How to decide whether to start DB early

Nebulous2

Is this a public sector DB pension? There is an issue about attitude to risk. A lot of public sector workers are cautious. Many private sector workers are more tolerant of risk. 

DB pensions are calculated to be fiscally neutral. If you live an average length of time the actuarial reduction won't cost you anything. 

There's  also the psychological bit to be considered, it isn't all about money. I had been on a monthly wage for 40 years, and appreciated the security that brought. Having a monthly income that meets our basic needs gave me peace of mind, even though there was a reduction. 

Marcon

Albermarle said:

In theory, the total benefit you receive on the average lifetime should be the same either way from the DB part so it's a gamble on how long you will live

Having said that there does seem some variation in the % reduction for each earlier year taken between different DB pensions, not always for very obvious reasons. Also we have seen posts from people where the early payment reduction has suddenly increased, probably when new actuaries have a look at the scheme.

Not so much a change of actuary, as something which commonly happens when factors are reviewed after the results of the latest triennial valuation are available.

leosayer

Nebulous2 said:

Is this a public sector DB pension? There is an issue about attitude to risk. A lot of public sector workers are cautious. Many private sector workers are more tolerant of risk. 

DB pensions are calculated to be fiscally neutral. If you live an average length of time the actuarial reduction won't cost you anything. 

There's  also the psychological bit to be considered, it isn't all about money. I had been on a monthly wage for 40 years, and appreciated the security that brought. Having a monthly income that meets our basic needs gave me peace of mind, even though there was a reduction. 

Private sector.

I'm not particularly cautious but like you, would be happy if our basic needs were met by regular monthly payment and anything above that comes from investments.

Pat38493

DB increase in payment terms looks reasonable to me but the key point is that in deferment, there are statutory tables that makes them apply the increase cumulatively as a minimum, whereas once in payment, they can apply the tests to each individual year.  So for example last year, you might well have ended up getting the full 10% (depending how long it's been deferred for) whereas if it was already in payment you would have been capped.

Regarding the excel modelling - if it's important to you that you minimise the risk of having to reduce spending in retirement, you really need to model the impact of a 40-50% market equity crash during the first 7 years or so of retirement.  You can probably do this in a rudimentary way in Excel.  This is also where stress testing tools that test the plan against monte carlo simulations or historical data like cfiresim or Timeline can be useful. In any case you may well find that getting the DB pension early even with reduction works out better in those kind of stress tests as well.

pterri

Pensions are so damn complex! I’m in a similar position, I’ve got a TfL DB pension. I want to try and retire next year at 56. I was going to take the pension at a reduced rate but it’s an 18% drop I think rather than taking it at 60 with no penalty (RPI protected up to 5%  until 2030 then CPI). I’ve got enough in a SIPP and ISA to cover the four years I think if I’m fairly frugal, getting the time back with little stress appeals. I can always pick up some other work. I can alway get the DB pension earlier if i need at less of a penalty as i approach 60 but really want to hang on for that. 

ToneP

I have applied to take both my LGPS (Nov 23) & CSPS (Apr 24) pensions early. I've already stopped working this year and used a small, dormant private pension as income.

The actuarial reductions were different in each case mainly due to having differing pensionable ages. CSPS 60yr & LGPS 65yrs protected.

I found the simplest way to consider whether it's 'worth it' is to note the difference in value between taking it early or at the unreduced pensionable age and then calculate how many years it takes to break even given that you've received the money for a number of years before the pensionable age.

 

For me it was a no brainer to take them now and make use of them as the break even point is way after my state pension age of 67 and I'll also be receiving the full amount of that.

Provided you can live on the amount that the pensions bring in then it's generally a case of a bird in the hand being worth two in the bush. There's been far too many people that have chosen to carry on working and ended up seeing very little of the pension they've earned.

Beddie

ToneP said:

I found the simplest way to consider whether it's 'worth it' is to note the difference in value between taking it early or at the unreduced pensionable age and then calculate how many years it takes to break even given that you've received the money for a number of years before the pensionable age.

 

For me it was a no brainer to take them now and make use of them as the break even point is way after my state pension age of 67 and I'll also be receiving the full amount of that.

Provided you can live on the amount that the pensions bring in then it's generally a case of a bird in the hand being worth two in the bush. There's been far too many people that have chosen to carry on working and ended up seeing very little of the pension they've earned.

I've been looking at my figures in a similar way - the break even age is key. It seemed to be about 85, if I took my DB pension at 60 instead of 65. I won't need much money by then and I'll have state pension on top, plus I could do equity release if I wanted to.

I'd also be able to use up my income tax allowance up until 67 when state pension kicks in, making it even more beneficial. 60 it is then!

AlwaysLearnin

Good discussion. One other thing I'd just mention is that it could also be worth checking how any reduction is allocated across the various splits of in-payment inflationary increases.  For example, a friend was surprised to find that their scheme took their reduction for their TFLS from the higher inflationary increase part first, working back to the lower increased parts, i.e. not chronological, or proportionately or evenly split.  One of those easily missed details, but the impact has become more apparent with this period of higher inflation.

Cowster

OP - You might find this recent video useful of James Slack - covers a scenario of one partner taking a DB early and the potential tax savings of doing so.  Obviously everyones situation is different but do think how much tax you may pay might be worth considering based on your own numbers.

https://www.youtube.com/watch?v=jiW4i5ErLOc&t=1s

leosayer

Safe withdrawal rates are pretty meaningless when your DC drawdowns will vary significantly once your DB and State pensions kick in.

I find it much more useful to create a cashflow model such as the one linked below.

https://www.youtube.com/watch?v=7Wkr5QtY-G8

You can then model different approaches to see which you feel more comfortable with. 

Whenever I do this for myself, taking DB early almost always ends up giving me the best financial outcome and it gives me better returns because I won't be drawing so much from my DC pot and therefore don't need to de-risk so much.

In the end, it's less about the maths and more about maximising your ability to comfortable enjoy what you have saved.

I got some god feedback when I posed a similar question last year:

https://forums.moneysavingexpert.com/discussion/6475643/how-to-decide-whether-to-start-db-early/p1