take pension now or wait?

twizzel

I can't decide whether to take my pension early or wait and I'm hoping you may be able to help make the decision one way or another by highlighting the considerations I should be making.

From a previous employment I have a deferred final salary pension currently valued at £22000 pa which I can take in full when I'm 57. I am now 52.
This deferred pension grows in line with inflation each year up to 5% (Don't know if this is CPI or RPI though).

If I take it early, say when I'm 53 (5 months time) I will be penalised 3.5% per year i.e. 14%, leaving £18920. I do have personal pensions funds also, so this wouldnt be my only income in retirement.

The whole pension scheme is still underfunded and I've been told the company is pumping more cash in over the next few years in an attempt to get it back on track.
I don't actually need this pension income just yet but I'm thinking that there is a chance the company may change my personal retirement age from 57 to 60 or higher. There is no hard evidence but I know other final salary schemes have done similar things.
I can hang out till I'm 57 but part of me thinks I'd rather get a reduced pension now (even though I'll continue to work) rather than run the risk of having to wait till 60, or something worse happenning to the scheme.

Bird in the hand and all that.
Any thoughts?

dunstonh

This deferred pension grows in line with inflation each year up to 5% (Don't know if this is CPI or RPI though).

If I take it early, say when I'm 53 (5 months time) I will be penalised 3.5% per year i.e. 14%, leaving £18920. I do have personal pensions funds also, so this wouldnt be my only income in retirement.

So, taking it early costs you around 6% a year (lets assume inflation linking is 2.5% and the penalty is 3.5%)

You are going to be paid for life but deferring it 5 years means you will get 5 years less payments although the figure that starts 5 years later will be higher. You need to calculate the crossover point (and remember to include tax and cash lump sum).

I don't actually need this pension income just yet but I'm thinking that there is a chance the company may change my personal retirement age from 57 to 60 or higher.

Unlikely. That is something that doesnt tend to happen to existing members but even when it does, it doesnt happen overnight and you are written to about the proposed changes well in advance of them happening. If that does happen, you then have ample time to commence benefits straght away.

benny5

Hi,

Cant speak for other pensions but in the case of mine they simply issued a statement to the effect that the fund could not support the then 2% per year reduction tor early retirement and changed it to 5% with immediate effect.

Since then I have lost a great deal of confidence in pension promises.

EdInvestor

What's your tax situation now and later?With a comparatively small penalty like this you may find that the damage gets even smaller especially if you are near the higher rate band (don;t forget to add in state pension and dividend income)..

Looks to me that locking in that low penalty makes sense in the circs.

lilac_lady

It's not easy to decide but if you're uncertain of what your company will do I'd opt for taking your pension early. Think how you'd feel if your pension was diminished or lost before you retire. If you have other pension income to come and can invest the early pension money carefully, you wouldn't lose too much (or too much sleep). Also, if you want to spend a bit while you're still relatively young, why not? You've earned it.

twizzel

EdInvestor wrote: »

What's your tax situation now and later?

I'm a basic rate payer these days but if I take this £18k pension now it will push about £15k into 40%. When I retire I will definitely be on basic rate only.

twizzel

dunstonh wrote: »

So, taking it early costs you around 6% a year (lets assume inflation linking is 2.5% and the penalty is 3.5%)

Thanks for the reply, but I'm not clear how I lose the 2.5% p.a in your calc. The recieved pension grows by inflation each year also, so wouldnt I only lose out on 2.5% of the 14% penalty, on top of the 3.5% per year ?