When to take DB Pension?

fcjf

I have been looking into my Pensions over the past few weeks and I’m trying to get some clarity over my DB pension. I am 52 and in addition to the DB pension detailed below I  also have £465k in DC pensions with annual contributions of £25k.

My DB pension is with the PPF. The current statement shows.

Entitlement at 60

Pre April 1997 deferred compensation entitlement: £3720

Entitlement at 65

Pre April 1997 deferred compensation entitlement: £3610

Post April 1997 deferred compensation entitlement: £12980

Total entitlement:  £16600

All clear so far, at 65 I’ll have a total entitlement of and £20,320 at today’s rate noting that the post 1997 compensation increases with CPI capped at 2.5% but the Pre April 1997 doesn’t increase.

The PPF website also has a Benefit Modeller which shows what I could receive if I took the benefits at different ages and with varying %'s of tax free lump sum's.

Just modelling ages 55, 60 & 65 and without any adjustment for indexation the figures are as below including some extra calculations I added.

My current thinking is to either retire at 58 or work reduced hours from then up to age 60 so the clarity I am looking for is when to start drawing the DB pension and whether to take the tax free lump sum.

As I understand it taking the DB benefit doesn’t trigger the MPPA so I could still contribute up to £40k into my DC pension.

It seems an obvious decision to start drawing the pension at 55 and use the proceeds to contribute to mine or my wife’s DC pension. I’m heading towards contributing £25,000 this year to my DC pension but I could increase this amount this year and the next 2 years to avoid falling foul of any recycling issues if I wanted to add up to £40k from 55.  If it looked like I would start breaching the LTA I would divert payments into my wife’s DC pension although this would only save 20% tax but better than the tax implications of breaching the LTA. My wife’s pension is only £20k at present and it would be good to increase this to ensure she’s using up her personal allowance once retired. My employer matches my 8% contribution so I don't want to give this up so I'd have to factor that into calculations.    

What other considerations / calculations should I be making in order to understand what the best course of action will be? I know I won’t be able to make any firm decisions for a couple of years but I do want to formulate a plan.

Given the generous commutation for taking the lump sum is this too good to turn down? 

Are the % reductions for taking the benefit before 65 generous or average?

I appreciate that this is a good problem to have but I'd appreciate any comments.

 

mark55man

Generally I would say you are thinking the right things.  I would suggest many regular posters on here are not familiar with PFF.  Also if I might be direct - its not quite clear which bit is most important to you.  Is it the LTA aspects or is it the when to start.  I've seen it said that the payback period for taking it early is in your early 80s. 

The usual pro vs con arguments are the extent to which you need the money now to fund lifestyle while healthier, and with that much DB income your risk of running out is pretty near zero.  If you have a healthy and much longer retirement then you might be kicking yourself for having fune in your 50s and blighting your 90s (but I doubt that).   A very much more realistic proposition is that in your 80s you will be either be OK but a bit limited in your activities or you will be in poor health which means you will need even less unless you get into a home in which case they'll take it all, large or small.  

Only you can know your requirements and the likelihoods - will depend if married / dependents / ....  

Good luck.  

Albermarle

The reductions for early payment and the lump sum size vs pension reduction , both look very good compared to the usual figure you see for company DB pensions .
Typically you see a reduction of about 3.5%/4% for each year taken early and a commutation rate around 20 .

fcjf

Albermarle said:

The reductions for early payment and the lump sum size vs pension reduction , both look very good compared to the usual figure you see for company DB pensions .
Typically you see a reduction of about 3.5%/4% for each year taken early and a commutation rate around 20 .

That's what I thought, if my maths is correct starting at 55 as opposed to 65 is a 1.4% reduction for each of the 10 years which seems generous. Combined with the commutation rate of 35 I cannot see any downside to taking this early.  

fcjf

mark55man said:

Is it the LTA aspects or is it the when to start.  I've seen it said that the payback period for taking it early is in your early 80s.   

