Take Pension now or Wait till NRD Age 60?

philng

I have quotations as follows for early retirement from a deferred Final Salary Pension. I am Age 57 and 4 months & Normal Retirement Date is at age 60 (2025).

Early Retirement Pension now £22133 per annum

Wait until Age 60 (2025) £23958 per annum

Pension increases on payment are inflation up to max 5% per year.

Assuming inflation remains high for next couple of years the Early Retirement figure will be close to the NRD pension anyway.

BUT does the Pension on Normal Retirement Date age 60 also increase similarly up to date of commencement? 

xylophone

BUT does the Pension on Normal Retirement Date age 60 also increase similarly up to date of commencement? 

What does your scheme guide have to say about revaluation in deferment?

Do you have a GMP?

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

philng

xylophone said:

BUT does the Pension on Normal Retirement Date age 60 also increase similarly up to date of commencement? 

What does your scheme guide have to say about revaluation in deferment?

Do you have a GMP?

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

On the age 60 NRD statement it shows a GMP Equalisation of £211.50 pa included in the above figures.

I will try & dig out the scheme guide & in meantime I have emailed the scheme provider.

philng

xylophone said:

BUT does the Pension on Normal Retirement Date age 60 also increase similarly up to date of commencement? 

What does your scheme guide have to say about revaluation in deferment?

Do you have a GMP?

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

Incidentally the early retirement factor states 0.932 - so just short of 7% reduction for drawing pension 2 years 7 months early.

Expotter

I'm in a similar situation as yourself, considering whether to access a DB pension early or draw from a DC pension first. As far as I understand, the cap of 5% is applied annually when the DB pension is in payment; but while it is deferred, the revaluation is calculated differently, as an average of a number of years. So in periods of high inflation it could make quite a difference.

philng

philng said:

xylophone said:

BUT does the Pension on Normal Retirement Date age 60 also increase similarly up to date of commencement? 

What does your scheme guide have to say about revaluation in deferment?

Do you have a GMP?

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

Incidentally the early retirement factor states 0.932 - so just short of 7% reduction for drawing pension 2 years 7 months early.

Revaluation in deferment is also price inflation up to max 5%.

So options are

£22133 pa now or £23958 in 2 years 7 months both increasing by up to 5% a year.

Which would you choose? 

Nebulous2

It's possible that it is an emotional decision as well as a financial one. I stopped work last year at 59 and took the actuarial reduction. My pension was in two parts, with NRDs of 65 and 67. I had to take both parts together.

I had cash I could have used to bridge a gap or keep me going, possibly to NRD. I calculated breakeven point as age 87 if I deferred. After 40 years of having a monthly wage, I felt the continuation of that money dropping in my account every month had a reassuring feel that I would have missed if it had stopped. 

Aside from that it is simply a bet on how long you live..... 

Expotter

From my research I'd suggest you also take this into account

"Whilst pension increases in payment are often capped on an annual basis, the revaluation of deferred pensions is usually capped over the whole period, typically at 5%pa. In practice given historic low levels of inflation, we’d need some pretty stonking inflation before we get to the point where average inflation over several years exceeds this 5%pa cap. Trustees need to think carefully about how this affects – for example – the reductions that they apply on early retirement. Typically, on early retirement, a scheme might reduce a pension by 3-4%pa, to reflect the fact that it will be paid for longer. But now early retirement means that a member will lose out on a few years’ inflationary revaluation. In the next couple of years that could easily average 6%pa. In most cases, pension increases in payment will be anticipated to be rather lower than that, which means that the typical early retirement reductions applied today may in practice be far too penal. Indeed, for schemes with low levels of pension increases once in payment, the only actuarially “fair” early retirement reduction might be none at all.

Not only is inflation increasing, but so is inflation volatility. This causes problems of its own. The way most schemes revalue deferred pensions on retirement is a good example of this. Typically, a revaluation factor will be calculated based on the number of complete years since a member ceased building up their pension. This inevitably produces cliff-edge issues in the way pension is calculated – drawing your pension with effect from the anniversary of the day you left work (or your pension stopped accruing) usually gives a higher benefit than drawing your pension the day before. But in 2022 there are some particularly extreme cases – for example, 13 is most definitely an unlucky number. If you draw your pension 13 years after it stopped accruing, you’ll get 5% less than if you wait until you’ve clocked up 14 years; and, bizarrely, 2% less than if you draw your pension after 12 years. There’s likely to be another big cliff-edge lurking at the end of this year – current high levels of inflation are not reflected in the revaluation factors used in 2022 but will kick in from 1 January 2023 – so members who can hold off drawing their pension until 2023 may well be much better off. Whilst these details may feel like the sort of minutiae that go over the heads of most members, financial advisers are becoming increasingly astute at making their clients aware of the importance of timing in many pension decisions."

Source: broadstone.co.uk

Sorry about copying and pasting ,but it won't allow me to post a link.

xylophone

Revaluation in deferment is also price inflation up to max 5%.

It appears that you do have a GMP as part of your deferred pension?

Does your scheme used Fixed Rate or Full Rate?

https://www.barnett-waddingham.co.uk/comment-insight/blog/what-is-a-gmp/

And what about increase in payment after age 65?

philng

xylophone said:

Revaluation in deferment is also price inflation up to max 5%.

It appears that you do have a GMP as part of your deferred pension?

Does your scheme used Fixed Rate or Full Rate?

https://www.barnett-waddingham.co.uk/comment-insight/blog/what-is-a-gmp/

And what about increase in payment after age 65?

The Early retirement quotation is:

Scheme pension built up before 6 April 1997 £8,599.30 a year

Scheme pension built up after 5 April 1997 £13,533.70 a year

Total Scheme pension at retirement £22,133.00 a year

It states  'when you reach your GMP age of 65, part of the Scheme pension built up

before 6 April 1997 will be replaced by a Guaranteed Minimum Pension (GMP) built up before

6 April 1988 of £376.48 a year and a GMP built up after 5 April 1988 of £1,549.08 a year.

So what does this mean in plain English?

The quotation at NRD £23958 just states 'it includes a GMP Equalisation of £211.50 pa'.

Would be really helpful if someone could explain the implications of this on both quotes?

philng

Was hoping to get a response and any help on this as to what the GMP bit means & any implications?