final salary pension : take early or not?

flyguy66

I'm in the happy position of starting to think about making best use of final salary pension and a SIPP I've been adding to for a number of years. 

I have quite a few options but my conundrum is based around starting to take either my SIPP as a bridging pension until my final salary is available to me without reduction at 65, or take my final salary pension early but with a reduction of about 4% for every year I take it early.

I'm trying to avoid breaching the threshold for 40% tax rate as much as possible to get the most of the tax advantages of my SIPP. Whilst thinking about that I've done quite a lot of modeling and can see that if I take my (NHS) final salary pension at 60 I'll take about a 20% reduction. That option gives me the same annual amount but maintains a larger pot in my SIPP as back up if needed. I have savings as well so the back up is really a back of a back up.

I can see that the cumulative amount I would receive from my final salary would be higher if I take it early until I get to be 85, god willing. After 85 I would received more if I delay taking until 65. I've taken into account inflationary increases in this. Am I missing something, is there a reason I should avoid taking final salary early and use as much of my SIPP bridging pension as possible? 

Thanks for your input in advance

Marcon

flyguy66 said:

I'm in the happy position of starting to think about making best use of final salary pension and a SIPP I've been adding to for a number of years. 

I have quite a few options but my conundrum is based around starting to take either my SIPP as a bridging pension until my final salary is available to me without reduction at 65, or take my final salary pension early but with a reduction of about 4% for every year I take it early.

I'm trying to avoid breaching the threshold for 40% tax rate as much as possible to get the most of the tax advantages of my SIPP. Whilst thinking about that I've done quite a lot of modeling and can see that if I take my (NHS) final salary pension at 60 I'll take about a 20% reduction. That option gives me the same annual amount but maintains a larger pot in my SIPP as back up if needed. I have savings as well so the back up is really a back of a back up.

I can see that the cumulative amount I would receive from my final salary would be higher if I take it early until I get to be 85, god willing. After 85 I would received more if I delay taking until 65. I've taken into account inflationary increases in this. Am I missing something, is there a reason I should avoid taking final salary early and use as much of my SIPP bridging pension as possible? 

Thanks for your input in advance

Is it quite the either/or choice you've outlined above - ie is the intention to stop work entirely at 60 and live off your SIPP/DB pension? You say you have savings 'as well', so possibly there are other scenarios such as living off those for a year or two and then taking your NHS pension at (say) 62 or 63. Why would you raid a tax-efficient savings plan such as a pension if there are other funds available to you? I appreciate there might be some ISAs in there, and obviously that impacts on the tax angle just to add a bit of extra complexity!

Beddie

I will be in a similar position and it's a no brainer for me - take it early. I too worked out it I'd be better off until I'm about 85. Even if I'm still alive then, the chances are I won't be spending much. And I can always do equity release if needed, as I don't need to leave a legacy.

QrizB

I'm going to assume that you plan to retire at 60, and that your NHS pension and SIPP then need to last you forever.

Taking the NHS pension early means you will at first be drawing smaller sums from your SIPP. Assuming the SIPP is invested for growth, and that it manages to beat inflation in the long run, you'll see more growth over your lifetime and will be better off overall.

Taking smaller SIPP withdrawals to start with also lessens your exposure to the risk of a stock market crash early in retirement depleting the SIPP irrecoverably.

(I have a similar choice ahead of me. Modelling my situation suggests that taking an early but reduced DB gives me a lower risk of running out of money before I peg it. Your situation might differ.)

flyguy66

Marcon said:

flyguy66 said:

I'm in the happy position of starting to think about making best use of final salary pension and a SIPP I've been adding to for a number of years. 

I have quite a few options but my conundrum is based around starting to take either my SIPP as a bridging pension until my final salary is available to me without reduction at 65, or take my final salary pension early but with a reduction of about 4% for every year I take it early.

I'm trying to avoid breaching the threshold for 40% tax rate as much as possible to get the most of the tax advantages of my SIPP. Whilst thinking about that I've done quite a lot of modeling and can see that if I take my (NHS) final salary pension at 60 I'll take about a 20% reduction. That option gives me the same annual amount but maintains a larger pot in my SIPP as back up if needed. I have savings as well so the back up is really a back of a back up.

I can see that the cumulative amount I would receive from my final salary would be higher if I take it early until I get to be 85, god willing. After 85 I would received more if I delay taking until 65. I've taken into account inflationary increases in this. Am I missing something, is there a reason I should avoid taking final salary early and use as much of my SIPP bridging pension as possible? 

Thanks for your input in advance

Is it quite the either/or choice you've outlined above - ie is the intention to stop work entirely at 60 and live off your SIPP/DB pension? You say you have savings 'as well', so possibly there are other scenarios such as living off those for a year or two and then taking your NHS pension at (say) 62 or 63. Why would you raid a tax-efficient savings plan such as a pension if there are other funds available to you? I appreciate there might be some ISAs in there, and obviously that impacts on the tax angle just to add a bit of extra complexity!

