Bridge the gap using DC scheme or actuarial reduction?

Albermarle

itsmeagain said:

Albermarle said:

 to defer your DB, however - that's a huge reduction. Are you sure it's correct? 

I do not know for sure , but although  4.6% per year actuarial reduction is on the higher side, I do not think it is that unusual ?

Well... I just googled JLR, gov, nhs, teachers etc 'DB early retirement factor'. It comes up with many DB schemes factor tables. Admittedly I haven't looked at every scheme, but none of the first 5 tables I looked at had factors as harsh as 46% reduction for claiming 10 years early. Even the pension protection fund is better.

I do know that I got lucky with the timing of mine. Every 3 years, the scheme review things to ensure it's fair/completive etc. 6 years ago, my scheme had a 40% reduction for going 10 years early, so I was also putting in an additional 30k PA to build a bridging DC fund. Three years later it improved to 35% reduction, then another 3 years later to only 30% reduction by the time I reached 55. I no longer believed that the reduction factor was unfair. This changed my mind and I took the DB instead of deferring, leaving my DC & VR money as a rainy day fund.

Just checked the LGPS . Taking the pension one year early means a 5.1% reduction , two years 9.9%, but 10 years 'only' 37.7% , as the reduction for each year gets progressively less.
So maybe 4.6% reduction for a couple of years is normal , but 46% for ten years is not normal .

QrizB

NHS 2015 scheme info here gives 5.4% for one year, 39.5% for ten years or 44.6% for twelve years (retiring at 55 vs NPA of 67?).

Not quite 46% but getting close!

Shedman

Is it the same reduction for deferred pensions though? I know some schemes have a lesser reduction for early retirement immediately after leaving service as opposed to that applied to deferred pensions (mine did as I discovered several years after leaving when getting an early retirement quote...roughly 5% p.a vs 4%p.a. for active pensions and that swayed my decision.

AlanP_2

OldSmithy said:

Company DC is not salary sacrifice. I completely get the mortgage side of things but I think the comfort of knowing it’s out of the way is very important to us equally. 

The reduction is worst case and in reality is unlikely to be quite that high, my pension is with the LGPS and a large proportion of service has a retirement date of 65 I believe. In addition I’m not sure we will stop working completely at 55 but maybe reduce to part time. I think it’s just about getting us to the point of having the option. 

The points raised are really helpful and I can now factor all of this into my thinking. I’m no expert but trying my best to understand all options to maximise the opportunities. 

Thanks once again. 

Check whether / when you will get Rule of 85 protection on your pre 2008 service pension portion as that would avoid any ER factors being applied.

I think pre 2008 service has a NR A of 60 anyway. 

itsmeagain

Albermarle said:

itsmeagain said:

Albermarle said:

 to defer your DB, however - that's a huge reduction. Are you sure it's correct? 

I do not know for sure , but although  4.6% per year actuarial reduction is on the higher side, I do not think it is that unusual ?

Well... I just googled JLR, gov, nhs, teachers etc 'DB early retirement factor'. It comes up with many DB schemes factor tables. Admittedly I haven't looked at every scheme, but none of the first 5 tables I looked at had factors as harsh as 46% reduction for claiming 10 years early. Even the pension protection fund is better.

I do know that I got lucky with the timing of mine. Every 3 years, the scheme review things to ensure it's fair/completive etc. 6 years ago, my scheme had a 40% reduction for going 10 years early, so I was also putting in an additional 30k PA to build a bridging DC fund. Three years later it improved to 35% reduction, then another 3 years later to only 30% reduction by the time I reached 55. I no longer believed that the reduction factor was unfair. This changed my mind and I took the DB instead of deferring, leaving my DC & VR money as a rainy day fund.

Just checked the LGPS . Taking the pension one year early means a 5.1% reduction , two years 9.9%, but 10 years 'only' 37.7% , as the reduction for each year gets progressively less.
So maybe 4.6% reduction for a couple of years is normal , but 46% for ten years is not normal .

Agreed - the LGPS table below...

#Years Paid Early	Pension reduction
0	0%
1	5.1%
2	9.9%
3	14.3%
4	18.4%
5	22.2%
6	25.7%
7	29.0%
8	32.1%
9	35.0%
10	37.7%

As the OP wants to keep calculations simple...

For a DB scheme to pay out a 50 year old when they reach 65 until aged 85, they'd get 100% pension x 20 years.

For someone taking it ten years early (from aged 55), they'd need a reduction of 33.3% to pay 66.7% x 30 years to get the same overall funds out of the scheme.

I.e, 100 x 20  =  66.7 x 30

OldSmithy

Sorry if I’ve confused things the LGPS reduction tables have 46% reduction at 13 years early, I assume for those with a later NPA but wanting to take it at 55 under current rules. Hence I picked the worse case scenario. 10 years would be less at just under 38% I think. It was more the principle of accessing DB early and keeping/using less of the DC scheme that I was interested in as my initial thought had been to exhaust this to protect the DB until NPA. I’ll use the info provided to think about it all in more detail as I suspect I may not need to access it at 55 anyway so the longer I can wait it will help but what it has shown is my original plan may need rethinking. 

Appreciate all of the help. Thanks. 

itsmeagain

OldSmithy said:

Sorry if I’ve confused things the LGPS reduction tables have 46% reduction at 13 years early, I assume for those with a later NPA but wanting to take it at 55 under current rules. Hence I picked the worse case scenario. 10 years would be less at just under 38% I think. It was more the principle of accessing DB early and keeping/using less of the DC scheme that I was interested in as my initial thought had been to exhaust this to protect the DB until NPA. I’ll use the info provided to think about it all in more detail as I suspect I may not need to access it at 55 anyway so the longer I can wait it will help but what it has shown is my original plan may need rethinking. 

Appreciate all of the help. Thanks. 

Yes - you did say you were late 40's, mentioned taking DB or DC/SIPP aged 55 several times for 10 years npa, implying that your NPA was 65 with a 46% reduction for going 10 years early.

You need to be accurate, not just talk about high level principle. The thought of taking a DB 10 years early with 37.7% reduction may be reasonable, but taking with 46% reduction (almost 20% less pension) is a different story and may completely change the answer.

In the nicest possible way, the bum info has caused much confusion. I'd give it a few weeks and start a new thread with more accurate info from the start, plus do some spreadsheets... You must include the tax implications of both methods (12.7k PA & 25% tax free SIPP), no tax free on DC (except if you take lump sum). Then you'll know which works out best out of take DB & 'top-up' with DC/SIPP as you need, OR use DC/SIPP to defer taking DB until DC/SIPP runs out.

Also list the pro/cons of each, consider if handing over your DC/SIPP on death is what you want etc. List it all in a post and people will comment on if they believe you have considered everything correctly etc...