DB Pension + AVC & early retirement - I don't know what I don't know!

avdb

Hi,
I'm 51 and have a DB pension, which if I retired at 60 would give me around £42000 a year. Unfortunately I can't stand work and hope to retire at 55! I started paying into an AVC through work (which goes into a Fidelity fund) a couple of years ago & by 55 I might have around £72000 in it. If I retire at 55 & take my DB pension it drops substantially to around £27000p.a & I'd really like to have a bit more than this. So I started to try to put together a plan to retire early and still have enough to live my life comfortably. The idea I came up with was to retire at 55, transfer my AVC into a SIPP (my employers have confirmed I can do this) then use my AVC/SIPP along with some savings to live on until I'm 60 when I can start taking my DB pension, which will give me £36000p.a. (or a smaller amount per year with a TFLS)

I'm wondering though whether I should try to get some financial advice on doing this? I'm not interested in transferring my pension out of the DB scheme really, I just want someone to see if my plan has any fatal flaws in it that I'm not seeing due to the fact that I don't really know much about the pension business/rules etc! For example does taking a SIPP 5 years before my DB pension impact in some negative way on my deferred DB pension, or impact on taking a tax free lump sum option from my DB pension at 60? If I'm drawing on a £72000 SIPP over 5 years and no doubt depleting it during this time does this have any implications on my DB pension. Is there infact some other way of retiring early with my financial situation that I just haven't thought of - I'm not really sure what questions I need to ask, or whether this is the kind of thing an advisor would be able to help me with, or whether I should try to get all these answers from my DB scheme, or from Fidelity who the AVC is held with? 

I'm just concerned that I might be missing something, but at the same time it may be that my plan is absolutely fine and a very standard thing, and I'd be wasting money trying to get advice!

Any thoughts gratefully received!  

Marcon

avdb said:

Hi,
I'm 51 and have a DB pension, which if I retired at 60 would give me around £42000 a year. Unfortunately I can't stand work and hope to retire at 55! I started paying into an AVC through work (which goes into a Fidelity fund) a couple of years ago & by 55 I might have around £72000 in it. If I retire at 55 & take my DB pension it drops substantially to around £27000p.a & I'd really like to have a bit more than this. So I started to try to put together a plan to retire early and still have enough to live my life comfortably. The idea I came up with was to retire at 55, transfer my AVC into a SIPP (my employers have confirmed I can do this) then use my AVC/SIPP along with some savings to live on until I'm 60 when I can start taking my DB pension, which will give me £36000p.a. (or a smaller amount per year with a TFLS)

I'm wondering though whether I should try to get some financial advice on doing this? I'm not interested in transferring my pension out of the DB scheme really, I just want someone to see if my plan has any fatal flaws in it that I'm not seeing due to the fact that I don't really know much about the pension business/rules etc! For example does taking a SIPP 5 years before my DB pension impact in some negative way on my deferred DB pension, or impact on taking a tax free lump sum option from my DB pension at 60? If I'm drawing on a £72000 SIPP over 5 years and no doubt depleting it during this time does this have any implications on my DB pension. Is there infact some other way of retiring early with my financial situation that I just haven't thought of - I'm not really sure what questions I need to ask, or whether this is the kind of thing an advisor would be able to help me with, or whether I should try to get all these answers from my DB scheme, or from Fidelity who the AVC is held with? 

I'm just concerned that I might be missing something, but at the same time it may be that my plan is absolutely fine and a very standard thing, and I'd be wasting money trying to get advice!

Any thoughts gratefully received!  

If you have a SIPP, any savings in that (and how you access them) has no impact on your DB scheme benefits. What might have an impact (particularly in terms of tax free cash from the DB scheme) is transferring your AVCs to your SIPP - you'd need to check with your scheme.

naedanger

avdb said:

Hi,
I'm 51 and have a DB pension, which if I retired at 60 would give me around £42000 a year. Unfortunately I can't stand work and hope to retire at 55! I started paying into an AVC through work (which goes into a Fidelity fund) a couple of years ago & by 55 I might have around £72000 in it. If I retire at 55 & take my DB pension it drops substantially to around £27000p.a & I'd really like to have a bit more than this. So I started to try to put together a plan to retire early and still have enough to live my life comfortably. The idea I came up with was to retire at 55, transfer my AVC into a SIPP (my employers have confirmed I can do this) then use my AVC/SIPP along with some savings to live on until I'm 60 when I can start taking my DB pension, which will give me £36000p.a. (or a smaller amount per year with a TFLS)

I'm wondering though whether I should try to get some financial advice on doing this? I'm not interested in transferring my pension out of the DB scheme really, I just want someone to see if my plan has any fatal flaws in it that I'm not seeing due to the fact that I don't really know much about the pension business/rules etc! For example does taking a SIPP 5 years before my DB pension impact in some negative way on my deferred DB pension, or impact on taking a tax free lump sum option from my DB pension at 60? If I'm drawing on a £72000 SIPP over 5 years and no doubt depleting it during this time does this have any implications on my DB pension. Is there infact some other way of retiring early with my financial situation that I just haven't thought of - I'm not really sure what questions I need to ask, or whether this is the kind of thing an advisor would be able to help me with, or whether I should try to get all these answers from my DB scheme, or from Fidelity who the AVC is held with? 

I'm just concerned that I might be missing something, but at the same time it may be that my plan is absolutely fine and a very standard thing, and I'd be wasting money trying to get advice!

Any thoughts gratefully received!  

I am in process of transferring a money purchase AVC arrangement to a SIPP with this exact purpose i.e. to fund a 5 year temporary pension until I can take my DB pension at its normal retirement date.

