pension options a or b

happyc84

Hi recently left a db pension scheme, they have advised that i can take the pension earlier with a small hit.

for example, Option A next year Age 56 - pension of 24kpa or 20kpa with 130 tax free lump,
or option B . do I wait until 65 then its 32kpa or 25kpa with 170k tax free.

Is option A a good deal? 

still working so will have a modest DC pension and full SP at 67. No mortgage to pay.  

MX5huggy

What’s the inflation rises both before taking the pension and after? 

What tax rate will you be paying on the pension if you take it now? 

Thrugelmir

The pension you receive at 65 may well be revised to factor in inflation. Is there a cap by which it can be increased?

AndrewB22

I had a similar offer. What you have to compare is the benefit of the additional years of pension (from taking it early) followed by a reduced pension (compared with not taking it early) for however many years you live. 

For example, ignoring (just for simplicity) the lump sum, you’d receive 9 years of £24k, which is £216k, followed by the rest of your life with £8k less.  Ignoring inflation, again just for simplicity, your simple payback is that if you live for more than 27 years from 65, until age 92, or older, you’d have been better off waiting. But otherwise the extra years of pension outweigh the reduced pension later in life. 

There are unfortunately then a lot of complicating factors.  If you pay more tax now then later, the extra £216k could be less 40% tax whereas the £8k less might have only been taxed at 20%. That means the break even life expectancy goes down, making deferring the pension more attractive. 

On the other hand, if you took that £216k and were able to invest it at a return greater than inflation, that might offset the tax disadvantage in whole or in part. 

Taking it early also means that you have a smoothing of income - the reduced pension from 65 almost overlaps with when you’ll receive the state pension, and is coincidentally about the same amount. 

Psychologically, deferring the pension is betting you’ll live a long time.  That seems to me to be tempting fate. I figured if I live long enough to regret taking the pension early, that’s not a terrible outcome. And if I die young I’d know I made at least one good decision in my life!  Scant comfort on my deathbed, but it would rot me from inside if I took a big decision based on living a long time. 

If you’re married you need to check whether a widow’s pension is reduced if you take your pension early. In my scheme it wasn’t, so whether I took the pension early or not my wife gets the same once I die, so it’s only a bet on how long I live.

I am also considering transferring my pension to a SIPP, but my circumstances are likely to be different to yours and that’s a completely different decision, and definitely not suitable for most people. I am a financial professional, I’m not reliant on my pension to maintain my standard of living in retirement, and I have reduced life expectancy. 

But if I was taking the DB pension, I would definitely take it early. My figures suggested that even with a big tax disadvantage (45% or 60% marginal income tax rate) and pretty dismal investment returns, I’d have to live beyond my life expectancy to regret it, and that’s a decision I’d be happy to get wrong because it would mean I hadn’t died. 

If you’re in perfect health and everyone in your family lives into their 90s, if you’re currently a higher rate taxpayer  or earning over £100k, and if you would just stick the money in a building society, you might well be better off deferring it. 

You have to run the numbers, I’m afraid.  Whichever decision you make is unlikely to be badly wrong unless you get hit by a bus on your 65th birthday. 

Bimbly

If you're still working, do you need the money now?

If you take the money now, will it stop you enjoying your retirement to the full because you will be on a reduced pension for the rest of your life?

It's neither a good deal nor a bad deal to take it early. It is a fair deal. More money now in exchange for less money later.

The general rule of thumb is to wait until the scheme retirement age (65, in your case) to take the pension unless there is a reason to take it early. That way, you will have a more comfortable retirement with a guaranteed income and no regrets.

happyc84

MX5huggy said:

What’s the inflation rises both before taking the pension and after? 

What tax rate will you be paying on the pension if you take it now? 

Thanks will check figures for pension - likely 3% max per year linked to CPI. whatever one is higher.

I would be paying tax at this level. less tax allowances.
If still working pay + pension.

Higher rate

£43,663 to £150,000

41%

happyc84

AndrewB22 said:

I had a similar offer. What you have to compare is the benefit of the additional years of pension (from taking it early) followed by a reduced pension (compared with not taking it early) for however many years you live. 

For example, ignoring (just for simplicity) the lump sum, you’d receive 9 years of £24k, which is £216k, followed by the rest of your life with £8k less.  Ignoring inflation, again just for simplicity, your simple payback is that if you live for more than 27 years from 65, until age 92, or older, you’d have been better off waiting. But otherwise the extra years of pension outweigh the reduced pension later in life. 

There are unfortunately then a lot of complicating factors.  If you pay more tax now then later, the extra £216k could be less 40% tax whereas the £8k less might have only been taxed at 20%. That means the break even life expectancy goes down, making deferring the pension more attractive. 

On the other hand, if you took that £216k and were able to invest it at a return greater than inflation, that might offset the tax disadvantage in whole or in part. 

Taking it early also means that you have a smoothing of income - the reduced pension from 65 almost overlaps with when you’ll receive the state pension, and is coincidentally about the same amount. 

Psychologically, deferring the pension is betting you’ll live a long time.  That seems to me to be tempting fate. I figured if I live long enough to regret taking the pension early, that’s not a terrible outcome. And if I die young I’d know I made at least one good decision in my life!  Scant comfort on my deathbed, but it would rot me from inside if I took a big decision based on living a long time. 

If you’re married you need to check whether a widow’s pension is reduced if you take your pension early. In my scheme it wasn’t, so whether I took the pension early or not my wife gets the same once I die, so it’s only a bet on how long I live.

I am also considering transferring my pension to a SIPP, but my circumstances are likely to be different to yours and that’s a completely different decision, and definitely not suitable for most people. I am a financial professional, I’m not reliant on my pension to maintain my standard of living in retirement, and I have reduced life expectancy. 

But if I was taking the DB pension, I would definitely take it early. My figures suggested that even with a big tax disadvantage (45% or 60% marginal income tax rate) and pretty dismal investment returns, I’d have to live beyond my life expectancy to regret it, and that’s a decision I’d be happy to get wrong because it would mean I hadn’t died. 

If you’re in perfect health and everyone in your family lives into their 90s, if you’re currently a higher rate taxpayer  or earning over £100k, and if you would just stick the money in a building society, you might well be better off deferring it. 

You have to run the numbers, I’m afraid.  Whichever decision you make is unlikely to be badly wrong unless you get hit by a bus on your 65th birthday. 

Thanks for the feedback, been reading this forum for a few years, and your response is one of the best, thank you for the time and effort put into reply. Will listen to my better half and make sure we ready to enjoy being FIRE status. Life is too short - just keep away from buses.

Albermarle

On a very simple basis , the reduction in pension for taking it early, is rather low , so potentially attractive.
The reduction per year is less than 3%, whereas normally it is more like 4% and can be more .

Also I assume it is not just a choice between taking it today or at 65 . You could always take it at some point inbetween , maybe after you have stopped working which should reduce any tax issues.