final salary pension : take early or not?

hugheskevi

Bostonerimus1 said:

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.

Life expectancy for males at age 65 currently (females will be a bit higher) is:

85 years for the population as a whole (source: ONS)
87.2 years for members of private sector DB schemes (source: Pension Regulator Scheme Funding assumptions)
86.6 years for Civil Servants (source: 2020 Valuation, page 22)

Members of DB schemes have a higher life expectancy than the population as a whole for a few reasons, eg, they by definition have been fit enough to work in the past, are wealthier than the average pensioner population, and in many cases will have had white collar jobs (not always the case of course, especially schemes like Mineworkers).

Bostonerimus1

hugheskevi said:

Bostonerimus1 said:

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.

Life expectancy for males at age 65 currently (females will be a bit higher) is:

85 years for the population as a whole (source: ONS)
87.2 years for members of private sector DB schemes (source: Pension Regulator Scheme Funding assumptions)
86.6 years for Civil Servants (source: 2020 Valuation, page 22)

Members of DB schemes have a higher life expectancy than the population as a whole for a few reasons, eg, they by definition have been fit enough to work in the past, are wealthier than the average pensioner population, and in many cases will have had white collar jobs (not always the case of course, especially schemes like Mineworkers).

I'd take DB early given those figures as I bet UK life expectancy might be falling by a couple of years given the state of the NHS and income inequality...of course that will be on average and what ends up really mattering is your own health and life expectancy.

zagubov

Another poster who’s found it better taking a DB pension early. I'd been paying past added years into my DB pension and realised I'd be better off taking it slightly early (at 59).  I still had a substantial mortgage to pay off, much bigger than my lump sum.

I returned to work first full-time and then gradually reduced my working days over the next 5 years. I started paying 40% tax but that ended when I reduced my days.

It was a very good move for me, allowing me to wind down my mortgage balance. Paid off the balance of the mortgage last month using part of the lump sum.

Lots fewer financial worries now as a result.

NedS

Playing devil's advocate or offering an alternative PoV not yet expressed in this thread, but I think many of us may be grossly underestimating our costs in later retirement, should we get to live that long (and that's besides potential care home costs).

I'm seeing this first hand at the moment with my elderly parents, both of whom are in their nineties and still living at home. They have to pay for everything as they literally cannot do anything for themselves. They have carers, cleaners, window cleaner, gardener, handyman, chiropodist... The list is endless as they now have to pay someone to do all the things they are no longer able to do - and that is literally everything down to £25 for someone to cut your toenails for you. It is very expensive and their living costs have increased significantly compared to 10 years ago.

Having seen them retire at 60, and live a 35 year retirement, I can testify that spending is very much U-shaped - higher in early retirement when you are still young enough to travel etc, then tapers off in your 70s and 80s, then massively increases again when you lose the capability to do things should you be lucky enough to live that long. This is when you may regret taking that DB pension early and reducing your guaranteed income if you do not have other savings to fall back on.

Nebulous2

It's an individual choice and not all the factors are financial. I had enough cash to bridge to NRA of 65 when I would have got the bulk of my pension unreduced. 

I chose to take the hit instead and took the reduced DB. 

I had a capital sum for the first time in my life and didn't really want to give it up. I had been a wage slave for 40 years and the DB dropping into my bank account every month had a reassuring familiarity about it. My calculations had 85 as the break even point. 

With over 10% added to my DB pension last year and 6.9% being added from April I'm still sure this was the best choice for me. 

OldScientist

If you haven't done so already, I would suggest considering the following when modelling the outcomes of taking the DB pension early or late:

1) Assume that one or other or both of you lives to 100 (if you are both 60, there is roughly a 10% chance of this occurring - see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 for chances on an individual basis - they can then be combined )
2) Calculating, in real terms (my understanding is that NHS pensions are CPI linked) what will be your income floor (i.e., DB and SP) assuming a) you both survive, or b) one of you dies early. What fraction of your expenditure does this support currently and, potentially, in the future (bearing in mind the comments made by @NedS upthread)?
3) Roughly how much inflation-linked income will your portfolio (SIPPs and savings) throw off? For the UK a useful rule of thumb is somewhere between 2.5% and 3.0% (assuming an asset allocation of 60% in shares and 40% in fixed income, a 40 year retirement, and the historical worst cases) although, currently, an RPI annuity (joint life with 100% survivor benefits) might pay a similar amount or even a bit more than this. Is this amount below, close to, or above any income shortfall after taking into account guaranteed income (point 2 above)?
4) Remember to include any lump sum with your DB pension in your calculations.

I followed a similar procedure before deciding to take my DB pension early because without doing so I could not have retired when I did.

In passing, I also note that the 'break even' year will be later than 85 or so should you die before attaining that age since, I think, the survivor benefit with NHS pensions is 45%.

michaels

I have always thought it makes sense to defer and thus maximise any (fully index linked) DB pension as a hedge against longevity risk whilst simultaneously spending DC as early as possible to avoid SOR risk.

Because I have enough sipp funds, I intend to use these to bridge the gap for both DB and SP (using an index linked bond ladder) rather than take the DB early.  Downsides obviously relate to inheritance and also for me ensuring DW provision as I am not able to allocate DB to her until it is taken.

Overall this method will give me a much higher no inflation or SOR risk baseline and a smaller DC pot that I can draw using some form of SWR.

saucer

OldScientist said:

…
In passing, I also note that the 'break even' year will be later than 85 or so should you die before attaining that age since, I think, the survivor benefit with NHS pensions is 45%.

The NHS survivor pension depends what sections of the scheme you are in. 50% for 1995, 37.5% for 2008 and 2015 sections. 

saucer

michaels said:

I have always thought it makes sense to defer and thus maximise any (fully index linked) DB pension as a hedge against longevity risk whilst simultaneously spending DC as early as possible to avoid SOR risk.

Because I have enough sipp funds, I intend to use these to bridge the gap for both DB and SP (using an index linked bond ladder) rather than take the DB early.  Downsides obviously relate to inheritance and also for me ensuring DW provision as I am not able to allocate DB to her until it is taken.

Overall this method will give me a much higher no inflation or SOR risk baseline and a smaller DC pot that I can draw using some form of SWR.

Is that the same regardless of being in the fortunate position of increased pension leading to being taxed at higher rate? I could delay the DB a couple of years using my SIPP and all of that would be at basic rate. The problem is that when I get to SP that would push me well into Higher Rate. I can’t get my head around what is the most sensible balance to strike. 

Either way these are definitely 1st World Problems 

flyguy66

Phossy said:

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.

I don't disagree with this, when having enough to live on and maximising DB go hand in hand it's nice to know.