Defined Benefit Early Redemption and Tax Free Option Numbers - General Expectations?

Barbados7

I have received some figures detailing an early start (9 months before NRD) to my deferred DB pension.

I requested two figures, one without taking any available tax free cash and the other taking £53,000 tax free, to maximise the overall tax free available to me.

Net of an additional payment at NRD until State Pension age, the full annual pension amount would be £ 33,312. Taking it 9 months early gives an annual figure of £31,527, so a drop of around 5.36%. This seems quite high.

Taking a tax free amount of £53,000 would further reduce the earlier taken (9 months) annual pension to £29,701, so a reduction against the full NRD pension of around 11%.

Combining taking the pension nine months early with the tax free amount it seems that it would take around 20 years before the overall annual reduction were to effectively have an impact (gross of tax saved).

Grateful for any thoughts on general expectations. Have I missed anything?

MallyGirl

did your 20 years calc take into account the rises that will happen every year?

Albermarle

What most posters with similar questions have missed, is that normally DB pension income increases each year. The % varies from scheme to scheme.

 the full annual pension amount would be £ 33,312. Taking it 9 months early gives an annual figure of £31,527, so a drop of around 5.36%. This seems quite high.

It is high - around 4% per 12 months is more typical..

Taking a tax free amount of £53,000 would further reduce the earlier taken (9 months) annual pension to £29,701, 

The figure to look for here is the commutation rate . Tax free lump sum divided by the reduction in pension income. So £53 K divided by £1826 = 29 . This is unusually high ( which is good and means taking the cash is a good deal) 

Maybe something a bit odd here. The reduction for taking it 9 months early seems excessive, whilst the commutation rate looks very generous.

Marcon

Barbados7 said:

I have received some figures detailing an early start (9 months before NRD) to my deferred DB pension.

I requested two figures, one without taking any available tax free cash and the other taking £53,000 tax free, to maximise the overall tax free available to me.

Net of an additional payment at NRD until State Pension age, the full annual pension amount would be £ 33,312. Taking it 9 months early gives an annual figure of £31,527, so a drop of around 5.36%. This seems quite high.

Taking a tax free amount of £53,000 would further reduce the earlier taken (9 months) annual pension to £29,701, so a reduction against the full NRD pension of around 11%.

Combining taking the pension nine months early with the tax free amount it seems that it would take around 20 years before the overall annual reduction were to effectively have an impact (gross of tax saved).

Grateful for any thoughts on general expectations. Have I missed anything?

What date were these figures calculated - before 6 April 2024, or on/after 6 April 2024?

Not sure what this means: 'Net of an additional payment at NRD until State Pension age, the full annual pension amount would be £ 33,312' Something can't be both 'net' and 'full' - I wonder if that's where confusion is creeping in?

poseidon1

Barbados7 said:

I have received some figures detailing an early start (9 months before NRD) to my deferred DB pension.

I requested two figures, one without taking any available tax free cash and the other taking £53,000 tax free, to maximise the overall tax free available to me.

Net of an additional payment at NRD until State Pension age, the full annual pension amount would be £ 33,312. Taking it 9 months early gives an annual figure of £31,527, so a drop of around 5.36%. This seems quite high.

Taking a tax free amount of £53,000 would further reduce the earlier taken (9 months) annual pension to £29,701, so a reduction against the full NRD pension of around 11%.

Combining taking the pension nine months early with the tax free amount it seems that it would take around 20 years before the oerall annual reduction were to effectively have an impact (gross of tax saved).

Grateful for any thoughts on general expectations. Have I missed anything?

I can imagine a rational case for taking a DB pension several years prior to NRD, and accepting a lower initial pension as a result, but 9 months early with the level of penalties you have quoted makes no sense.

What is so important that waiting another 9 months is intolerable?

You don't give your age, so not clear how near to state pension age you might be, and how that connects to taking the DB scheme early.

You don't indicate whether you are single or married, so to what extent any decision you make might impact on a potential widow 

As for the tax free lump sum, how much is that at NRD ( you don't appear to have provided that comparative)  and what is the reduced annual pension if TFC is taken at NRD?
  With these additional numbers one can calculate the percentage income return as a result of foregoing the cash, and whether that might constitute a valid reason to reconsider the TFC decision ( maximum TFC for many seems to be a knee jerk  response, without proper consideration of the value of extra inflation linked lifetime  annual income).

As an example, an acquaintance exchanged £100k TFC, to boost his pension from £35k to £45k in 2016 (he retired age 56 ).  8 years later that annual pension is now £72,800 ( a 61% increase on his starting amount). Admittedly his scheme provides for generous blended CPI/ RPI increases, but that was one of the reasons  I advised him to forgoe the cash.

 In this regard I  wholly support Albermarle's observation on this, what is the % increase built into your DB scheme?

Brie

Double check that they are using the correct NRD as my pension administrator got mine wrong.  The scheme changed at some point raising the NRA from 60 to 65 and they assumed, incorrectly, I was in the later version of the scheme. 

Barbados7

Thank you all for your very helpful responses. I'll try to answer the points below-

- I didn't factor in any future potential annual rises in the pension when making the calculations, they vary per individual incorporated element, e.g. inflation (up to max 5%) or 3% minimum and another is the lower of inflation or 2.5%. The valuation was made very recently, so post 6th April.
- I had questioned the reduction percentage for taking the pension early with the administrator and I was advised that it was correct. I had always thought an annual reduction of circa. 4% would be roughly expected.
- The 'net of additional payment..' refers to a small temporary additional pension paid from NRD age 60 until State Pension age. I had excluded this from the numbers quoted earlier.
- Taking the pension now is in consideration of the LTA being re-introduced as I have additional uncrystallised DC elsewhere.
- I have already retired, so the scheme NRD is just 11 months away, 9 months early refers to the projected valuation at anticipated start date of the DB payments.

I think I will request a valuation of the same tax free cash value at NRD, as referred to above and again request clarity on the reduction factor so close to NRD.