Which pension first ?

Kelvin_Hall

Hi,
I’m planning on retiring early, at 60, next year.  I will get a full state pension at 67.

I have two final salary pensions - one which was set for a retirement at 60 and will pay approx £2500 per annum and one which was set for a 65 retirement but which will pay out approx £6500 a year if taken from next year.

I also have just short of £200,000 in defined contribution pension pots.

My question is, should I take the approx £9,000 per year from my final salary pensions and top that up with drawdown from my pension pot, or would I be better to leave the money in my final salary pensions and drawdown all I need at the moment ?

My wife also has final salary pensions which can pay £9,000 per annum from next year.

So the question is really just the principle - only take the drawdown or take the final salary and less drawdown.

Or does it not matter 😁

Thanks in advance 👍

MX5huggy

What happens to the DB that you’re considering taking at 60 if you leave it? Some don’t offer anymore if you wait you just miss out. 

Dazed_and_C0nfused

At face value it seems unnecessary to take an actuarially reduced DB pension of you can fund the next 5 years from a mix of the smaller DB pension and DC pot.

How much of a reduction is it for taking it 5 years early?

Kelvin_Hall

Thanks for the replies.  Both good questions which I’ll try to find the answer for 😁

arnoldy

Also look at rises from the DB pensions when in payment. Most people don't realise that the vast majority of (non public sector) DBs are NOT index linked. They are almost always capped and rises are based on a blended composite rate capped at 0%, 2.5% and 5% within various parts of the DB depending on when accrued.

Also be aware that deferred DBs have better inflation protection than those in payment, could be important in todays high inflation times. This is controlled by pension revaluation orders and you will find you pension changes quite a lot each January, and on the anniversary of when the pension was put into deferment. 

As other have said the reduction for taking early is important, if it is 3% pa or less it could very well be worth you taking the DBs early.

For example NRA 65, 3%pa reduction, anticipated age of death 83 (national average)

at 60 you get 23 years at 0.85 of full pension = 23*0.85 =19.55
at 65 you get 18 years at 1.00 of full pension = 18*1.00 = 18.00 = less!!

There is a sweet spot in taking a DB, depending on the reduction pa, but often it is around 58-60.

Ultimately, primarily because of inflation,  I would in your situation wait till the deferred pensions are revalued in November/December this year and look at what you get with a view to taking next year, possibly on anniversaries of deferment.

Use pension Lump sum to tide you over from DC if necessary.

These are just my thoughts and ideas, not advice, I have an interest in the area but am not qualified or professional. Good luck.

Kelvin_Hall

MX5huggy said:

What happens to the DB that you’re considering taking at 60 if you leave it? Some don’t offer anymore if you wait you just miss out. 

I looked and it doesn’t seem to offer more, so I guess I will be taking that one 😁

Thanks for prompting me to look 👍

Kelvin_Hall

arnoldy said:

Also look at rises from the DB pensions when in payment. Most people don't realise that the vast majority of (non public sector) DBs are NOT index linked. They are almost always capped and rises are based on a blended composite rate capped at 0%, 2.5% and 5% within various parts of the DB depending on when accrued.

Also be aware that deferred DBs have better inflation protection than those in payment, could be important in todays high inflation times. This is controlled by pension revaluation orders and you will find you pension changes quite a lot each January, and on the anniversary of when the pension was put into deferment. 

As other have said the reduction for taking early is important, if it is 3% pa or less it could very well be worth you taking the DBs early.

For example NRA 65, 3%pa reduction, anticipated age of death 83 (national average)

at 60 you get 23 years at 0.85 of full pension = 23*0.85 =19.55
at 65 you get 18 years at 1.00 of full pension = 18*1.00 = 18.00 = less!!

There is a sweet spot in taking a DB, depending on the reduction pa, but often it is around 58-60.

Ultimately, primarily because of inflation,  I would in your situation wait till the deferred pensions are revalued in November/December this year and look at what you get with a view to taking next year, possibly on anniversaries of deferment.

Use pension Lump sum to tide you over from DC if necessary.

These are just my thoughts and ideas, not advice, I have an interest in the area but am not qualified or professional. Good luck.

Thanks so much for taking the time to write all that Arnoldy.  It really reaffirms my faith and hope in human kind, when people like you take the time to help a random stranger.

Lots of great advice and knowledge there, which I greatly value, as I’m kinda new to this whole pension thing and it’s a bit of a steep learning curve.

Thanks again, so much 👍

Albermarle

I also have just short of £200,000 in defined contribution pension pots

How you deal with this DB vs DC can also depend on your personality and family situation.

Some people do not like the idea of holding investments in a pension ( I presume at this stage that the DC pots are invested and not just sitting in cash ). They worry they will crash and feel like they should withdraw/spend a lot of it asap .

Other people may see it as an opportunity to keep it invested, and hopefully growing for the future. They might even ( like many on this forum) actually take an interest in, and enjoy investing.

Another point is that the DB pension ( and your wife's) will eventually die with you. A DC pot ( if any left of course) can be handed on to a beneficiary, and is currently not included in any inheritance tax calculations.

Also you do not mention any cash savings or other investments, that could maybe be used as part of the mix?

Kelvin_Hall

Dazed_and_C0nfused said:

At face value it seems unnecessary to take an actuarially reduced DB pension of you can fund the next 5 years from a mix of the smaller DB pension and DC pot.

How much of a reduction is it for taking it 5 years early?

Thanks Dazed, a couple of years ago I got a quote for taking the larger DB pension at 60 and 67.  At that time it was £6650 at 60 and £11000 at 67.

Albermarle

Kelvin_Hall said:

Dazed_and_C0nfused said:

At face value it seems unnecessary to take an actuarially reduced DB pension of you can fund the next 5 years from a mix of the smaller DB pension and DC pot.

How much of a reduction is it for taking it 5 years early?

Thanks Dazed, a couple of years ago I got a quote for taking the larger DB pension at 60 and 67.  At that time it was £6650 at 60 and £11000 at 67.

If both figures are in todays money , then that is a bigger than normal reduction.
Maybe the £11,000 includes some kind of estimation of inflation over the 7 years, so you are not really comparing like for like.

Kelvin_Hall

Albermarle 
How you deal with this DB vs DC can also depend on your personality and family situation.

Some people do not like the idea of holding investments in a pension ( I presume at this stage that the DC pots are invested and not just sitting in cash ). They worry they will crash and feel like they should withdraw/spend a lot of it asap .

Other people may see it as an opportunity to keep it invested, and hopefully growing for the future. They might even ( like many on this forum) actually take an interest in, and enjoy investing.

Another point is that the DB pension ( and your wife's) will eventually die with you. A DC pot ( if any left of course) can be handed on to a beneficiary, and is currently not included in any inheritance tax calculations.

Also you do not mention any cash savings or other investments, that could maybe be used as part of the mix?

Great questions Albermarle.  It’s good to think these things through (though it raises even more questions 😁).

The DC pot is split between two active modern large multinational’s pension schemes.  I don’t intend actively managing them as investments myself (been bitten before), so can the pot be left in those pensions once I’m retired and can I draw down from them or does the money need to be put else where to allow draw down ?

Apologies if these are silly questions.

Not too bothered about leaving stuff for the kids, looks like they’ll be better off than we ever were 😁.  And I’m not philosophical inclined to the passing on of wealth 😎

Hardly any significant other savings, about £15,000 in cash and company share saving scheme.

Thanks for your help.