Deferred pension choices

Brilley

Hi,
Just looking for some opinions on what to do with a deferred pension.

In summary our current status:- Spouse has just started to take their index linked pension which just about covers all our "basic" costs, (food, household bills etc).
We have a further 5 years to wait until we both get our state pensions and another small index linked pension which will bring in a further total of aprox. 16k. giving a total index linked income of about 30k (less tax).

ie we should have enough to maintain our current standard of living.
We have some savings that we are using to bridge the next 5 years until state pension. (We have no mortgage / debts).

We have also maxed out on Premium bonds, and have aprox £100k in NSI index linked bonds

I have a deferred DB pension with a current CETV of £300k.

The options to consider are:-
1/ Start taking pension now (aprox. £12k pa but this is "fixed", ie no increases once started)
2/ Take the pension in 5 years at 65 (aprox £15k, again fixed with no annual increases)
3/ Take the CETV and use to draw down at 3% (Should give £9k per year increasing with "inflation"..hopefully).
4/ Buy an annuity which has been quoted as giving £7.8k index linked.

(NB We do not need to "leave" anything" for inheritance etc. so at some point we also have the value of the house to consider).

..just wondering which option you good people would advise?

Albermarle

Normally the advice on this forum is not to take the cetv unless there is an overwhelming case to do so.
This is because the '£9K pa + inflation ' can only ever be a hope and never a certainty.
Although the fact that unusually the DB pension is not index linked , so maybe that changes the discussion, although presumably because of that the cetv is quite low.
The other issue is that to take the cetv you would have to pay for a comprehensive review by a qualified IFA, which would cost about £5K.

AnotherJoe

4 would take a long time to match 1 by the time it does you probably wont need the extra.

3 starts so low below 1 and theres a lot of uncertainty, a decent stock market crash could make it impossible to ever catch up

So that leaves 1& 2.
If you can bridge the 5 years with savings then i'd go for 2, otherwise you can do a halfway house, bridge for a few years then go for reduced payment

Brilley

Hi both, and many thanks for the replies. I was heading to the conclusion that 1 is probably the best option financially, but also need to consider my spouse if I pop my clogs first, (although they would still get a survivor pension of about 40%....).

Aiki

AnotherJoe wrote: »

4 would take a long time to match 1 by the time it does you probably wont need the extra.

3 starts so low below 1 and theres a lot of uncertainty, a decent stock market crash could make it impossible to ever catch up

So that leaves 1& 2.
If you can bridge the 5 years with savings then i'd go for 2, otherwise you can do a halfway house, bridge for a few years then go for reduced payment

Sounds advice narrowing down to 1&2, IMHO.

You will need to pay more tax on the extra £3K for option 2 which increases the payback time to 25 years assuming basic tax rate stays at 20%. Payback drops closer to 20 years if some of this extra £3K is covered by personal tax allowance. So if you want more money in 20 to 25 years, option 2 is the winner. In all depends on how much of this money you 'NEED' in the next 5 years. Whatever you need in these 5 years either comes from pension and savings in option 1 or savings only in option 2. The more money that comes from savings the more option 1 becomes favourable IMHO.

AlanP_2

I'd add a 5th option for completeness - Take the CETV and only withdraw from it when needed (new car etc.)

If you have enough other income to maintain your standard of living why transfer it and take out £9k a year that you don't "need"?

This may not suit your circumstances if there is nobody to leave your estate to but even so worth considering.

I have a similar deferred DB that will not increase once I start drawing it, and like you our retirement income needs will be covered by other pensions. Unlike you we have 3 children so we are likely to go down the transfer route.

DT2001

I understand the previous posters and their long term logic however I wonder if taking the CETV would be worth considering for the following reasons:-
1. More than 3% could be drawn in the next 5 years before SPA as
when SP kicks in the return from this CETV is surplus to existing living standards so a reduction in capital is not a disaster and would allow more income when some expect to spend more.
2. The difference between CETV and the fixed pension is less than £3k because 25% tax free element.
3. Possibility of taking 25% cash free for anything unexpected
4. If looking at 25/30 years of retirement higher inflation is more likely.

I accept this is a riskier route however the OP has a good base and this fund is, I think, the cream on top. The only other rider to my comments would be what happens if OP’s spouse dies 1st - would they get 50% of index linked pension as CETV fund could have been depleted.

Brilley

Hi DT and thanks for another point of view I had not really considered.

NB If anything happens to my spouse then I would get about 40% of their pension and whilst I could probably just about survive on that and my own state pension it still leaves options regarding my own "flat" pension. (It would be worse if spouse needed to go into care at some point as they would take all that).

...and yes my pension would be considered "excess" to our actual need, so I suppose transferring it and only using it for "big" one off items could be an option.
All down to what you think will happen to inflation really?
Thanks again for all the input....I will "hold fast" for a bit and see what happens over the next year or two.
(We use an IFA and they are happy to do a CETV if it's what I want, but they are not really committing either way which is understandable I suppose...)