Retirement planning

Bobinyorkshire

Looking to retire within the next 12 months and would appreciate your comments.
I work for the NHS (1995 scheme mainly) and have a DB pension with actuary reduction of about 4% per year when taken early. One option is to take the pension early with actuary loss, but subsequently paying less income tax on the lower income and not using savings. Or to use savings to fill the gap in income, thus avoiding penalties and allowing the pension to receive the annual increase.

The dilemma is that the early penalty is not financially detrimental until 79 years of age by which time I will have my state pension (this may be actually longer if the reduced income tax if factored in). Also, I suspect the annual uplift of the pension is very likely to be less than inflation. However, the lump sum is less if taken early, as would be the annual pension my wife would get in the event of my death. But if I were to die before taking the pension then my understanding is she would not receive a lump sum. PS: Not in bad health, but just covering all bases!

Stubod

..as mentioned on your earlier thread on the savings forum, you need to understand "your number". My OH retired a couple of years early from the NHS, but we decided to live of savings rather than take an "early pension" as we thought this was a better use of our savings, and meant that we had a larger lump sum and a larger index linked pension than if we had taken it early?

Bobinyorkshire

Thank you for your reply. I’ve looked at our outgoings and determined that we could manage using my ‘early’ pension income with only small top ups occasionally from savings. It’s more about being tax efficient as well as how I would feel about dwindling savings and not having a regular ‘income’. 

Stubod

..we took the view that the difference in leaving the lump sum and pension alone for a couple of years would outperform anything we could make on savings interest. eg, by not taking the lump sum for 2 years it gained around £4k which we would not have been able to match by any savings interest. Likewise the increase in the pension itself particularly when factoring in the ongoing long term index linking.

Bobinyorkshire

Thank you again for your insight. Just looked at my estimate again and the dependents pension isn’t reduced as I first thought - so that is reassuring. The only other consideration is whether the extra tax paid on a higher pension (from taking it later), which is paid every year until you die is significantly different to the extra pension income and lump sum you receive by leaving it longer. I’m probable over-thinking this and ultimately it may be what feels right in the end about whether I want an ‘income’ from day 1 of retirement or accepting that your savings are used an income in the interim. 

DT2001

Will you have any taxable income if living off your savings? If not or only a small amount is it worth opening a SIPP and using some of your savings to get tax relief over the next 12 months. Then to drawdown to the limit of your personal allowance. 

Not sure if this would work as no figures were given or other details.
could meet your criteria of tax efficiency.

Stubod

..I would do the sums to check, we did and it was a no brainer but we had to get our head around the thought of "no income", for a while while taking ,money out of our savings...

All things being equal I would assume it would always make more financial sense to defer the pension rather than take early. (eg health issues may mean you are better taking it sooner rather than later, and obviously you actually need savings in the first place to fund any gaps).

I also appreciate you have to overcome the mental hurdle of "spending" your savings and not having an income for a year or two....

Bobinyorkshire

Thank you again. It’s reassuring to have these helpful comments and I’ll do the maths, although I expect to see the same as you. I’ll also look at a SIPP too, but I’m a bit more nervous about putting the savings in ‘the market’ when I might need them as income

Nebulous2

Stubod said:

..I would do the sums to check, we did and it was a no brainer but we had to get our head around the thought of "no income", for a while while taking ,money out of our savings...

All things being equal I would assume it would always make more financial sense to defer the pension rather than take early. (eg health issues may mean you are better taking it sooner rather than later, and obviously you actually need savings in the first place to fund any gaps).

I also appreciate you have to overcome the mental hurdle of "spending" your savings and not having an income for a year or two....

The mental hurdle was at least part of it for me, as I said in the savings thread, but there is a bird in the hand element as well. Different components of the pension may well have different retirement ages. For me in the LGPS it took 24 years to break even by deferring for a year. Statistics say I am likely to live those 24 years, but I'm not an aggregated statistic, I'm a single unit and I may not make it.

I was in a position, by a quirk of transferring in from a previous pension, where I didn't need to take a lump sum. As I have more cash than I need and the conversion rate from pension to lump sum at 12:1 is poor, I opted not to take any cash. That has the same impact as deferring, giving up money to invest for a bigger pension, with a shorter break even point. 

Nebulous2

Bobinyorkshire said:

Thank you again. It’s reassuring to have these helpful comments and I’ll do the maths, although I expect to see the same as you. I’ll also look at a SIPP too, but I’m a bit more nervous about putting the savings in ‘the market’ when I might need them as income

If you are willing to put a bit more meat on the bones with some figures, then there are people here who would run some scenarios for you. 

You have made some assumptions that may not hold up, for example a SIPP is simply a tax wrapper. It isn't a market. You can invest the money in a range of places including a money account, which is not subject to investment risk. 

If you are a basic rate tax payer putting £10000 in a SIPP will cost you £8000 with tax relief. If you stop work and don't have an income depending on timing it right,  you can draw that £10000 out with no tax payable. You have turned £8k into £10k. If you are a higher rate tax payer the advantage is even more. 

george_jetson

I will have to make a similar decision soon too. 

I am 54 and was planning on taking my DB pension 3 years early at 57

However I have a lot of cash savings earning very little in interest. 

I am considering putting £40k into a SIPP, tax relief turns this into £50k and I can withdraw this at £16k/year tax free each year between 57 and 60. 

I am just waiting for an updated pension statement and will sit down with a calculator before making a final decision. But £10k “free” money and increased index linked pension does seem the way to go. 

It does seem a little daunting to tear through a substantial chunk of my savings but I note there is a separate thread on this very subject…