You're right. There are other options, taking form my savings being one of these. I suppose my thoughts are around getting the most out of my NHS pension, if the numbers make drawing a reduced amount early, why not? If I die before I'm 85 taking it early seems to make sense. The savings (mainly ISA and therefore tax free interest is quite an attractive option at the moment) and SIPP will be there and accessible for any back up. 

michaels

I am modelling taking my DB pension early with reduction (at 55) or bridging the gap using an index linked bond ladder purchased from my sipp funds (I would also bridge the state pension gap in the same way) - total cost about 600k out of an 800k sipp pot.  It would appear that the latter gives a higher zero historic risk of failure return (and also higher than using an SWR with the sipp invested more traditionally in a mix of stocks and bonds)

The issue I have is that until I start drawing the DB I am unable to allocate approx 7% of the benefit to increase the survivors pension to 100% as my DW has very little own provision and I am thinking both of us would only want to see an income reduction of 1 x SP on first death.  If I defer the DB until SPA then I need to find some other way to protect DW against my demise prior to this age as otherwise she would only get a lump sum plus 37.5% of the DB benefit.

flyguy66

michaels said:

I am modelling taking my DB pension early with reduction (at 55) or bridging the gap using an index linked bond ladder purchased from my sipp funds (I would also bridge the state pension gap in the same way) - total cost about 600k out of an 800k sipp pot.  It would appear that the latter gives a higher zero historic risk of failure return (and also higher than using an SWR with the sipp invested more traditionally in a mix of stocks and bonds)

The issue I have is that until I start drawing the DB I am unable to allocate approx 7% of the benefit to increase the survivors pension to 100% as my DW has very little own provision and I am thinking both of us would only want to see an income reduction of 1 x SP on first death.  If I defer the DB until SPA then I need to find some other way to protect DW against my demise prior to this age as otherwise she would only get a lump sum plus 37.5% of the DB benefit.

michaels said:

I am modelling taking my DB pension early with reduction (at 55) or bridging the gap using an index linked bond ladder purchased from my sipp funds (I would also bridge the state pension gap in the same way) - total cost about 600k out of an 800k sipp pot.  It would appear that the latter gives a higher zero historic risk of failure return (and also higher than using an SWR with the sipp invested more traditionally in a mix of stocks and bonds)

The issue I have is that until I start drawing the DB I am unable to allocate approx 7% of the benefit to increase the survivors pension to 100% as my DW has very little own provision and I am thinking both of us would only want to see an income reduction of 1 x SP on first death.  If I defer the DB until SPA then I need to find some other way to protect DW against my demise prior to this age as otherwise she would only get a lump sum plus 37.5% of the DB benefit.

Lots more to think about when there are other dependents involved. Fortunately for me, MOH is in a reasonable position with her own pension arrangements, and there's enough provision within my estate beyond my pension to improve that position further.

Somebody

If I was in your position I would take the DB early.  Yes, you get a lower annual amount but you have guaranteed income a number of years early.  

Full disclosure: I took my DB (not public sector) early at 56 ; and not yet accessed DC&SIPP funds.  

Bostonerimus1

When to take a DB pension usually comes down to what it will allow you to do and how long you think you'll live. The break even point will be around your life expectancy ie 80ish for most people. So if you take DB early you will start to fall behind in the total pension amounts taken in your 80s, when compared to people who took DB later, but if it allows you to retire early and do things while you are still relatively young then I say do it. I took my DB at age 55 and definitely don't regret it.

Phossy

Similarish position in that I have a (deferred) DB, a SIPP that I am building and some savings. My plan is to take the DB early along with the maximum tax free amount. This brings down my income to a point that enables us to live comfortably and still leave tax headroom to make tax efficient drawdowns from the SIPP if / when needed. The lump sum will be saved / invested cautiously and effectively used to pay for 'luxuries' (eg. holidays), primarily during the bridging years to when the State Pension kicks in. The SIPP I see as of a backup/ emergency pot in the short term or a luxury pot if I live long enough and still have the ability/ desire to travel. The SIPP will be maximised and savings minimised ahead of me 'retiring' to maximise tax benefits. There is also a balance in here to take into account my DW pension position and ensure she is set-up OK should I go first. With regards to the 'break-even' point on the DB, I looked at that when I first started assessing my pension in detail, but it's not something that concerns me anymore. What is important is having enough money to live our lives, not 'winning' by maximising what I extract from the pension provider at some date that I may never see.

saucer

Similar position here. DB pension (NHS) that I intend to take early and  reduced 2 years at 58. With a SIPP that I am still paying into I will likely end up paying a chunk of tax at higher rate. Even so, by my calculations, money out of the SIPP subject to higher rate is still tax efficient because of the tax free element and having been otherwise subject to it as income. 

Taking the DB reduced seems like a no brainer because deferring it leads to fewer years in payment and more of it subject to higher rate tax at the unreduced level. Adding it all up break even is early to mid 80s. I’d be happy to be put right on any of this.