much difference it makes. Do you have a pension or could you build up a pot as it appears you’ll retire without taxable income a few years before SPA?

Duggo

I have around £2k a year at 60 from the NHS 1995 scheme, another £700 a year from the 2015 NHS scheme, payable at 67 and two DC pots I no longer add to of around £14k each.

Duggo

Would appreciate any thoughts on calculating the communion rate, and whether it’s a poor deal?

blue_eyes

commutation factor:
instead of getting 24,331 you'd be getting 17,174 - a difference of £7157
instead of getting zero lump sum you'd be getting £114,499

so you're getting 114499 for 7157 of pension
which is 114499/7157 or £16 for each £1 of pension
commutation is 16:1

usually you can take any spot on the gradient between 0 and 25% (not just either or)

not quite as bad as LGPS (12:1) but not all that good unless you really need the money straight away.

My thoughts on an early reduction factor:
it's not a penalty, it's an actuarial calcuation - they pay out the same as they would - but for longer as you're getting it earlier - as they calculate a mortality age for. If you think you will outlive that age, then perhaps getting the certainty of the pension is better, if you like having more in your hands to be able to decide/invest/control yourself, then perhaps take early reduction.

Think about what's important to you, and perhaps also consider your tax situation over the years (plop some numbers into a spreadsheet for each year between now and 85 or so).

Also - don't take advice off a random bunch of strangers on the internet too seriously
:-)

Duggo

Thanks blue-eyes for working out the commotion factor for me, and don’t worry, I will be running numbers through a spreadsheet, but I find the advice here is great, and often raises things I hadn’t thought of!