Take DB early or at NRD

richbeth

Hi,

I'm 55 in June and planning early retirement and accessing my pensions then.  I'm self employed and not currently working having just finished a contract.  I don't plan to work again.

I’ve always had a high level plan to use DC pensions to see me though to when my DB pension was available (this is from a previous employer).  However I have just obtained some quotes for taking the DB pension early which look quite attractive, this coupled with the freeze in LTA for the next few years has made me rethink and I am considering taking the DB pension at 55.  This should give me some wiggle room with the LTA and looks to be almost cost neutral until I’m aged 80.  The seems a bit too good to be true so maybe I’m missing something.

Aim – maximise income to age 80 by which time we’ll have downsized so generated additional capital.

facts

DC pension value £625k (£80k in cash rest invested in global trackers)

DB pension NRD 65 but currently no penalty for taking at 60.  Current value = £19,844 pa

DB pension options (age, amount ps, PCLS, total value exc inflation to age 80)

55 - £15,967 no PCLS, £399k

55 - £14,275, PCLS £95k, £452k

60 - £19,844, no PCLS, £397k

60 - £17,305, PCLS £115k, £461k

Note – DB is linked to RPI each Sept and is increased in January each year

In case of death a spouse pension is paid, if I go at 55 it's £9,498, if 60 it's £11,828 - In addition my wife has her own pension provision

I’m considering taking the £14k DB with PCLS at 55 and looking for a sanity check.  Is there a clear winner one way or the other ? what am I missing?!

Also, if I take the DB early given current high inflation is it better to wait until Jan next year ?

Thanks in advance

ewaste

If the plan is to go at 55 then with RPI linking and a relatively large DC pension, i'd take the age 55 with no PCLS option. With inflation and hopefully a long time in retirement it should be a good risk free option to cover core living expenses. In my opinion it would also provide some insurance against sequence of returns risk vs relying purely on the DC pension until age 60.

Couple that with a full state pension, which I presume you've logged in and checked, you should have a secure retirement. The DC fund can be used to fill the gap and other expenses above core living costs until SPA.

What is the RPI cap e.g. 5%? Although if I remember correctly there are possible changes coming to 'RPI' in reality aligning it with CPIH. 

Although that commutation rate pension to PCLS is rather attractive 🤔 so it depends on your circumstances. 

DT2001

Does your pension increase in deferment at the same rate as in payment?
How much are you looking to generate each year in total. If you took DB at 60 and suffered a poor SOR from 55-60 would it alter your plans.

af1963

Don't know if your figures will already take account of this, but depending on what other income you plan to take from the DC pensions, it may be that you pay less tax on the DB pension income by taking more of it before your state pension begins and uses most of your annual allowance.   ( e.g. if you could live on the £14K pension from 55, topping up from the tax free PCLS, you'd pay only about £300 in tax each year.)  

richbeth

sorry for the delayed response.

Pension increase by RPI up to a maximum of 12% a year both before and after pension commencement

re income tax that's a good point, I shouldn't hit the HR threshold but you never know so taking it now would reduce the likelihood of that.

My main concern is the LTA , we have no dependants so taking the pension shortly (age 55) will use ca 35% of the LTA whereas due to the current freeze waiting to 60 would probably use more like 45-50% but give me the same income up until aged 80.  I see too many people going way before then and our contingency plan is to downsize but this isn't factored into any financial plans.

Albermarle

From an LTA perspective it makes sense to take a DB pension early. On the other hand in your case the reduction for each year you take it early seems to be around 5.5%, which is quite high ( typically more like 4%)

Pension increase by RPI up to a maximum of 12% a year both before and after pension commencement

This is very good !

michaels

Are deductions for taking DB early normally 'actuarially based' so basically 'fair' or is there often an element of the pension company making a profit from 'impatient' retirees?

Linton

michaels said:

Are deductions for taking DB early normally 'actuarially based' so basically 'fair' or is there often an element of the pension company making a profit from 'impatient' retirees?

The deductions for taking a DB pension early should be fair to both the person taking early DB and to the other members of the scheme.  What is fair is up to the actuary to determine. The pension assets are held in trust so there are no profits from which someone else can gain.  The pension company will just be paid management fees.

arnoldy

Albermarle said:

Pension increase by RPI up to a maximum of 12% a year both before and after pension commencement

This is very good !

This is astonishing outside public sector. Just be careful about the financial health of the fund, it is some heavy lifting this fund has to do there.

In the (unlikely hopefully) event of scheme funding issues it is better to be an active pensioner rather than deferred as I understand it, but still not great.

RogerPensionGuy

arnoldy said:

Albermarle said:

Pension increase by RPI up to a maximum of 12% a year both before and after pension commencement

This is very good !

This is astonishing outside public sector. Just be careful about the financial health of the fund, it is some heavy lifting this fund has to do there.

In the (unlikely hopefully) event of scheme funding issues it is better to be an active pensioner rather than deferred as I understand it, but still not great.

RPI of 12% appears very high, I would recheck that. 

Looks like all the choices for the OP are nice ones, looks like a good position to mitigate LTA.

Reference a DB scheme falling in to the PPF, I understand no difference if its being draw or not, its all about a person's age at point of time it pops in to the PPF, I certainly won't be surprised if many more DB schemes do indeed pop in the PPF these next few years, it one reason why people are CETVing out of DB in to DC schemes.

Cheers 

richbeth

RogerPensionGuy said:

RPI of 12% appears very high, I would recheck that. 

Looks like all the choices for the OP are nice ones, looks like a good position to mitigate LTA.

thanks everyone.
re the RPI up to 12 %, for some reason I had 5% in my head so I did double/triple check this and it's definitely max of 12%.

It's one of life quirks that as a 21 yr old got lucky joining a company with a great pension scheme without realising it, then getting made redundant 13 yrs later resulted in a 30% uplift. So a bit of a double whammy that has created a great foundation for early retirement.