Planning ahead: How to fund income gap from retiring at 62 to drawing DB and state pension at 68

Qyburn

When I was going through this exercise I found it better to work in tax years rather than calendar or birthday to birthday. You'll probably need to do this at some point anyway, as your State and DB pensions will probably start mid tax year.
It can also help with timings, for example I plan to take my lump sum for 24/25 in March 24, to benefit from that year's tax allowances. In other words taken and taxed in FY24/24, but to be spent in 25/26.

GunJack

I completely get where the OP is coming from in not wanting to take a DB early..... it's one thing it being "cost neutral" over the lifetime of the pension paying out, but that is not the relevant part of a DB - the relevant part is the loss of income PER YEAR that actuarial reduction does. What's the point in having some reduced income for an extra 2-3 (or however many) years, if that income is not enough to live on??? There's no "pot" to consider with a DB, it'll just keep paying out for as long as you (and your spouse) are alive, so you/it will never run out of money.

Not only that, but the compounding of lower annual rises (in cash, not percentage terms) on top of the reduced initial income is very significant.. 

Universidad

GunJack said:

the relevant part is the loss of income PER YEAR that actuarial reduction does. What's the point in having some reduced income for an extra 2-3 (or however many) years, if that income is not enough to live on???

Yes, you'd be absolutely right in most cases. In most cases, the question is about whether one can afford to retire early or not.

The OP is not asking about whether they can afford to retire early. They've decided that they can, and they will, retire early.

If a position is cost neutral, it shouldn't be discounted out of hand over a conventional wisdom that doesn't necessarily apply.

SarahB16

GunJack said:

I completely get where the OP is coming from in not wanting to take a DB early..... it's one thing it being "cost neutral" over the lifetime of the pension paying out, but that is not the relevant part of a DB - the relevant part is the loss of income PER YEAR that actuarial reduction does. What's the point in having some reduced income for an extra 2-3 (or however many) years, if that income is not enough to live on??? 

Yes, this is exactly where I am coming from.  I do not have extravagant taste but I do want to enjoy my retirement and that includes having foreign holidays and UK breaks.  I want to ensure I have a comfortable annual income to live off.  

Universidad said:

GunJack said:

the relevant part is the loss of income PER YEAR that actuarial reduction does. What's the point in having some reduced income for an extra 2-3 (or however many) years, if that income is not enough to live on???

The OP is not asking about whether they can afford to retire early. They've decided that they can, and they will, retire early.

I do appreciate your reply Universidad but I haven't said that I can afford to retire early.  I would like to be able to retire somewhere between the age of 62 and 64 but I wouldn't do that if it meant my income in retirement was reduced to the extent that I felt I was watching my expenditure far too closely.  I enjoy my job and am not counting down the years to retirement.  My job is mentally challenging but not physically challenging so hopefully I can continue for as long as I need to (of course hoping for good health to continue).   

What I said was:  

Ideally I would like to retire at 62 (but this could be 64) but I thought it would be best to set out my pension provision in this post by way of background…   

I should add I’m not saying that I will be able to afford to retire at 62 as I will need to appraise my financial circumstances nearer to the time…    

NedS

Universidad said:

GunJack said:

the relevant part is the loss of income PER YEAR that actuarial reduction does. What's the point in having some reduced income for an extra 2-3 (or however many) years, if that income is not enough to live on???

Yes, you'd be absolutely right in most cases. In most cases, the question is about whether one can afford to retire early or not.

The OP is not asking about whether they can afford to retire early. They've decided that they can, and they will, retire early.

If a position is cost neutral, it shouldn't be discounted out of hand over a conventional wisdom that doesn't necessarily apply.

It's only cost neutral if the OP dies at the average age determined by the actuary. We must not forget that something like a DB pension is also an insurance policy against running out of money if living longer. Providing you have more than enough guaranteed income to infinity, then no harm in reducing that income a little by taking the DB early.
But how much is enough in your 90's is a difficult question to answer in your 50's. My parents are in their 90's now, and their spending has increased as they now have to pay for every last thing as they are no longer capable of doing anything for themselves, but are not yet at the point where they need a care home. Similarly, I know our core expenditure could be met now by £25k per year, but when I'm 90 and have to pay for a carer, cleaner, taxis to get anywhere, gardener, window cleaner, odd job man for all the home repair jobs, IT guy to fix the email/internet... the list is endless - all of a sudden that £25k core spend looks woefully inadequate.

Universidad

I do appreciate your reply Universidad but I haven't said that I can afford to retire early.  I would like to be able to retire somewhere between the age of 62 and 64

My apologies, I had read what you said as an intention to retire between 62 and 64, rather than that you might not retire early at all. That's my poor comprehension skills. If you don't feel that you can afford to retire early, absolutely don't put yourself in a difficult position.

It's only cost neutral if the OP dies at the average age determined by the actuary.

Indeed, if you die any younger than expected, you come out ahead with early retirement. And if you die with a DB pot, it disappears (survivors pension notwithstanding). If you die with money in your bank account, you can pass it on. There are many nuances here, but that is precisely why one should not act as if the received wisdom about DB pensions is always right.

Albermarle

Universidad said:

I do appreciate your reply Universidad but I haven't said that I can afford to retire early.  I would like to be able to retire somewhere between the age of 62 and 64

My apologies, I had read what you said as an intention to retire between 62 and 64, rather than that you might not retire early at all. That's my poor comprehension skills. If you don't feel that you can afford to retire early, absolutely don't put yourself in a difficult position.

It's only cost neutral if the OP dies at the average age determined by the actuary.

Indeed, if you die any younger than expected, you come out ahead with early retirement. And if you die with a DB pot, it disappears (survivors pension notwithstanding). If you die with money in your bank account, you can pass it on. There are many nuances here, but that is precisely why one should not act as if the received wisdom about DB pensions is always right.

For those lucky enough to have a potential LTA issue, then taking a DB pension early can be a good tactic, as it reduces the %LTA it takes up.

bostin

OP - what's to stop you continuing to build up your LGPS AVC then, at age 62, transfer this to a SIPP and draw it down outside of LGPS i.e. to leave your defined benefit element untouched until aged 68?

You benefit from salary sacrificing your income (i.e. tax plus NI savings) in a way that you can't do into a SIPP directly. It's something that I'm giving serious thought to in bridging the gap between stopping work and drawing LGPS. A recent seminar at the Council I work for also suggested this as an option to consider.
 

SarahB16

bostin said:

OP - what's to stop you continuing to build up your LGPS AVC then, at age 62, transfer this to a SIPP and draw it down outside of LGPS i.e. to leave your defined benefit element untouched until aged 68?

If I could afford to retire at 62 I would no longer be working and therefore, I believe, would be unable to transfer money into a SIPP as I would not have earned income.  

However, what you have posted has made me wonder what are the personal tax implications of taking the AVC pot at age say 62-64 (at retirement) but leave the LGPS pension untouched until 68?

I wonder if the same calculation is used as if the AVC pot and LGPS pension were taken at the same time, i.e. the AVC pot needs to be 25% or less of the LGPS value?  The pension amount at 68 would be greater than at 62 (if no CPI uplift was applied in those 6 years) so using the LGPS pension value calculated at retirement age (62) would be a prudent figure to use but I don't know if the same calculation is used. 

Does anybody know please?  I'm wondering if you may know @Silvertabby as I know you have very helpfully answered questions similar to this in the past please?   

I looked at the following but could not see this explained: 

 Taking your Additional Voluntary Contributions :: LGPS (lgpsmember.org)

NoMore

Transferring pensions is not affected by your income. New contributions are.