What is the impact of taking a DB pension early?

LV_426

I have a couple of DB pensions, for which the trustees issued me with a statement of benefits, which includes projected income at NRA.
I recently found out it's possible to take these early, at age 60, but what are the implications of doing this? Is it usual to get a reduced monthly income, until NRA, and then it increases? Would the long term income be severely reduced?
Is it even advisable to take it early?
I do have other DC pensions, so taking the DB early would reduce the need to draw on my DC funds. I'm currently 55.

AndrewB22

It will depend on several factors: how much it is reduced by for taking it early, offset by the benefit of having the lower pension for more years, then taxes, investment returns, inflation, and life expectancy. 

If your pension is reduced by 20% by taking it 5 years early, for example, for every £100 of pension would have received, you’d receive 5 extra years of £80 followed by the rest of your life with £20 less each year. In the five extra years you’d receive a total of £400 and, in overly simplistic terms, it would take 20 years until you were worse off. 

But if you invested the £400 and it returned more than inflation, you might never be worse off. 

Layer on tax differences, and that might change the maths again. 

It’s definitely not a dumb thing to consider taking the pension early. But whether it makes you better off depends on when you most need money, what you do with it, whether you’ll have enough later if you spend the early pension, and so on. 

When I was looking at this, it made sense to take the pension early. But your circumstances could easily be different. 

The actual level of reduction is usually calculated fairly by the pension scheme, so it’s unlikely to be a rip off. 

Finally, in my pension the NRA was 65 but I could take the pension unreduced at 60. You really do need to get all the facts and figure out the pros and cons. But I think your question was whether it was worth looking into: it is. 

Nebulous2

LV_426 said:

I have a couple of DB pensions, for which the trustees issued me with a statement of benefits, which includes projected income at NRA.
I recently found out it's possible to take these early, at age 60, but what are the implications of doing this? Is it usual to get a reduced monthly income, until NRA, and then it increases? Would the long term income be severely reduced?
Is it even advisable to take it early?
I do have other DC pensions, so taking the DB early would reduce the need to draw on my DC funds. I'm currently 55.

Many DB schemes allow you to take your pension early, but you need to check exactly what they are offering you. It's likely that they will apply an 'actuarial reduction' often around 5% per year - so taking a pension at 60 instead of 66 could mean a 30% reduction. It isn't all bad news however, although you get less you get an additional 6 years pension you wouldn't get otherwise. 

It may be worth getting a quote and working out what is your best option. That will be very individual. We often see people on here choosing to take it, or choosing to defer it, based on their own circumstances.

To some extent it is a bet on how long you will live. I took my DB pension at 59. The breakeven point for deferring it a year until I was 60 was about 86. If I live longer than 86 I would have been better off waiting the additional year. There are psychological factors as well though. After a lifetime of having a monthly wage I was struggling with the idea of not having one and depleting my savings, so the monthly pension is a reassuring presence, regardless of the calculation. 

MX5huggy

You need to look at the early retirement reductions for each scheme. 

No the pension does not go back up at NRA, it will go up by some calculation of inflation possibly capped each year. 

The reductions reflect the fact that the pension will be in payment longer, if you put the numbers in a spreadsheet you see that the break even point is around average age a death (86). 

Remember your State Pension (check it online) will give you a big boost at SP age. So live off your reduced DB’s plus some DC till SP age then reduced DB’s and SP. 

Here’s one schemes reductions https://www.lgpsmember.org/your-pension/planning/taking-your-pension/

Bimbly

One thing to consider is that the DB pension is guaranteed income likely to rise with inflation.

Money in your DC scheme could go up or down.

I would rather take the money out of the DC scheme first - so I don't have to worry about the markets/investing - then take the DB income later.

I would still take the DB at NRA, though. 

LV_426

Thanks. I like the idea of retiring early. I've done some planning with Voyant, and even not factoring in the early DB benefits, it was possible, but I'd be depleting some of my DC assets.

I would like to balance my retirement date, with being able to pass on a significant chunk of wealth to my kids to help them with big purchases like houses, or get them started with significant investment funds. So I'd like to preserve as much as possible.
Both my wife and myself will get the full SP.

arnoldy

Bimbly said:

One thing to consider is that the DB pension is guaranteed income likely to rise with inflation.

. 

No. For all intense and purposes private sector DBs will not rise with inflation. The overwhelming majority will have elements capped at rises of 0%, 2.5% or 5% - giving a typical composite cap of 3%. So this year holders of private sector DBs (with inflation at circa 10%) will be 7% worse off in real terms. For the rest of their lives. And if inflation is high next year or the year after that will further hit.

DT2001

Do you have any GMP within the DB pensions? If so you need to check how the anti franking rules affect.

I took my pension at 51, when I reach 65 the ‘excess’ element of my pension will revert to its starting level - all of the increases over the 14 years are ‘franked’ against the GMP increase. I do get a good increase in total but the 3 parts of the pension increase at different rates thereafter (0%, CPI Max 3% and RPI max 5%). If inflation stays above 5% taking mine early looks better but if it drops back to close to 0% not so good.
You could also be affected by GMP equalisation.
Taking it early in my case allowed lots of it to be tax free. 

If no GMP a lot easier spreadsheet to work through.