The transfer has not completed yet, so I cannot say for certain there aren't any insurmountable problems but I don't believe there are. However there are a lot of forms and questions my pension scheme require to be completed by the receiving SIPP arrangement.  (So I am anticipating some administration difficulties during this transfer process.)

There is not as far as I am aware any statutory need for advice provided your AVC arrangement is entirely money purchase with no guarantees such as guaranteed annuity rates etc. 

Considerations:
- What tax free cash communtation factors are used in your DB scheme? If they offer poor value then an  advantage of leaving your AVC fund where it is, is that you could take your TFLS from the AVC fund and not commute any DB pension.
- Also you may be getting near the Lifetime Allowance by the time you take your DB pension. You should be aware of this so it doesn't come as a surprise. (Unlikely to be a problem, especially if you are aware of the situation.)

Alternatives;
- Live off savings for 5 years - not nearly as tax efficient - but simpler to arrange.

I doubt Fidelity will give you any signficant help. (I doubt their pricing model allows for much in the way of providing help other than in how to use their own platform and funds.) 
It is possible you pension scheme may help, or if your employer has a pensions dept they may offer help, or perhaps a union might offer help.) In my case I am a deferred scheme member so largely on my own.

PS A concern I have is that while I believe such a transfer is possible in theory it may not be practically possible because the transferring scheme asks for information from the receiving SIPP that they aren't willing to provide or vice versa. (Both parties seem to be asking a lot of questions and seeking a lot of information from the other party.)

Dansmam

Awwh pal I couldn't stand work either so binned it to live off ISAs till 60. Hadn't looked at transferring avc to sipp. Might mean I can delay DB a bit longer.  Off to do some research. Always something new to think about on here 👏

cloud_dog

I am doing exactly as @avdb describes.

It took me a while to obtain written confirmation from the scheme administrators that I could this, principally because I wanted to execute periodic partial transfers out.

You also just need to double check the recieving scheme (SIPP) will accept the transfer.  For some the mere mention of the term AVC meant they declined.  I went with AJ Bell YouInvest in the end.

What you are proposing isn't particularly complicated, and in my opinion does not require the advise of an IFA.

The only comment would be if the AVCs can form part of the overall DB pension calculation, and to review the value of retaining the AVC, using it for any PCLS calculation and taking the full mount of DB pension early with the reduction?

avdb

Hi,
Thanks to all who replied. It's good to know that what I'm planning doesn't appear to involve any obvious pitfalls and that others have had the same idea. I'm going to check a few things that you guys have mentioned with my pension scheme administrators & here's to hopefully retiring early!

hugheskevi

Another thing you might consider is whether using a mortgage to give you access to capital to live off now, which later gets repaid from DC/DB/State Pension, could be a way of smoothing income to enable an earlier retirement. That would be attractive if you have enough resources for retirement overall, but inaccessible at the moment due to age and not wanting to reduce DB income.

You should also plan to have a full State Pension record, eg by making voluntary contributions after retiring if necessary.

TVAS

Ask your scheme to calculate your tax free cash at 60 and if you can use the AVC funds first.
Ask them to calculate your maximum tax free cash using Pre A Day 6 April 2006 as you may be able to extract more than 25% of the fund tax free. If your scheme provides good post retirement increases in payment it makes sense to use all the AVC fund first and less pension, especially as you may have poor commutation factor. This means the amount of pension given up for tax free cash anything under 20:1 is considered poor so for each £1 of pension you get £20 cash.

If you decide to transfer AVC to SIPP to live on between 55-60 at least you will be in a fully informed position of what you are giving up if you have Protected Tax Free Cash (PTFC) more than 25% of the capital value of your DB. 

You can't eve go part time as this would mean your pension would be calculated on a lower final salary. £42,000 is an excellent pension, I know you want to go at 55 but you might change your mind. The nearer you get to 60 the less early retirement penalty, or the less time you have if you claim at 60 so you can totally deplete any AVC to SIPP fund.
Good luck to you. 

itsmeagain

Alternative view assuming;

• you get 27kPA by being an active paying member until 55 and taking DB @ 55, OR
• you get 36kPA by being an active member until 55 by deferring until 60

You can then work out how many years is the breakeven point. I.e, breakeven x 27k = (breakeven - 5) x 36k.
The breakeven point = 20 years, i.e, 27k x 20years = £540k     &     36k x 15years also = £540k.

Will you be bothered that deferring your pension makes you better off after you become 75 (when receiving state pension)?

Also, consider that your savings are tax free and you can 'top-up' your 27K DB with your 25% tax free part of your AVC/SIPP.

Spending your savings & AVC to get a better early retirement factor (but less accumulative pension until after you are 75), leaves you with no 'rainy day' fund when you are only 60, with no money to gift after death, because you spent it all whilst deferring your DB.

You could also consider something between the 2 extremes. I.e, defer for only 2 years and take the 25% tax free element + 12.5kPA out of your SIPP (all tax free) before taking your improved DB (still leaving half of your SIPP in tact).

You should also consider that £72k over the 5 years deferral is only £14.4kPA, so not enough to bridge the gap of deferring and claiming your DB. 

Is there a chance that you could get redundancy aged 55 too? That's a bonus if you were planning to leave anyway!

Also consider that if you are taking your DB and the company goes bust, you are in a better position than if it went bust during the 5 years that your were deferring (pension protection fund).

I'm in a similar position (DB & AVC), but already 55 and getting 1 year salary in redundancy. However, my early retirement factors on the DB make my breakeven point after 25 years (age 80).