In a DB pension scheme, retiring soon - options?

PensionerToBe

I am due to retire in the next couple of years or so.

I pretty much know what I want to do with regard to my pension, and I want to put this out there to see if anyone can hint at any major drawbacks with my plan / as a sanity check.

I am lucky enough to have a very good DB pension, and been with my employer in excess of 30 years. I have checked that I will also get the full basic state pension at 67. I plan to take a variable pension option which gives me a higher payment up to the point that the state pension kicks in, and a lower payment after that with the state pention making up the difference.

This will be my only income in retirement.

THe pension scheme will deduct income tax at source, the only thing I will need to organise (I think) is what happens with income tax when the state pension kicks in, as I understand will count as taxable income. I am assuming a change of tax code or something.

I am married and we have a child of early primary school age. The DB scheme has a provision for a widow pension should I go before her, and an income for/on behalf of the child should he be under 18, (or under 23 if in full time education) when I kick the bucket.

The DB scheme also allows you to take a lump tum and a reduced pension.

My thinking is that I want to maximise my income, keeping things simple as possible. I have no plans (or any need - for example we are mortgage-free now) to take a lump sum, just want to leave my money in the DB scheme to give me as much regular and secure income as possible. We should be quite comfortable on that, given our lifestyle.

As such, I do not plan to use an IFA. It is, of course,  possible I could take a lump sum and invest it to try and save a bit of tax, but that sounds too much like gambling to me, as well as being a lot of faff and hassle, and I am not a person to take risks, or give anyone else an income from my pension pot.

The only thing I may do is take out a simple life insurance policy to give some additional support to my family should anything happen to me. I would pay for that from my regular income.

My intention is to leave the pot fully intact and take the income I know I will get.

Thoughts?

Notepad_Phil

Sounds fair enough - provided you're absolutely sure that your DB income will be covered against whatever inflation may do and that your OH will have enough income for her needs when you do kick the bucket.

Though if you gave some details on the lump sum situation then we could give some opinions on whether it might be worthwhile considering taking it - e.g. if you received a £30k lump sum for the loss of £1k DB income then I certainly would at least consider it, but if it was only £12k for that £1k of dB income then I definitely wouldn't.

AlanP_2

Sounds reasonable to me, but a couple of other things to check / consider over and above Phil's good point above:

1) Check your SP forecast carefully - As a member of a DB scheme you will have been contracted out of SERPS (additional SP) in the past and will have benefited from lower NI payments during that period. All that changed with the new SP in 2016. You may have enough NI years to get full NSP, you may not (ignore the 35 year bit, that only applies to those starting NI payments afetr 2016). Look at your online forecast and read it all the way through. I'm a similar age and have 40+ years of NI credits but still need another 3 to get full NSP as I was also in a DB scheme. Buying added years is good value ~ £800 a year to get £5.29 a week additional SP.

2) Do the same for your wife.

3) What is her pension situation? Working out a strategy that maximises joint income after tax is better than having one getting below Personal Allowance in retirement and one getting a lot. 

 

PensionerToBe

Thanks.

I will revisit the pensions forecast on HMRC, but I did look at it before and was forecast to get the max basic pension without any further suggestion that I am short on NICs.

My wife is considerably younger than I, and is at least probably 17-20 years from that point (retirement) and even more than that before reaching SPA. She is making enough provision so that her likely income will be above the tax threshold.

PensionerToBe

Pensions forecast - I may or may not be a year short when I finish, I can top up if necessary.

xylophone

I will revisit the pensions forecast on HMRC, but I did look at it before and was forecast to get the max basic pension without any further suggestion that I am short on NICs.

Look at this

https://www.which.co.uk/money/pensions-and-retirement/state-pension/your-state-pension-forecast-explained-a24r12y9jt41

What is your estimate up to 5/4/21  (or possibly 22)?

Your forecast does not show that you need to continue to contribute to reach full NSP?

Is a COPE  (used once to establish your starting amount at 6/4/16) shown?

THe pension scheme will deduct income tax at source, the only thing I will need to organise (I think) is what happens with income tax when the state pension kicks in, as I understand will count as taxable income. I am assuming a change of tax code or something.

The state pension is paid gross but is taxable - HMRC will issue a tax code to your occupational pension payroll manager so that tax due on your SP will be deducted from your occupational pension before you receive it.

molerat

THe pension scheme will deduct income tax at source, the only thing I will need to organise (I think) is what happens with income tax when the state pension kicks in, as I understand will count as taxable income. I am assuming a change of tax code or something.

You don't really have to do anything, it will happen automatically but could be a bit confusing if you don't 100% understand how income tax works as they often change a code to something that doesn't look right but in fact is.  HMRC will deduct the figure that DWP give them from your tax allowance so that tax appropriate to your total income is deducted, often not quite right for the first year with a mid year pension start but is corrected for year 2 .  You just need to keep an eye on things especially if it is likely to put you into a higher tax bracket.

arnoldy

PensionerToBe said:

I am lucky enough to have a very good DB pension, and been with my employer in excess of 30 years. I have checked that I will also get the full basic state pension at 67. I plan to take a variable pension option which gives me a higher payment up to the point that the state pension kicks in, and a lower payment after that with the state pention making up the difference.


Thoughts?

This sounds like a private sector DB pension. This is NOT the same as a Government pension in so far as rises are almost certainly capped at a blended rate of circa 2-3% CPI (elements will have rises capped at 0%, 2.5% and 5%).

In todays 10-15% inflation environment these pensions are therefore guaranteed to loose value very very quickly.

By taking the biggest lump sum and investing it in say high % equity, this is likely to meet or beat inflation over the long run. This would be a mitigation.

p00hsticks

PensionerToBe said:

My wife is considerably younger than I,

Bear in mind that some DB schemes will reduce the widows pension on offer in such circunstances.

Albermarle

As such, I do not plan to use an IFA. It is, of course,  possible I could take a lump sum and invest it to try and save a bit of tax, but that sounds too much like gambling to me, as well as being a lot of faff and hassle, and I am not a person to take risks, or give anyone else an income from my pension pot.

If you intend  to take the full pension available, then speaking to an IFA is not necessary.

If you took the lump sum and wanted to invest it, they could have an input. FYI many posters on this forum do not have the benefit of a DB pension and have to rely on their pension pots being invested in the financial markets. However long term investing is not gambling, but a necessity for many people to grow their pension to a decent size and to beat inflation. 

One advantage of these types of pensions, is that if all goes well, you can leave a substantial sum for your heirs, that is not included in inheritance tax calculations. 

PensionerToBe

arnoldy said:

PensionerToBe said:

I am lucky enough to have a very good DB pension, and been with my employer in excess of 30 years. I have checked that I will also get the full basic state pension at 67. I plan to take a variable pension option which gives me a higher payment up to the point that the state pension kicks in, and a lower payment after that with the state pention making up the difference.


Thoughts?

This sounds like a private sector DB pension. This is NOT the same as a Government pension in so far as rises are almost certainly capped at a blended rate of circa 2-3% CPI (elements will have rises capped at 0%, 2.5% and 5%).

In todays 10-15% inflation environment these pensions are therefore guaranteed to loose value very very quickly.

By taking the biggest lump sum and investing it in say high % equity, this is likely to meet or beat inflation over the long run. This would be a mitigation.

It's a civil service pension (my co used to be civil service but is now only part-owned by govt). So far as I know, it is index linked and not capped.. I will check this.