Retirement planning

Stubod

..as per the comments above, getting your head around "no income and spending savings" v "take pension now" is a bit of a mental hurdle to overcome. But when we thought about it that is exactly what we had saved the money for when we decided to retire early! With hindsight, and now we are passed that stage and are taking the pension it was obviously the right thing to do.

We have the same dilemma / decision when the state pension is due to start. Heart says take it as soon as it's available, but head says defer it for a couple of years as you get a 5% uplift per year, (could never match that rate with savings?). For me on a deferred, (none index linked) DB pension this would seem to make more sense.

Westertonbilly

Bobinyorkshire said:

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!

Recently had a similar dilemma when considering retirement from local government. Having done the maths (post tax) I decided to draw the pension now. I reckoned it would be around 25 years before I was worse off, by which time my ability to spend on enjoyable pursuits will likely be much reduced.

Dazed_and_C0nfused

george_jetson said:

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…

Do you have sufficient pensionable earnings in the current tax year to be able to do this?

You having the cash to do it is one thing but there are limits to how much you can contribute and get tax relief.

george_jetson

Dazed_and_C0nfused said:

george_jetson said:

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…

Do you have sufficient pensionable earnings in the current tax year to be able to do this?

You having the cash to do it is one thing but there are limits to how much you can contribute and get tax relief.

Yes - I have two years to get the money in.

Albermarle

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).

One exception can be if you are likely to have Lifetime Allowance issues .

In this case taking a DB pension early can be a tactic to reduce your potential liability for  an LTA charge ,

NSG666

Stubod said:

..as per the comments above, getting your head around "no income and spending savings" v "take pension now" is a bit of a mental hurdle to overcome. But when we thought about it that is exactly what we had saved the money for when we decided to retire early! With hindsight, and now we are passed that stage and are taking the pension it was obviously the right thing to do.

We have the same dilemma / decision when the state pension is due to start. Heart says take it as soon as it's available, but head says defer it for a couple of years as you get a 5% uplift per year, (could never match that rate with savings?). For me on a deferred, (none index linked) DB pension this would seem to make more sense.

You've probably done your sums but when I looked at the effect of deferring the state pension doing a cumulative total if taken asap then a similar one starting a year later (about £9k behind) I'll be into my early 80s before I gain any benefit i.e. I lose c£9k in year 1 and it takes c.15 years at the higher rate to get that back. Need to check the figures as I did it a few months ago and the main bit I concluded was that I didn't think it was worth it.

NSG666

george_jetson said:

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…

I've done something similar but I've overcooked it and ended up with more in my SIPP that I can draw out tax free before I take my DB pension at 60. The initial thought is 'bugga' but if you think it through every £1000 you are over has cost you £800 (assuming 20% tax relief) then when you draw it out 25% is tax free so you pay £150 tax on each £1000 so you are still slightly better off.

Bobinyorkshire

am I right in thinking that you have to subtract the pensions contribution you make to the DB pension (employers and employees) from your annual salary to determine the maximum you can put into a SIPP? If so, does anyone know what the NHS contributes? I know I contribute 9.3%

NSG666

Bobinyorkshire said:

am I right in thinking that you have to subtract the pensions contribution you make to the DB pension (employers and employees) from your annual salary to determine the maximum you can put into a SIPP? If so, does anyone know what the NHS contributes? I know I contribute 9.3%

I hope/believe it's just the employees contribution as that's the bit that you get tax relief on. That's how I worked it out for my wife for the past few years then maxxed out her pension contributions to gross salary - never had any comeback from HMRC.

Albermarle

The initial thought is 'bugga' but if you think it through every £1000 you are over has cost you £800 (assuming 20% tax relief) then when you draw it out 25% is tax free so you pay £150 tax on each £1000 so you are still slightly better off.

Yes this is the minimum 6.25% tax benefit from a pension that is often quoted on this forum .
Of course if you can keep under your taxable limit and/or get 40% tax relief in the first place you are gaining a lot more normally.