final salary pension : take early or not?

NedS

saucer said:

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 

If you are going to be a higher rate tax payer post SP age, then it makes sense to fully maximise your tax allowance before SP age during any "early retirement" to draw income right up to the threshold, even if you are only drawing from a SIPP and reinvesting in an ISA if not needed now - far better to draw it now at 20% tax than later at 40% tax (assuming you do not intent to use a pension for inheritance tax planning). Whether you do that by taking your DB early or drawing from a SIPP (or a combination of both) will depend on other factors as being discussed herein.

michaels

NedS said:

saucer said:

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 

If you are going to be a higher rate tax payer post SP age, then it makes sense to fully maximise your tax allowance before SP age during any "early retirement" to draw income right up to the threshold, even if you are only drawing from a SIPP and reinvesting in an ISA if not needed now - far better to draw it now at 20% tax than later at 40% tax (assuming you do not intent to use a pension for inheritance tax planning). Whether you do that by taking your DB early or drawing from a SIPP (or a combination of both) will depend on other factors as being discussed herein.

Given the frozen thresholds this probably makes a lot of sense if you have room to move funds to an isa.  Also (assuming they don't screw around with isas) it offers some protection against future pension rule changes.

leosayer

Phossy said:

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.

I snipped this bit because its such an important point that tends to get lost amongst all the talk of tax reliefs and investment returns by those of us who are actively saving and planning for retirement.

For such people like me, the thought of taking (for example) a 20% reduction in DB pension for the rest of your life seems anathema.
But when you start to look at what you actually need, the security it will give you and the flexibility it will give you with other savings, taking DB early seems like a no-brainer.

An earlier post was made about 'U' shaped spending in retirement being a possible reason to avoid taking DB early. However I would counter that by saving that many expenses drop away in later life such as holidays, meals out, clothing and if you have retained some DC/SIPP savings as a result of taking DB early then some of those savings may be available should they be required.

hugheskevi

leosayer said:

An earlier post was made about 'U' shaped spending in retirement being a possible reason to avoid taking DB early. However I would counter that by saving that many expenses drop away in later life such as holidays, meals out, clothing and if you have retained some DC/SIPP savings as a result of taking DB early then some of those savings may be available should they be required.

U-shaped retirement spending has always been the classicial assumption.

Analysis of expenditure in retirement has shown this is not what happens - expenditure just tends to fall throughout retirement for most, with many pensioners not spending all of their income.

However, for those who need external care (speaking generally, not just care home provision), spending can increase considerably. Typically, couples avoid this as they care for each other and usually don't need so much external support. The big change tends to come when the first person dies and their survivor then has greater external care needs.

Although it is difficult to mitigate this risk, ensuring elderly people are living in appropriate accommodation before their care needs escalate can go some way to mitigation - those living in an appropriately adapted ground floor flat may have fewer needs than those who are still living in much larger accommodation with the associated upkeep requirements.

german_keeper

As I understand it as well as personal care issues the U shaped assumption also involves things like cleaning and gardening. Always seemed logical to me but interesting to see not necessarily the case,

We are comfortable enough in retirement, me 59 and Mrs GK nearly 58, and as far as we know in fairly rude health, but at the moment not really in a position to pay for a gardener and a cleaner. Although I suppose if we really wanted to we could prioritise our spending differently.

But we are in a bit of a funny position with my mum. She is in the advanced stages of a very aggressive dementia and thus is fully funded, including a 1 to 1 carer, under Section 117. She does in fact have sufficient income and savings to pay for her care (although probably not at the level she receives) so the inheritance for me and my 2 sisters is growing exponentially.

When she does pass some of my share of Mum's money will be immediately invested in a cleaner and a gardener, whether our health determines or not. I think every time the cleaner or gardener arrives, whatever time of day, I may just pour a glass of red and drink a toast to my dear old mum.   

SarahB16

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.

Your thinking sounds similar to my own current thoughts.  

The majority of my pension income will come from my current employer (LGPS DB scheme).  I won't be a higher rate tax payer in retirement so I would prefer to take my DB pension at 65 (actuarial reduction of 2 years on the post 2014 tranche).

I also have a small DC pot and another relatively small DB pension (intend to also take that DB pension at 65).  

My current thinking is to see when I can afford to retire based on what my DB pension income will be (I'm thinking somewhere between the age of 61 to 63) and fund the gap to 65 using my small DC pot and savings (savings to be replenished with my AVC pot at 65). 

I would need to add to my DC pension pot so it is worth (number of years to age 65) x £16,760.  

jamesd

Most people won't like it but another option would be a mortgage repaid out of your income when both DB and state pensions are being paid.

At least 25% tax free is available to you now from new pension contributions, plus up to £30k split 25% tax free and 75% taxable using the small pot rule. This tends to favour using savings to ensure that your pension contributions are the maximum allowed with tax relief.

Jumping up now can also have the advantage of making the rules around tax free lump sum recycling irrelevant by changing your expected contribution to the maximum and hence eliminating any increase due to tax free lump sums. One of the rules looks at the year you take the tax free lump sum and the two years either side to see if there's an unexpected increase. You'd be increasing way before that window for the DB and for the DC you could use the other limits if not far enough in advance.

GrubbyGirl_2

I'm curious, as your final salary pension is an NHS pension can I ask how long you've worked for the NHS?  If a long time you might find part of it may be under the 1995 scheme in which case you would be able to take that element at 60 without reduction and take the rest at 65.

flyguy66

GrubbyGirl_2 said:

I'm curious, as your final salary pension is an NHS pension can I ask how long you've worked for the NHS?  If a long time you might find part of it may be under the 1995 scheme in which case you would be able to take that element at 60 without reduction and take the rest at 65.

I'm a relatively recent arrival, 6 years in 2008, 9 or so in the 2015 so sadly can't take at 60 without reduction. I'm looking at the McCloud remedy at the moment to see if that gives me any better options, it's tricky figuring this out unless anyone knows better. Best I've come across to help with this is the modeller recently set up for NHS Scotland, link below if people haven't found this yet. It's a rough guide but suggests I may be slightly better off chucking all that I can (everything up to 31st March 2022) into the legacy 2008 scheme. 

https://mccloudnhsmodeller.pensions.gov.scot/

flyguy66

OldScientist said:

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%.

Thanks for the thoughtful comments Oldscientist, rationally outlined as I'd expect from a fellow man of science. I'll model as you suggest