Should I really take the DB income?

Decision_Time

Hello and apologies for the length of my post, but I have a question I'm wrestling with regard to my one and only DB pension.
Currently my wife and myself (both 59) are early retired and living comfortably from our investment portfolio, but when I hit age 60 in late December I am able to start my DB pension without acturial reduction (yes, even as a male). Unfortunately it comes from pre-1997 employment and so is more like a level annuity with the only inflationary increases coming when I get to male GMP age (i.e. 65) when approximately 50% of it will receive 3% max post-1988 GMP inflationary increases - note, trust me when I say there will be zero voluntary increases from the company behind the pension.
My quandary comes from the fact that I probably won't need either the DB income or the CETV to meet our needs over our retirement so am unsure on which one to take, especially given the inflationary outlook and that my DB pension will have very limited protection from it. It feels right to take the DB income, even though I think that investing the CETV would be the most financially rewarding route (and I would like to leave an inheritance), so I thought I'd post up the options and see what your opinions were.

Option 1: A full pension starting at £8k (with no tax free lump sum); there will be no increases until 65 at which point £3.8k will continue with no inflationary increases and £4.2k will start to receive post-88 GMP inflationary increases i.e. a maximum of 3%. My main reason for taking this option is to further reduce our risk on our path to state pension age (in 7 years time, during which inflation hopefully won't have hit my pension too much). i.e. use the deflating £8k of income to help bridge any market or dividend shortfalls that may occur if there was a sustained crash along the way to age 67. At that point our two full state pensions (this has been checked) plus my wife's local government pension will cover the vast majority of our needs. Any pension income that is not needed to cover any shortfalls will be used to purchase additional equity funds. This option also has the advantage of a spouse pension of 60% on my death and I'd like to leave as much DB pension income as possible for my wife, to reduce her need for investment income when I'm no longer around.

Option 2: A tax free lump sum of £34k; a starting pension of £5.1k on which there will be no increases until 65; at 65 the pension will step up to £5.6k at which point £1.4k will continue with no inflationary increases and £4.2k will start to receive post-88 GMP inflationary increases. Given that it's not a very good commutation rate, and we certainly don't need the money, this option seems a non-starter.

Option 3: A CETV of £185k. Note there is subsidised advice needed should this have been the option I preferred. I realise the multiplication factor of CETV to income is poor, but then so is the inflation proofing of the pension and the main reason for my taking this option rather than the full pension would be the potential for sustained higher inflation to return, which would decimate my DB pension's real value over time given the low inflationary proofing it comes with. Hopefully a well invested CETV (e.g. in something like VWRL) would offer some inflationary protection, but then we already have this protection in place in our large investment portfolio which is many times the size of the CETV (though of course additional assets are always welcome). Note we use 100% equities in our investments, and always have done, so I am used to the markets ups and downs; we also have several years of income saved in cash that we can fall back on if necessary.
Option 4: Continue to defer my pension. Excess of GMP by inflation to a max of 5%, GMP by a fixed 7%. This would hopefully keep the pension at its current value, but my calculations say that it's likely to be 15 to 20 years before I'd make back the lost income and even longer if I did invest the DB income into something like VWRL.

So is there anyone out there who would do something other than take the full pension now or is there anything in the above that I've got wrong?
I look forward to your replies

Decision_Time

Apologies for the format of the above, it seems to have lost the lines I was expecting to see and I can't seem to edit it.

MX5huggy

What rate of tax are you paying? Because option 2 looks better if you are paying 40% or even 20%. 

Decision_Time

I'll definitely be in the 20% band but I looked at the commutation rate and it seemed poor to me however you calculate it (i.e. always less than 20), so I'd be interested to know why you think it could be the option to go for?

xylophone

December I am able to start my DB pension without acturial reduction (yes, even as a male).

If 60 is your normal scheme retirement age, no actuarial reduction would be expected, regardless of the fact that you are male.

GMP does not have anything to do with actuarial reduction.

While you were working for this employer, you were in a Contracted Out Salary Related Pension Scheme.

Your scheme had to guarantee that when you reached GMP age  (65 for a male) you would receive a pension at least as great as you would have done had you been contracted in to SERPS.

 You left before reaching scheme retirement age - when you left, certain rules applied to your deferred pension and the way that its component parts (GMP/excess)  revalued in deferment.

https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/

As you have not reached GMP age, revaluation of the GMP must continue.

It seems clear from what you have said above that your scheme would be prepared to permit a transfer out (even though you are less than a year from SNRA) subject to your taking the required advice from a Pension Transfer Specialist (the fee for which the scheme would subsidise).

There is, of course, no guarantee that the advice would be positive -  this could mean that you would find it very difficult to find a provider to accept a transfer out.

If you took the option of a lump sum and reduced pension, you could use the lump sum to fund your living expenses for a time which would mean that you could leave more in you investment accounts.

Or you could use the lump sum to fund stocks and shares ISAs for you and your wife.

If I were in your position, I would be disinclined to defer the pension beyond NRA.

MX5huggy

I only “better” when compared with itself not taking the tax position into account. 

Option 3 looks attractive but there’s loads of threads about that. 

Albermarle

Option 3) is not a simple option anymore 

Links to two of the many threads on the subject

Final Salary Pension Transfer — MoneySavingExpert Forum

DB Pension Transfer Advice — MoneySavingExpert Forum

Decision_Time

"If 60 is your normal scheme retirement age, no actuarial reduction would be expected, regardless of the fact that you are male."

Actually 65 is the normal scheme retirement age, however people are allowed to retire at 60 without permission from the company or the trustees.

"If you took the option of a lump sum and reduced pension, you could use the lump sum to fund your living expenses for a time which would mean that you could leave more in you investment accounts."