It is more about how to maximise the DB pension as opposed to any individual element but I think starting drawing it early helps both?

mark55man said:

The usual pro vs con arguments are the extent to which you need the money now to fund lifestyle while healthier, and with that much DB income your risk of running out is pretty near zero.  If you have a healthy and much longer retirement then you might be kicking yourself for having fune in your 50s and blighting your 90s (but I doubt that).   A very much more realistic proposition is that in your 80s you will be either be OK but a bit limited in your activities or you will be in poor health which means you will need even less unless you get into a home in which case they'll take it all, large or small.  

Only you can know your requirements and the likelihoods - will depend if married / dependents / ....  

Good luck.  

This is an interesting point about retirement generally and spend profiles from the date you plan to retire. When I have produced spreadsheets on this I start to reduce spending from age 75 based generally on what I see from friends parents. My mum was diagnosed with dementia at 67 and died at 77 whilst my wife's dad died from a heart attack in his late 60's. The likelihood of these type of events repeating themselves for us may be slim but you never know what's around the corner and I am of the opinion that I'd rather enjoy life whilst I can at the expense of having to be more frugal in later years if life was kind to us, without running out of money of course and this is where I have a slight concern about taking a fixed income early at a reduced amount. Your comment about still having a the DB income to fall back on, as well as 2 x full state pensions (if still around by then!) is key for me and gives me the confidence to plan for taking the DB pension with lump sum early I just wasn't sure if I was missing something which I should be factoring in.        

Thanks for responding.

Albermarle

In these discussions about spending when you get beyond 75/80 there seems to be proposed only two options .
1) That you are sat at home , doing little and not going anywhere hardly . Therefore not spending much at all.
2) You are in a care home paying £50K pa 

In reality there are many other possibilities . For example you could still be healthy and active , going on cruises etc .
Or you could be at home with some health/old age problems , so employing cleaners, gardeners, odd job men, daily care visits etc
Or you could be in a posh retirement village paying service charges for all the facilities.
Or many other possibilities.

It can be argued that spending more money as you get older to keep comfortable is a realistic scenario.

DT2001

I was just thinking about the impact of inflation. do the pensions increase differently in deferment to when in payment?
If increasing below inflation are you better to take asap?
Have you worked a ‘number’ for retirement?
What provision does your OH have - if you die first is it better to have commuted (often the widow/er’s pension is based on figure before commuting)?

I took my pension at 51 as the fund had a shortfall and invested most of the money. Having said that I didn’t fully understand the adjustment due at 65 for GMP ((1/3 of my pension will no longer increase due to changes in the SP rules ( after drawing my pension ) and 1/3 by CPI max 3%).
Check the details.

fcjf

DT2001 said:

I was just thinking about the impact of inflation. do the pensions increase differently in deferment to when in payment?
If increasing below inflation are you better to take asap?

The increases are CPI capped at 2.5% for both in payment and deferred sums. I'd suggest this leans towards taking early.

DT2001 said:

What provision does your OH have - if you die first is it better to have commuted (often the widow/er’s pension is based on figure before commuting)?

The scheme details state that on death the beneficiary would receive half of the pension payment either that was being paid or would be due to be paid at the time of death. I would suggest that the sooner I commute would ultimately provide a better long term answer as the commutation would be against the full pension at the time. My Wife would also receive my DC pension which is going to provide over half of our pension provision.

DT2001 said:

I took my pension at 51 as the fund had a shortfall and invested most of the money. Having said that I didn’t fully understand the adjustment due at 65 for GMP ((1/3 of my pension will no longer increase due to changes in the SP rules ( after drawing my pension ) and 1/3 by CPI max 3%).
Check the details.

There is an element of my Pension, the Pre 6th April 1997 amount, which won't increase at all so again I think getting this out as soon as possible will avoid inflation impacting this.
You would have thought 3% would have been a reasonable cap but for the next few years at least this looks like it will inadequate. Out of interest what happens to the remaining 1/3 of your pension?

DT2001

The final 1/3 increases by RPI max 5%.
The other 2/3 rds related to GMP pre and post 88 having increased by 7% since deferment.