taking DB early calculation

daveyjp

With so many DB pensions and so many changes to DB pensions over the years you may get more detailed responses if you say which DB pension and how many years service you have.

arnoldy

Make sure the calculations are on NET pay not gross. This makes taking (smaller) pensions earlier slightly more attractive. Remember that a full state pension, when you get it, will push a lot of your private pension into tax. 

Bobinyorkshire

Had the same dilemma about my NHS pension. Decided to try and leave until nearer 60 (1995 scheme) for several reasons including a larger tax free sump sum and a larger pension for my wife if I die earlier than her. After help on this forum I decided to bridge the gap using a SIPP

Pipkin1812

I always read these discussions about break even points with interest but I’m not really sure why it’s so important. We none of us know how long we will live so isn’t it about affordability? If the pension offers you a comfortable lifestyle at an age when you would like to retire and you can afford it why is the break even point relevant. Or am I missing something? I have similar choices to make with my LGPS and am genuinely interested in the answer, thanks. 

marlot

Pipkin1812 said:

I always read these discussions about break even points with interest but I’m not really sure why it’s so important. We none of us know how long we will live so isn’t it about affordability? If the pension offers you a comfortable lifestyle at an age when you would like to retire and you can afford it why is the break even point relevant. Or am I missing something? I have similar choices to make with my LGPS and am genuinely interested in the answer, thanks. 

If you only have one scheme, it may be simpler.  When I retired at 55, I had four different DB schemes, two DC schemes, and some savings. 

Lots of permutations.  And lots of little details to explore.  eg. One of the DB schemes pays out a widows pension based on the non-reduced amount.  Another only pays out as a fraction of the reduced amount.

I'm glad I modelled the various options.  This forum really helped me understand the nuances.

Albermarle

Pipkin1812 said:

I always read these discussions about break even points with interest but I’m not really sure why it’s so important. We none of us know how long we will live so isn’t it about affordability? If the pension offers you a comfortable lifestyle at an age when you would like to retire and you can afford it why is the break even point relevant. Or am I missing something? I have similar choices to make with my LGPS and am genuinely interested in the answer, thanks. 

It is human nature to want to see if you are being offered a fair deal or not, regardless of your valid point about is it really relevant .

hugheskevi

Pipkin1812 said:

I always read these discussions about break even points with interest but I’m not really sure why it’s so important. We none of us know how long we will live so isn’t it about affordability? If the pension offers you a comfortable lifestyle at an age when you would like to retire and you can afford it why is the break even point relevant. Or am I missing something? I have similar choices to make with my LGPS and am genuinely interested in the answer, thanks. 

If the consideration is being made some years prior to retirement, then there will be alternatives to consider, for example saving into a DC pension to use rather than taking DB early.

Close to retirement, it could be that taking out/increasing mortgage to avoid an actuarial reduction would result in a better outcome, ie using funds from mortgage in the short-term and repaying from the unreduced pension.

There is also likely to be a decision about lump sum to take, and if the actuarial terms for early retirement are poor, the commutation terms for lump sum probably are too, and similar considerations would apply to taking the lump sum. A lot of value could be lost by wanting more money immediately.

If well off and expecting to leave an inheritance, then the decision is probably even more influenced by wanting to target value over taking pension early, as ultimately the decision just leaves a smaller legacy than would otherwise be the case (assuming that assets are not all illiquid with no way to directly or indirectly release value).

In all cases, the terms affect the incentives to work longer. If you have reached the point of financial independence and so can live a decent lifestyle (which will vary considerably by individual preferences) then working slightly longer would give resources to considerably reduce or avoid an actuarial reduction entirely. For perhaps only 6 months or a year of additional work, retirement resources could be increased significantly, both from the additional salary, extra pension accrual and extra pension value from avoiding reduction. The extent to which it is worth it will depend on individual decisions, but at the margin those decisions should be influenced by these sort of financial considerations. In many cases there won't be a single definitive retirement figure targeted but a range of income.

Also, the not knowing how long to live works both ways. If you live to a ripe old age, even a fully indexed DB pension will lose value relative to earnings, resulting in you becoming relatively poorer to wider society over time.

Personally, I've always viewed pensions from a value perspective, and will respond to the incentives I am given. My scheme has fair early retirement factors from age 55 and very unfair ones to take a protected minimum age pension from age 50. I'd like to take it from 50 but not at unfair terms so 55 it is. Similarly the lump sum terms are a rip-off, so I use DC pension savings to provide flexible resources. It has always struck me that accepting unfair terms is rather like borrowing, in that I pay a high price to access resources slightly earlier whereas with planning, flexibility and patience I can end up with a much better outcome.

zagfles

What inflation increases are applied in deferment and in payment? Is there a cap? How long has it been deferred?

The answers to these questions could make a big difference to the comparison.

DT2001

Is there any GMP element as that will affect the calculation or reduction at SPA.
My pension is affected by both and since drawing early the new SP has altered future increases on part of the pension. 

The benefit of taking it early might be spending more time retired as long as your reduced income allows you to do what you want to.

IAMIAM

Secret2ndAccount said:

Doesn't matter. Nobody knows how long the OP will live. It's a fair offer - neither a gift nor a rip-off. The OP should decide when and why they need the money, taking a 10,000ft whole of life overview. That will determine whether it makes sense to take the money now, or to tuck it away for later.
OP, do you have sufficient pension provision to be comfortable in later life? If so, then maybe you can take the money now. If things look they could be a bit tight in your 60's, then why do you want to start burning the money now? You don't have to tell us the answer, but you do have to know the answer.
Remember that pensions are taxable, so your pension added to your salary could push you into a higher tax bracket; or taking it early could be a way to get at it without paying tax.

This is spot on.

Take it at 55, die at 70.
Take it at 60, die at 65.
Take it at 65, die at 68.

I have seen this happen over and over again.
Do what is right for you. Why take it at 60, get 32k, then get state pension and then end up paying more tax than you needed to. Do you really need a salary of 45k at age 65? All questions you know the answer to.