Taking DB pension very early

KrimsonKing

So this is a slightly odd one. Our DB scheme was 'closed to future accrual' some years ago but is not being wound up. As I understand it, the company will continue to fund the scheme to ensure it has sufficient funds to cover all current and future liabilities, and will also ensure that payments will rise inline with inflation, but nothing else and no future earnings will be pensionable from the time it was closed.
The upshot of this, I guess, it that there won't be huge difference in me taking this pension now (52) and waiting until normal retirement age (65) because the unusual feature of our scheme is that you can draw it from the age of 50 and continue to work. I've had a couple of illustrations from the administrator, 52 and 60, and it's around £300 per month against £400 with a lump sum of £24K against £30K, not huge differences and the bottom line is that I could really do with the extra income now and would be drawing it for a lot longer (lump sum would be put aside).



To my simple mind it looks like a no-brainer but then why isn't everyone else doing it?(Or maybe they are!) Difficult for people to comment I know but I'm worried about having missed something somewhere so any advice would be appreciated.

molerat

A 25% reduction for taking it early, 25% less per month for the rest of your life. Is it such a no brainer now ?

Thrugelmir

KrimsonKing wrote: »

will also ensure that payments will rise inline with inflation,

Which rate of inflation. Some older schemes still use RPI as opposed to CPI. Makes a real difference to the final outcome.

cisamcgu

60-52 = 8 years
8 x 12 = 96 months
96 x 300 = £28,800 - this how much you get between 52 and 60 if you take it early

Now, difference between 400/m and 300/m = £1200 per year

Therefore 28,800/1,200 = 24

So, once you reach 60 + 24 = 84 years old you start to lose out.

I would take it now, but taxation may make a HUGE difference if you continue to work.

AnotherJoe

Depends upon your taxation position now and when you would retire.
To take some extremes, you could be taxed 40% on it now until you retire age 65, or you could wait until you retire at say age 60,give up working and take no other pension until SP (living on other means such as burning down a DC pension) and thus take the higher amount untaxed for 7 years.
Or you may do something inbetween.
Spreadsheet time.

bluenose1

molerat wrote: »

A 25% reduction for taking it early, 25% less per month for the rest of your life. Is it such a no brainer now ?

Yes but he could get £3,600 per year between 52 and 60 = £28,800 which he would like now.
The annual pension would reduce by £1200 per year so my very simplistic way of looking at is £28,800 minus £6k reduction in lump sum = £22,800 / £1200 reduction means he would be age 79 before worse off. This obviously doesn't include inflation so woukd probably be a few years before that.

My husband and I are pretty certain we will be cashing my DB pensions in at 55 as we figure from 67 when SP kicks in we will be cash rich anyway and would like the money while young enough to enjoy it.


EDIT - I Posted same time as above and agree with both their views. Woukd take it but think about the tax implications.
Personally I will earn over the personal allowance no matter whether I take my pension or not so all will be taxed at 20%.

Thrugelmir

cisamcgu wrote: »

60-52 = 8 years
8 x 12 = 96 months
96 x 300 = £28,800 - this how much you get between 52 and 60 if you take it early

Now, difference between 400/m and 300/m = £1200 per year

Therefore 28,800/1,200 = 24

So, once you reach 60 + 24 = 84 years old you start to lose out.

I would take it now, but taxation may make a HUGE difference if you continue to work.

The starting pension at 60 needs to be revised inline with the appropriate rate of inflation. Even at an average rate of 2% inflation over 8 years. The starting pension is £1,378 higher not £1,200 at 60. Over the subsequent 20-30 years the gap will continue to widen.

KrimsonKing

Thanks for all responses, much appreciated.

I can see that, on the face of it, it's a 25% reduction but, as Bluenose points out, by the time I hit 60 I'll have banked almost £30K from the scheme already and that could provide a real improvement in lifestyle in the meantime. It's CPI linked incidentally.

I'm low-paid, relatively speaking, at £22KPA so this wouldn't take me anywhere near the 40% mark, there will be a tax hit but not massive. It will also be reassuring to have a lump sum locked away for emergencies, especially as it's close to our outstanding mortgage balance, giving the option to clear it in a year or three. I also have the DC scheme, introduced to replace the DB one, which I'm paying into additionally on salary sacrifice so that's something else to consider, plus the state pension at 67 FWIW.


Finally, although they've said they're not closing the scheme and winding it up, you never know. This represents years of work and it would be good to get something back from it now on the off-chance of future problems.