Sanity check taking PPF pension early

dacdac

Hi,

I was made redundant in the summer and currently living off  payout while I plan the structure of my early retirement. I am 57. One of my DB pensions has recently entered the PPF and I have been looking at the associated options.  The normal retirement age is 63.

@63 = £9,110 per year

@58 = £8,410 per year

 I am trying to compare the benefits in taking the pension early.

Pension is pre 1997 and will not increase by cpi once commenced . It will increase by CPI until taken so I have used the maximum of the pension increasing by 2.5% which at 63 gives approx £10,300pa

 

Assuming drawing until 85 I see an illustration of the total compensation as follows:

 

@63 £10,300 x 22years = £226,754

@58 £8,410 x 27years = 227,070

 

So my conclusion is that it would be best to draw the pension at 58. There will be a small hit in spouses pension but not significant enough to make an impact.

This got me thinking about options to take a TFLS.

If I take £45,360 as a lump sum at 58 my pension will be £6,800 pa

Which along side my other pensions will be OK

 

@58 6,800 x 27 plus £45,360 =  £228,960

 

I like this option best as I will use the lump sum to help bridge the gap until other DB pensions start and means I will delay drawing down on my DC pension pot.

 Is there anything I have overlooked as I have picked up on this forum that it is unusual that taking the lump sum is the best option?

westv

I didn't think you could take PPF pensions early.

Dazed_and_C0nfused

From one of the PPF booklets,

Early retirement

You may be able to receive your compensation earlier than your normal pension age.

You have to be 55 years old or over

to do this – unless you have a right to take your pension earlier under the rules of your former pension scheme (known as ‘protected’ pension age).  

However please be aware this could never be below age 50.

If you want to receive your compensation early, you should contact us for an early retirement illustration, or visit our member website. 
Because you’ll be receiving your payments early, the amount you’ll receive will be lower than what you would’ve received at your normal pension age, as it’s being paid over a longer period.

westv

Ah, I must be thinking of the FAS - which is what mine was with until the PPF took over. It doesn't allow early payment or  deferment.

dacdac

Yes the PPF does offer options to take pension early and the figures I have quoted I have taken from their compensation modeller from their web site

Dazed_and_C0nfused

Once you get to SPA would the extra £1,890 have tax deducted i.e. the real value is only £1,512?

dacdac

Dazed_and_C0nfused said:

Once you get to SPA would the extra £1,890 have tax deducted i.e. the real value is only £1,512?

Good point, yes and probably a bit before SPA depending on how I structure the DC pot draw down.

bowlhead99

dacdac said:

Assuming drawing until 85 I see an illustration of the total compensation as follows:

 @63 £10,300 x 22years = £226,754

@58 £8,410 x 27years = 227,070

So my conclusion is that it would be best to draw the pension at 58. There will be a small hit in spouses pension but not significant enough to make an impact.

Of those two, if you take the first one you get a little over 20% more money per year while the second one you get a little over 20% more years of income, so it's giving roughly the same amount. But that's assuming you plan to die at 85 - which is between the average life expectancies of an average 58 y/o man (84) and an average 58 y/o woman (87). In looking at it like that, you're just planning to get the income for the 'average' amount of time. But if you're in the unfortunate (?) position of being among the half of the people who live longer, the option that pays more than 20% extra every year is going to be quite useful - more than a quarter of people would live to their early 90s, and one in ten would live to 97-98.

My grandma's 100+ and by that point she doesn't need much for parties and holidays though an extra couple of thousand a year to help with carers or cleaners etc would be nice. So the 'take it later' option, if you can get by without it for now, is a neat little insurance policy against living a long time.   

Of course if there's no inflation uplift, an extra couple of thousand a year in your sixties is only going to be extra hundreds in real terms when you get to age 100, so looking at the potential long tail beyond age 85 is maybe less useful than if you were someone on a non-PPF scheme which was indexed and preserved the extra uplift in real terms.

Being able to access the money earlier is quite efficient if you can do it without too much tax (i.e. you don't have other incomes that would make that £8.4k of income taxable), although if you're also going to be drawing from your DC pot or other pensions then the 8.4k from this one which appears tax free may only be displacing some other income from being tax free within your annual allowance.

But I suppose the bottom line is that if you need some money from some source to get you through to drawing other pensions, it makes sense to take from the PPF fund (whether lump sum or not) because you're giving up a non-inflating income based on certain actuarial assumptions whereas preserving your DC drawdown pots could create inflating income (rather than non-inflating income) out into the future if you blow the assumptions. 

Some people would not want to commute a DB pension (inflating or not) into a lump sum or early draw, because at least the DB is a known benefit (other than the inflation erosion of it) while a DC pot is not; the sequence-of-returns risk when drawing an income from DC for forty years may result in you screwing it up.  But when you have a variety of other DB pensions, state pension etc to fall back on as well as this PPF one, you may think the DC one is not much of a risk when managed sensibly, and therefore aim to avoid drawing down the DC one for as long as possible while consuming more of the PPF one instead.