final salary pension : take early or not?

flyguy66

NedS said:

saucer said:

michaels said:

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.

This is part of my thinking, avoiding paying tax at 40% at some future date seems to go hand in hand with an approach of taking NHS pension early and also maximising my SIPP drawdown. Eventually the tax thresholds surely must start to change again which might give a little more headroom 

flyguy66

jamesd said:

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.
Are you suggesting buy to let option?

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.
I'm a relative newby jamesd, I understand some of this but not the £30k split small pot rule you mentioned, do you have a link to where this is discussed? Thanks

Thanks jamesd

NedS

hugheskevi said:

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.

Is this because many (statistically) do not live long enough to live through the second upside of the U shape?

From my own family experience, with both of my parents currently in their 90's, I can testify that their expenditure has risen sharply in recent years as their capacity to do things for themselves has fallen, and they now have to pay people to do the things they used to do for themselves. Who would have thought they'd need to budget £25 per time to have their toenails cut?

I agree those who die at an average life expectancy of 85-86 are probably at the bottom of the U-shaped spending curve and might not see the sharp increases in spending that those living another 10-15 years will experience. But many people do live well past 85. If we are going to base our retirement planning assumptions around living to 100, then we should also assume U-shape spending is likely. If we are happy to assume we will not outlive average life expectancy, then I accept generally reducing expenditure in retirement is a more likely outcome. So it all depends on how long you live, IMHO.

Yorkie1

At a retirement planning seminar I attended through work about 12 months ago, they were indeed flagging the U shaped curve. Not everyone will need it, but it's just a consideration to have at the back of your mind.

Nebulous2

NedS said:

hugheskevi said:

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.

Is this because many (statistically) do not live long enough to live through the second upside of the U shape?

From my own family experience, with both of my parents currently in their 90's, I can testify that their expenditure has risen sharply in recent years as their capacity to do things for themselves has fallen, and they now have to pay people to do the things they used to do for themselves. Who would have thought they'd need to budget £25 per time to have their toenails cut?

I agree those who die at an average life expectancy of 85-86 are probably at the bottom of the U-shaped spending curve and might not see the sharp increases in spending that those living another 10-15 years will experience. But many people do live well past 85. If we are going to base our retirement planning assumptions around living to 100, then we should also assume U-shape spending is likely. If we are happy to assume we will not outlive average life expectancy, then I accept generally reducing expenditure in retirement is a more likely outcome. So it all depends on how long you live, IMHO.

I'm in contact with some older people who have family members that fulfil this function. I think some of the family members that do have caring experience. It's not all about money either, some of it is about having real difficulty getting chiropodists to provide domiciliary visits. 

I'm also aware of a few families who have hybrid living situations - granny flats for instance - where family members pick up a lot of the slack. 

With an increasingly older population a lot of the tasks we have come to think of as provided by the state will no longer be. 

jamesd

flyguy66 said:

jamesd said:

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.
Are you suggesting buy to let option?

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.
I'm a relative newby jamesd, I understand some of this but not the £30k split small pot rule you mentioned, do you have a link to where this is discussed? Thanks

Thanks jamesd

I wasn't thinking of buy to let. Say you need an extra 100k of capital to draw on to retire as early as you want. You could take out a £100k mortgage on your home and do most of the repaying when both DB and state pension are being paid. You'd want to increase the £100k to allow for the payments made before they start.

The retirement interest only mortgage type can be ideal for this since only interest payments are mandatory and you can defer the capital repaying for the DB+SP time.

The small pot rule lets you take the whole of three pots in your lifetime worth up to £10k each. You can split or combine pots to get them to exactly £10k each and maximise your benefit. Hargreaves Lansdown will do the splitting for you if you transfer at least £30k to them. The advantage of the small pot rule is that it doesn't count as flexible drawing so it doesn't trigger the £10k a year Money Purchase Annual Allowance restriction.

tigerspill

For me, it was a no brainer - I took my DB pension at 55 rather than waiting until 60.  The reduction factors at the time were around 3.2% per year.  I did a spreadsheet and worked out that it would take a very long time for taking at 60 worked out better (and I would likely be long dead by that time).

SarahB16

tigerspill said:

For me, it was a no brainer - I took my DB pension at 55 rather than waiting until 60.  The reduction factors at the time were around 3.2% per year.  I did a spreadsheet and worked out that it would take a very long time for taking at 60 worked out better (and I would likely be long dead by that time).

Yes but it seems that you were in the very fortunate position that you could live off the reduced pension taken at 55 for the rest of your life.  

I know for many people and this includes myself that I need to continue working until the pension I have accrued is sufficient to live off.  

flyguy66

jamesd said:

flyguy66 said:

jamesd said:

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.
Are you suggesting buy to let option?

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.
I'm a relative newby jamesd, I understand some of this but not the £30k split small pot rule you mentioned, do you have a link to where this is discussed? Thanks

Thanks jamesd

I wasn't thinking of buy to let. Say you need an extra 100k of capital to draw on to retire as early as you want. You could take out a £100k mortgage on your home and do most of the repaying when both DB and state pension are being paid. You'd want to increase the £100k to allow for the payments made before they start.

The retirement interest only mortgage type can be ideal for this since only interest payments are mandatory and you can defer the capital repaying for the DB+SP time.

The small pot rule lets you take the whole of three pots in your lifetime worth up to £10k each. You can split or combine pots to get them to exactly £10k each and maximise your benefit. Hargreaves Lansdown will do the splitting for you if you transfer at least £30k to them. The advantage of the small pot rule is that it doesn't count as flexible drawing so it doesn't trigger the £10k a year Money Purchase Annual Allowance restriction.

Thanks jamesd. I'm not sure I could get the idea of a mortgage on the home to fund my retirement past MOH, but interesting idea. I'll need to look at 3 pot rule more closely as I don't think I've quit grasped the advantages this offers 

jamesd

The three small pots let you take out some taxable money without triggering the MPAA. No other benefit.

There used to be the additional benefit that the lifetime allowance wasn't involved either but that's currently moot.

The mortgage is just shifting some money from your future self to when it's more useful. You're young for equity release but if you don't care about inheritance that's a tool you could use later to improve your lifestyle. Most people won't like either but they are just tools to use to achieve objectives.