Take DB Pension Early (now) or Early (next year)?

jasser1492

Thanks to the advice of contributors I contacted some of my older deferred DB pension schemes with a view to taking before 55. 

One scheme allows me to take before 55 (protected early retirement age). My next question is do I take now (age 53) or wait a year? If I wait a year the actuarial reduction will be less and there is also the possibility of high indexation given inflation. Any thoughts? 

The down side to delaying is that the lump sum will allow me to clear debt that will relieve me of repayments of c. £200 per month.

Thanks in advance.

arnoldy

What is the Normal Pension Age and what is the P.a. reduction for taking early? If you then make a reasonable assumption on when you die - say 83 if you are male a few basic calcs will show you the sweet spot. This might be affected by your debt, but high inflation may be eroding your real terms debt anyway so be careful about paying that back early.

For example, pension NPA 65; 4%pa early reduction

@52 you get 48% of pension accrued
@53 you get 52% of pension accrued

so, you get 52/48 increase = 8.3% increase in pension for 30 years by delaying a year - dont take it!! NB you will also get the inflation (capped) increase as well if you defer or take it.

This is just ballpark stuff. When I did my own calcs my sweet spot was 57.5 years to take a deferred DB assuming death at 83.

jasser1492

arnoldy said:

What is the Normal Pension Age and what is the P.a. reduction for taking early? If you then make a reasonable assumption on when you die - say 83 if you are male a few basic calcs will show you the sweet spot. This might be affected by your debt, but high inflation may be eroding your real terms debt anyway so be careful about paying that back early.

For example, pension NPA 65; 4%pa early reduction

@52 you get 48% of pension accrued
@53 you get 52% of pension accrued

so, you get 52/48 increase = 8.3% increase in pension for 30 years by delaying a year - dont take it!! NB you will also get the inflation (capped) increase as well if you defer or take it.

This is just ballpark stuff. When I did my own calcs my sweet spot was 57.5 years to take a deferred DB assuming death at 83.

Thanks. The normal pension age is 60. For each early year they reduce the pension by 5% and the lump sum by 3%. Ignoring the debt I worked out that I will be better off taking it early up to the age of 70. If I live longer than 70 I would be better off taking it later at 60. But the debt repayment and freeing up of taxed income to £200 a month is pretty compelling. 

I guess my main uncertainty was whether the very high inflation we have at the moment (say 9%) means it is worth delaying for another year. If it’s uplifted by 9% and I save 5% actuarial reduction then one year delay might mean 15% better. But still I have to offset that against the £2400 of income going each year to service debt. 

I don’t think my debt will be inflated away. It’s unsecured credit card debt and they will increase the rates, and I am in the public sector and my employer hasn’t given me a pay rise for four years.

im just worry gutting over the timing really. Perhaps I just need to take it and stop fretting.

Bimbly

jasser1492 said:

I'm just worry gutting over the timing really. Perhaps I just need to take it and stop fretting.

This is a big consideration.

Once you pay off your debt, will you have enough money to live on with your DB income? If not and you end up going into debt again, this will not be a good situation.

Have you explored all other avenues with this debt? Can you you, for example, shift it to a 0% credit card for a year or two until you take your pension? Might be worth heading over to the debt board to explore options. Perhaps then you could be comfortable in waiting to take your pension and not fretting. Are you still employed? If you move your debt, it will be easier to do so while you have a salary.

Reductions for taking DB pensions early are worked out to be roughly cost-neutral. You have less money per year for more years (with an average life span). The calculations you generally need to do are, how much annual income are you giving up in return for the lump sum? Paying off debt is one good reason for taking the lump sum even if the deal is not that good. Also, can you afford to live off the pension income? If still working, do you need to stay a little longer to ensure you are on a strong financial footing?

At the end of the day, peace of mind is a valuable commodity. A year fretting is not a great year and you are not getting any younger. But you have to make sure that your DB income is enough to live on or the fret will return.

jasser1492

Thank you. I would continue in work. This is a deferred pension from a long time ago and not linked to my current employment. So I should be in a much better financial position having a small pension and lower debt. Unfortunately refinancing the debt and remortgaging have proven unfruitful (high level of debt being serviced). Nothing new has gone on the cards for some years now, but it was an expensive lesson. 

Kim1965

Being debt free at retirement ia must. Have you other pensions? 

jasser1492

Thank you. Yes, debt should be cleared by 60 and I have four other DB pensions that I can take between 60 and 67. Mortgage should be paid off by then too. So there is a plan of sorts. I think I am just seeking to maximise my finances by taking advantage of being able to take this pension before 55.

Albermarle

I guess my main uncertainty was whether the very high inflation we have at the moment (say 9%) means it is worth delaying for another year. If it’s uplifted by 9% and I save 5% actuarial reduction then one year delay might mean 15% better

It is important that you are fully aware of the rules of this scheme. Some schemes will uprate your deferred pension with inflation with no cap, but once the pension is in payment and inflation increase may well be capped at say around 4%. So with the current high inflation, if this was the case, then hanging on for another year or two would be better.

Hopefully someone more knowledgeable than me in this area will comment.

jasser1492

Albermarle said:

I guess my main uncertainty was whether the very high inflation we have at the moment (say 9%) means it is worth delaying for another year. If it’s uplifted by 9% and I save 5% actuarial reduction then one year delay might mean 15% better

It is important that you are fully aware of the rules of this scheme. Some schemes will uprate your deferred pension with inflation with no cap, but once the pension is in payment and inflation increase may well be capped at say around 4%. So with the current high inflation, if this was the case, then hanging on for another year or two would be better.

Hopefully someone more knowledgeable than me in this area will comment.

Thank you, very good points. I’ll pick up with the scheme.