Drawing a DB Pension early...

CloesUnc

Good morning money savers,

I would please like to canvas some opinions on something.

I plan to ensure that I get full state pension at age 67 by buying extra NI..so I should be all set for SP from 67.

BUT I also have a DB pension with an NRA of 60, but that I could take at 55 (actually I can take it from 50).

Now, I estimate that I could get approx £14,000 per year at 55 (rising each year with CPI) or leave it until 60 when I will get approx £20,000 again rising with CPI.

In my mind it makes more sense to take the £14,000 at 55 because over the years until I hit 67 (12 years until SP age) I will receive £195,000, whereas if I wait until 60 I will receive, over the 7 years to 67, £150,000...£45,000 less. 

People generally seem to say on here that more money while younger is better.

Any thoughts? 

Albermarle

Your maths does not work because the DB pension will not stop paying at 67 . So after 67 you will still be getting £14K or £20K pa + inflation until you die .
Normally it works out about equal if you take it early or not , based on average life expectancy. However you seem to be losing 6% of pension for every year you take it early which is on the high side . Normally it is around 4 to 5%.

JGB1955

It depends on how long you think you'll live.
Ignoring CPI, If you live to 80 you will receive £350K from the pension taken at 55, as opposed to £400K if you wait until 60.  If you live to 90 the figures are £490K / £600K.  If you only make it to 75, the figures are (very roughly) £280K/£300K.

Retireinten

In really simple terms you want to work out how many years it takes you to get the £70k  (£14000 x 5 years = £70000) you would receive if you took your pension at 55, with your higher pension from 60. £70,000 divided by £6,000  (£20k-£14k) = 11.66 years. So by the time you hit 71/72 the higher pension will be a better deal financially.

But there are other factors at play here. Do you need £20k plus state pension from 67? Or would £14k plus state pension suffice?   Does taking the pension earlier allow you to retire early and is this something you are keen to do? If you plan on taking the pension early will you still work, in which case how much tax will pay? Does it change your tax bracket? 

I'm in the LGPS, I will be taking this early at 60 as I have some protections attached to part of my pension. I will still have some actuarial reduction though and I could take this earlier but I lose far too much per year, as I forfeit the protections. But I'm at the point where I need more savings to fund early retirement over more pension from 67/68.   I'm saving separately to fund retirement at 55 over taking my DB, but I would not delay taking the DB beyond 60 to reduce the acturial loss because I don't need the extra pension from 60. Hope that makes sense - it's about finding the balance that's right for you and your circumstances. 

CloesUnc

Albermarle said:

Your maths does not work because the DB pension will not stop paying at 67 . So after 67 you will still be getting £14K or £20K pa + inflation until you die .
Normally it works out about equal if you take it early or not , based on average life expectancy. However you seem to be losing 6% of pension for every year you take it early which is on the high side . Normally it is around 4 to 5%.

Thanks for your reply. Indeed in the long term you are right of course. But in the short term to 67 I would actually have more money coming in when I am younger. The other option I have is to draw from SIPP from 55 to 60 at full tax allowance rate and drain that down, leaving DB until NRA. My original plan was to do that. My spreadsheet has too many options from which to choose and I'm trying to get some perspective!

This is why your an other peoples' opinions are quite valuable!

arnoldy

20k/14k = 1.43. So a 43% increase if taking 5 years later @ 60, and you do have to go on the data that says blokes go at 83 and Women a bit later.
A 43% increase is circa 7.5%pa return for 5 years + guaranteed pension that's 43% higher until in all probability you are 83+. PS a small point it will probably be CPI plus cap.
What about using a SIPP 55 - 60? Start one now if you don't have? At 60 you can take the pension or look at the CETVs. With the higher pension you can continue to pay back £2.88k into SIPP and get tax relief. 

Marcon

CloesUnc said:

People generally seem to say on here that more money while younger is better.

Any thoughts? 

What people generally say here isn't necessarily relevant to your situation. Is more money while younger what YOU want/need?

Thrugelmir

CloesUnc said:

Now, I estimate that I could get approx £14,000 per year at 55 (rising each year with CPI) or leave it until 60 when I will get approx £20,000 again rising with CPI.

The starting pension at 60 will be higher allowing for an additional 5 years inflation. 

SMcGill

I’m looking at doing the same thing as you on two DB pensions. The early retirement factors for those are 0.84 and 0.79 to take them five years early. So effectively I get 84% and 79% of the amount I would get if I waited until normal scheme retirement age. The early retirement factor for yours looks like it’s 0.7.

If I understand how these things work then basically you’ll get £70,000 by taking your pension early (£14k x 5) but that gain will be eroded by £6,000 a year from age 60. So by the time you’re 72 you’ll be worse off.

edited to correct the pension age you mentioned

WYSPECIAL

SMcGill said:

If I understand how these things work then basically you’ll get £70,000 by taking your pension early (£14k x 5) but that gain will be eroded by £6,000 a year from age 60. So by the time you’re 72 you’ll be worse off.

That £6,000 will be taxable though so you'll only benefit from £4,800 pa annum of it which pushes the time you'll be worse off to about 75

bluenose1

I was going to cash in my DB pension at 55 for exactly the same reasons then got some advice to consider using my DC pot first. Know what you mean about spreadsheets but really worth doing a spreadsheet of the effects of inflation etc of doing  both options. 

Look at the spreadsheet cfw1994 has done on here, it would be a really good way of comparing the scenarios. 

Although you would benefit from the increase in DB pension at 55 when you factor in what you lose per annum between 60 to 67 it is not as quite as an attractive option as it seems.
saying that I know two people who have done it and for them it was a good decision as they didn’t have the DC / SIPP option.