"Or you could use the lump sum to fund stocks and shares ISAs for you and your wife."

I did start off really thinking that the lump sum might have been the option to go for, but the poor commutation rate put me off the lump sum option.

"If I were in your position, I would be disinclined to defer the pension beyond NRA."

Yes I would agree with you.

"Option 3 looks attractive but there’s loads of threads about that. "

"Option 3) is not a simple option anymore "

Yes, AJ Bell's withdrawal from the market has made a negative from the advisor a lot more difficult to deal with if you still want to transfer.

AlanP_2

Sounds like the Digital scheme to me.

I'm ex-DEC and completed my transfer out in April this year using the subsidised IFA deal they have in place, CETV on a broadly similar ratio.

The lack of inflation proofing was my real concern, I have less inflation linked GMP than you and calculated that (on average) I would get ~ 1/3rd CPI overall. I know a couple of older ex-DEC colleagues that have been badly affected by this over the last 20 years or so. 

As you say, absolutely no chance of company increasing the non-GMP element once in payment.

We both have LGPS pensions to come, that with 2 * SPs, will give us >£50k guaranteed, CPI linked retirement income so the Digital DB was not critical to us. More than half of that is my wife's so she would be fine with that plus ~50% of my LGPS pension and vice-versa.

In addition we will have ~£200k in other investments / cash to use as required.

The transfer out was a no-brainer as far as I was concerned so started the process off, got a positive recommendation and transferred to the Royal London pension the advisor set up (no ongoing IFA involvement).

Am retiring at end of this month and starting to withdraw the RL funds leaving my LGPS for 18-36 months to minimise actuarial reduction whilst my wife is continuing to work.

Decision_Time

"Sounds like the Digital scheme to me."
That's the one
"I'm ex-DEC and completed my transfer out in April this year using the subsidised IFA deal they have in place, CETV on a broadly similar ratio."
How long did the IFA take to go through the process? I'd hope that given their knowledge of the scheme they'd be able to do it long before the 3 month deadline ran out - but saying that, I guess I'd contact the IFA first before getting the official CETV figure to line everything up.
"The lack of inflation proofing was my real concern"
Did the IFA go into this in any detail? My understanding is that my wife will get 50% of my GMP, it would be good if the IFA mentioned that too.
"I have less inflation linked GMP than you and calculated that (on average) I would get ~ 1/3rd CPI overall. I know a couple of older ex-DEC colleagues that have been badly affected by this over the last 20 years or so."
Yes indeed. I'd rather it got full inflationary proofing but I'm figuring that getting some inflationary proofing would be handy for my wife when I'm no longer around. Between what's left of my DB pension, her LGPS pension and a state pension, she wouldn't go hungry and our investments will hopefully have kept growing too.
In fact the ability to use my DB income to hopefully avoid having to sell assets during any market crashes is one of the big advantages of just taking my DB income. I'd just put the incoming income into my wife's pension and our S&S ISAs if markets continue to do well over the next 7 years (now that would be nice!) then .
"We both have LGPS pensions to come, that with 2 * SPs, will give us >£50k guaranteed, CPI linked retirement income so the Digital DB was not critical to us. More than half of that is my wife's so she would be fine with that plus ~50% of my LGPS pension and vice-versa."
Now that would be nice
"Am retiring at end of this month and starting to withdraw the RL funds leaving my LGPS for 18-36 months to minimise actuarial reduction whilst my wife is continuing to work."
Congrats, hope you enjoy your retirement. I reckon once your wife sees how much you're enjoying it then she might start thinking about retiring too.
Just a week of being able to get up when I wanted and do what I wanted was enough for me to know that I'd never go back to the life I'd left.

Decision_Time

Sorry, the lines seem to have got lost again and I can't seem to edit my post so hopefully the below looks better.

"Sounds like the Digital scheme to me."

That's the one

"I'm ex-DEC and completed my transfer out in April this year using the subsidised IFA deal they have in place, CETV on a broadly similar ratio."

How long did the IFA take to go through the process? I'd hope that given their knowledge of the scheme they'd be able to do it long before the 3 month deadline ran out - but saying that, I guess I'd contact the IFA first before getting the official CETV figure to line everything up.

"The lack of inflation proofing was my real concern"

Did the IFA go into this in any detail? My understanding is that my wife will get 50% of my GMP, it would be good if the IFA mentioned that too.

"I have less inflation linked GMP than you and calculated that (on average) I would get ~ 1/3rd CPI overall. I know a couple of older ex-DEC colleagues that have been badly affected by this over the last 20 years or so."

Yes indeed. I'd rather it got full inflationary proofing but I'm figuring that getting some inflationary proofing would be handy for my wife when I'm no longer around. Between what's left of my DB pension, her LGPS pension and a state pension, she wouldn't go hungry and our investments will hopefully have kept growing too.

In fact the ability to use my DB income to hopefully avoid having to sell assets during any market crashes is one of the big advantages of just taking my DB income. I'd just put the incoming income into my wife's pension and our S&S ISAs if markets continue to do well over the next 7 years (now that would be nice!) then .

"We both have LGPS pensions to come, that with 2 * SPs, will give us >£50k guaranteed, CPI linked retirement income so the Digital DB was not critical to us. More than half of that is my wife's so she would be fine with that plus ~50% of my LGPS pension and vice-versa."

Now that would be nice

"Am retiring at end of this month and starting to withdraw the RL funds leaving my LGPS for 18-36 months to minimise actuarial reduction whilst my wife is continuing to work."

Congrats, hope you enjoy your retirement. I reckon once your wife sees how much you're enjoying it then she might start thinking about retiring too.

Just a week of being able to get up when I wanted and do what I wanted was enough for me to know that I'd never go back to the life I'd left.