Redundancy / early retirement

Bob2001

I am going through the redundancy process, with my final day with the company being 31st December.
i was 55 in August, and hadn’t thought about retiring so soon, but now with redundancy it is looming.
i have worked for the company for just over 24 years, and have a DB pension which ran until the end of 2018.
Taking the pension at 55 means a 13% reduction, which should work out around £21K per annum (still waiting for Equiniti to confirm the exact figure after 11 days, unbelievably poor company IMO).
Since January 2019 I have contributed to the company DC pension scheme (with AVC’s in addition) which currently has £35,300 in there..
The settlement package is pretty good (I believe) with a limit at 2 years basic salary, which with my length of service equates to a figure of £131K.
I want to put as much of the settlement as possible into the DC pension, which I estimate will be in the region of £80K back dating the allowed allowance of £40K over the previous 3 years (again, waiting of Equniti to confirm my contributions for 2017-2018 and 2018-2019 whilst in the BD scheme).
So that would give ~£115K in the DC pension.
The remaining settlement amount of £30k tax free, plus £20K gross (I am a 40% tax payer), plus around £28K from company share scheme (tax free) will be invested - suggestions where wto invest would be really welcome.
Other information - mortgage is paid off, £60K in Marcus, £20K in Vanguard Lifestrategy ISA, £20K in cash ISA, £50K Building Society.
My wife has also recently been made redundant - around £70K savings, awaiting company pension numbers - my wife will qualify for (full) state pension in 18 months.
We have planned a renovation of our house (moved in June), architects are already involved, and will spend around £100K on this.
i am more than a little nervous about money after redundancy dropped, and wondered what advice you knowledgable experts could give me about making the most of savings/investments and the DC pension - I am thinking to keep the DB pension as it is and not draw the 25% tax free lump sum?
in the current climate this may be early retirement, no issues with working again and ideally a part time job would be good - giving time to enjoy life more, and bring in additional money.
Any thoughts would be really appreciated.


looking back at the previous 3 ye

tacpot12

It's a very good redundancy settlement, and you have a good plan with what to do with it, and you have the cash in place for the extension. 

Not drawing a lump sum from the DB pension if you don't need it is probably a wise decision, but it would make sense to compare what you would receive as a lump sum vs. the pension you will receive to make sure that is good value for money - the advantage of taking the lump sum when you draw the pension would be the flexibility to invest it or spend it. 

It would normally be best to live off the DC pension first to avoid the reduction for taking the DB pension early. 

My calculations are that you personally have c £250K to draw on between now and when the DB pension will be paid without reduction (13 years), and your wife will have a full state pension in 18 months time which will reduce the amount you need. This would seem to allow to plan on an "income" of £23,500 pa with this rising in line with CPI (if you take your wife's State Pension into account). Anything from your wife's works pension would be on top of this figure. This might not allow you to retire comfortably, so some part-time work would be necessary, but perhaps only until your wife is able to draw her state pension. The DB pension will make you a bit better off when it starts being pay. 

Does your figure of £80K going into the DC pension include the tax relief? 
Do you have a budget for what your living costs are going to be in retirement. 

Bob2001

Thanks Tacpot - in answer to your queries:
I haven’t thought about not taking the DB pension straightaway, I believe there’s no penalty if you take it at 60 - but would need to clarify with Equnity if this is correct, and if I can defer once I leave the company (Equnity will not answer any questions over the phone and quote 10 working days to respond - absolutely shocking frankly).
Yes, my £80K (estimated) going into the DC from the settlement is gross, so does include the tax relief.
My initial thinking was to draw the DB pension from January at £21K, and take ~£10K per year from the DC pension for 12 years or so (so £2.5K tax free, £7.5K taxed), my state pension then kicks in? That would leave ~£220K, £100K for the house, £120K in savings/investments.
The 13% reduction of the DB pension is around £3K difference per year, is it worth funding everything from my DC pension and savings for 5 years, which would be all of the DC pension used up, to realise an additional £3k per year?

bigfer

I had the same dilemma about taking DB pension early, but I did at 57. I know it seems counterintuitive and against the grain but I put that down to my age and attitude to pensions over the last 30 years. 
In simple terms, I would need to reach mid eighties to start losing money, so I took the reduced pension last year. 18 months on, still feeling it was a good idea, especially following on from covid. I have a guaranteed monthly income to pay all direct debits and a chunk of living expenses without shifting cash from savings. This has allowed my other investments to recover post March.
Each one to there own obviously, but one thing I can say with certainty....you can't beat early retirement, pandemic or not. Good luck with whatever course of action you decide on.

Bob2001

Thanks Bigfer - I’m sure you’re right, but I still feel apprehensive about being able to afford to do it...

Albermarle

You mention the DC pension and investments as two separate things . However of course your DC pension is invested , unless it is held in cash (hopefully not )
So you need to be clear that   the investments in your pension are suitable , as well as those outside it.

Bob2001

Thanks Albermarle - fair point, the DC pension is with Fidelity and their Lifestyle investment.
Thinking about maximising my carry over payments, I presume I will be able to pay the balance between the £40K limit and what contributions have been paid for 2017-2018 tax year, 2018-2019 tax year, and 2019-2020 tax year, and also to pay up to £40k for this current tax year?
Finishing paying into the scheme in December will mean there will be in the region of £25k left of the current years allowance.
Have I understood this correctly, or is it only the previous 3 tax years that I can pay up to the allowance in December?

RetSol

Bob2001 said:

Thanks Bigfer - I’m sure you’re right, but I still feel apprehensive about being able to afford to do it...

I'm in a similar situation to @bigfer although I made the leap at 55.  Cut your suit according to your cloth and you will be fine, by the sound of it.  I have experienced a lot of anxiety around taking my pension early whilst still feeling, deep down, that it was the right thing to do.  Your apprehensiveness may have less to do with your finances and more to do with the life change that the situation presents you with. 

Bob2001

Yes I think your probably right there RetSol - it’s definitely a case of looking at things from a different perspective. A life with much more spare time, and no work related pressures, has to be worth something.

DT2001

Pension carry forward calculator link with HL https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

I think the key is your income requirements. Then build a simple spreadsheet starting when you both have your SP and work backwards. It may show you can be drawing down more from capital than would normally be advisable. 
I’d also look at what would happen if one of you died re the DB pensions. If you take the 25% and die 1st does your OH get 50% of the lower figure or what would have been paid. All DB pension seem to have slightly different rules so look at small print. I assessed my decision to draw early on incomplete information and having had help from MSE forumites now know what will happen at 65 (GMP) and at SPA (reduction in payments of £600+ p.a.). 

13% reduction of pension from 60 to 55 seems low, mine was twice that (from memory). Does the pension increase in deferment at the same rate as in payment?

Bob2001

Thanks for the link DT2001, I will check that out.
I finally had the details through from Equiniti this morning - with the 13% reduction the total pension will be £21,407.
i have a few options:
A stepped pension of £22,935 to SPA, then £20,621 from SPA,
A tax free lump sum of £114,732 and a pension of £17,209
A tax free lump sum of £122,917 and residual £18,437 to SPA, then £16,123 from SPA.

All options include a spouse’s pension of £10,703 payable after death.
I’m really considering taking the lump sum, which with my DC pension would work out at £28,000 for the next 12 years until SPA, then £17.2K + state pension. 
This would give about £1k per month after all outgoings, and a healthy pot (~£220K) for investing/saving and Adventure.
Or would taking the lump sum be a touch rash?