Sense Check

L9XSS

ok currently 55 years of age, have circa £19k outstanding on mortgage, with a 2 year 6 month term outstanding. Could possibly be paid off by the very end of 2023. Current job pays about 21k a year (36 hour contract). Pay into employers pension, NEST, current value about 1k.
No dependents, not married but OH has own place, employed etc.
DB pension payable at 65 years of age, forecasted at £23.5k per year (current statement).
SIPP value 161k. I’m realistically only panning this to grow to 171k in the next 5 years (combination of payments and small % growth).
State pension payable at 67 and I’ve checked, 35 years of contribution and £185 p/w.
Relatively small savings......£1000 but could grow this in the next 5 years to £8000 realistically.
Plan on working to 60 (5 more years) to achieve the above realistic targets (for me). 
Would like to utilise my SIPP to bridge the 5 year gap to DB pension. £25k per annum would suffice. If I don’t take the 25% TFLS upfront then £16,700 of the annual amount would be tax free each year and I estimate I could easily save £500 a month into savings account etc.
From 67 years of age my annual income (DB pension and SP) would be substantially higher, north of 35k? With some SIPP cash remaining in the pot (estimate 46k though would utilise 14k to top up years 65 to 67) around 34k.
Any thoughts or advice? I really would like to stop working at 60 years of age.

af1963

Also worth considering whether it's worthwhile ( and allowed) to take the DB pension early, at a reduced rate ?

That would give you some income between 60 and 65, at the cost of reducing your income after 65 when you expect to have more income than you say you need.  May be worthwhile depending on the exact numbers from your DB scheme.  

Albermarle

Without any indication of your expenditure, it is not possible to judge the figures.

Plus you need to take into account that with inflation, your expenditure will be rising and your SIPP will have to at least grow but thus much to keep pace. Although estimating what inflation might be after this year, is not easy.

L9XSS

af1963 said:

Also worth considering whether it's worthwhile ( and allowed) to take the DB pension early, at a reduced rate ?

That would give you some income between 60 and 65, at the cost of reducing your income after 65 when you expect to have more income than you say you need.  May be worthwhile depending on the exact numbers from your DB scheme.  

23% actuarial reduction for taking 5 years.
3.3% reduction for taking 1 year early.

AndrewB22

You seem very switched on to me, L9XSS.  You need to do the maths on whether having 5 more years of 77% as much pension is worth the rest of your life with 23% less. Simplistically, the five extra years means you’ll receive, for every £100 of pension you would have received at 65, an extra £385, followed by the rest of your life at £23 less per annum. Whether that’s a good idea depends on many factors, including tax, investment returns, etc. But I think it is worth serious consideration. 

As others have said, you need to work out whether you can afford to retire at 60 but everything you say makes that seem plausible to me. 

DT2001

Income required, flexibility, ability to downsize, inheritance and whether aiming for reducing income beyond, say 75 are important factors.
From what you have said so far - 
If £25k is a ‘good’ income to allow you to do what you want then I think taking the DB pension early is worth considering. At SPA you will get that from DB and SP barring inflation beyond your DB scheme rules.
You would also have a larger pot to be used flexibly. You would need 9 years of £8k p.a. From 60 to 67 to provide £25k p.a. Then you have £100k to utilise as you wish - more in the early years to fund say a holiday of a life time or just taking natural income to protect most of the capital as a safety net.

NedS

What inflation protection does the DB pension afford - is it capped, or uncapped?

L9XSS

NedS said:

What inflation protection does the DB pension afford - is it capped, or uncapped?

It’s a mixture of capped. As an average probably around 3% per annum.

NedS

Over the next 5 years, clearly priorities should be to clear the mortgage and plough any excess cash into your SIPP. I wouldn't worry about the lack of cash savings - you have a job / income and being 55 you can access the TFLS from your SIPP in the event of an emergency.

I consider you have an ideal mix of assets. You have a really strong base of inflation-linked DB and state pension combined with a good chunk of DC pension which you can use flexibly to best suit your needs. You already appear to have sufficient assets to retire at 60 assuming you are comfortable with the numbers. The main question then becomes do you draw down heavily on the DC pension from 60-65/67, or do you take the DB pension early at 60 retaining a larger portion of the DC pot.

With capped inflation linkage (for arguments sake capped at 3%), the cap is taken as an average over the time the pension is in deferment, meaning that if inflation has averaged well below 3% during the years your DB pension has been in deferment, then you may still see a good chunk of the likely 10% inflationary increase next year - the pension is revalued from the time you left the job to the time you start drawing the pension, with a maximum averaged 3% annual increase over that time period. The moment the pension goes into payment, the cap applies to the increase for each individual year, so if inflation for this year is 10%, you'd only see a 3% increase. For this reason, if we are in a period of high inflation (above the cap), it may be beneficial to leave the pension in deferment rather than take it early, especially if you think inflation will return to a benign level at or below the cap. Right now, I would not be wanting to take a capped DB pension early if I had the choice but the inflation picture will no doubt look very different in 5 years time. Anyway, you have 5 years to decide which route may be more beneficial to you.

L9XSS

Thankyou @NedS for your thoughtful insight to my post. My thought process will very much be about how I structure the DC and DB pension to give me the most efficient and cost effective route from 60 years of age. I appreciate the detail in your reply as it’s given me some indicators to focus my thinking and deliberation. 

NedS

L9XSS said:

Thankyou @NedS for your thoughtful insight to my post. My thought process will very much be about how I structure the DC and DB pension to give me the most efficient and cost effective route from 60 years of age. I appreciate the detail in your reply as it’s given me some indicators to focus my thinking and deliberation. 

Taking a DB pension early with actuarial reduction is generally designed to be cost neutral to both you and the pension scheme - it is normally designed to ensure the same amount is paid out if you live to the average age. You get a little bit less, but paid over a longer period of time. If you live longer than average, you lose out. Your health at 60 and family history may help inform that decision depending how long you think you are likely to live - longer than the 85 year average or not.

Other factors I'd consider is if you still have a sizable DC pot moving into old age, how will you manage those investments once you've lost your marbles? Maybe you'd use any cash remaining to purchase an annuity? Maybe it would be beneficial to run down the DC pot aged 60-67 and not take the DB pot early.

I don't really see that many compelling financial arguments (apart from the inflation linkage mentioned earlier) either way as the actuarial reduction is designed to be cost neutral, so it's mostly lifestyle factors and attitudes toward risk that are likely to influence your decision.