Deferred DB increases at 8%, what would you do?

pterri

I’m 56, intend to retire next year at 57. I’ll be using a SIPP and ISA to bridge until I can claim my DB at 60, I don’t want to access it early and take the penalty, I’ll see how my spending is in that period but I think it’s more than doable.

 If I defer at 60 it increases at 8% a year on top of RPI (the RPI increase is limited to 5%). I don’t have to make a decision about that now, I’ll have to do the sums. 

What do people think? I’ll probably claim it but interested in other opinions. It will be £37k when I retire and index linked so will be whatever at 60 (£40.5k at 60 if RPI is 3%)

Marcon

pterri said:

I’m 56, intend to retire next year at 57. I’ll be using a SIPP and ISA to bridge until I can claim my DB at 60, I don’t want to access it early and take the penalty, I’ll see how my spending is in that period but I think it’s more than doable.

 If I defer at 60 it increases at 8% a year on top of RPI (the RPI increase is limited to 5%). I don’t have to make a decision about that now, I’ll have to do the sums. 

What do people think? I’ll probably claim it but interested in other opinions. It will be £37k when I retire and index linked so will be whatever at 60 (£40.5k at 60 if RPI is 3%)

Not sure what other people would do/think matters one jot! It all comes down to what works for you - and you've said nothing about your other savings, spending habits etc. That's what you need to consider, not the random selection of responses you'll get from strangers.

It's not a 'penalty' for taking your pension early. Your pension is payable for longer, and payable sooner than expected, so the starting level is adjusted to take account of this. Normally the reduction factor is to ensure that early retirement is 'cost neutral', so by the time you die, you'll have received roughly the same overall amount as you'd have received had you retired at the scheme's normal retirement age. Don't forget you get 3 years of extra pension is you start taking it at 57 rather than 60 - in your case that could be around £100K.

One thing I'd do is double check the increases for late retirement. 8% on top of RPI sounds high, even if a lot of your pensionable service has built up a substantial GMP entitlement. Also bear in mind that unless that %age is hard wired into your rules, it could change - up or down - in years to come.

Out of interest, what's the %age per year reduction for early retirement?

pterri

Marcon said:

pterri said:

I’m 56, intend to retire next year at 57. I’ll be using a SIPP and ISA to bridge until I can claim my DB at 60, I don’t want to access it early and take the penalty, I’ll see how my spending is in that period but I think it’s more than doable.

 If I defer at 60 it increases at 8% a year on top of RPI (the RPI increase is limited to 5%). I don’t have to make a decision about that now, I’ll have to do the sums. 

What do people think? I’ll probably claim it but interested in other opinions. It will be £37k when I retire and index linked so will be whatever at 60 (£40.5k at 60 if RPI is 3%)

Not sure what other people would do/think matters one jot! It all comes down to what works for you - and you've said nothing about your other savings, spending habits etc. That's what you need to consider, not the random selection of responses you'll get from strangers.

It's not a 'penalty' for taking your pension early. Your pension is payable for longer, and payable sooner than expected, so the starting level is adjusted to take account of this. Normally the reduction factor is to ensure that early retirement is 'cost neutral', so by the time you die, you'll have received roughly the same overall amount as you'd have received had you retired at the scheme's normal retirement age. Don't forget you get 3 years of extra pension is you start taking it at 57 rather than 60 - in your case that could be around £100K.

One thing I'd do is double check the increases for late retirement. 8% on top of RPI sounds high, even if a lot of your pensionable service has built up a substantial GMP entitlement. Also bear in mind that unless that %age is hard wired into your rules, it could change - up or down - in years to come.

Out of interest, what's the %age per year reduction for early retirement?

From the guide…

Deferring your pension after age 60

As an alternative to drawing your pension at age 60 you will be offered the option to defer payment and receive a bonus of 2/3 of one per cent for each complete month (8 per cent a year) that your pension remains deferred 

it also does have the RPI link (limited to 5%). It’s a great scheme, and in well in surplus. I can’t remember what the reduction  is at 57, at 58 it’s 8%.

I’ve got £110k in a SIPP and £87k in an isa. I’m a simple soul so that will very easily cover me until I’m 60 with some left over. Also at 60 I’ll have 126k in AVCs to access, it’s linked to the DB so depending on the sums and how much I use my SIPP it could be tax free. Transfer to the SIPP or take some/all as a lump sum. I’ll probably take at least some as a lump sum and feed that into the isa.

plenty to think about over the next year but it’s all very doable. 

I doubt I will defer if at 60, you can’t spend it when you’re six feet under. 

FIREDreamer

pterri said:

I’m 56, intend to retire next year at 57. I’ll be using a SIPP and ISA to 4bridge until I can claim my DB at 60, I don’t want to access it early and take the penalty, I’ll see how my spending is in that period but I think it’s more than doable.

 If I defer at 60 it increases at 8% a year on top of RPI (the RPI increase is limited to 5%). I don’t have to make a decision about that now, I’ll have to do the sums. 

What do people think? I’ll probably claim it but interested in other opinions. It will be £37k when I retire and index linked so will be whatever at 60 (£40.5k at 60 if RPI is 3%)

Worth noting - add in the state pension and you will be in 40% tax territory so any deferral increase will be taxed at 40%.

pterri

FIREDreamer said:

pterri said:

I’m 56, intend to retire next year at 57. I’ll be using a SIPP and ISA to 4bridge until I can claim my DB at 60, I don’t want to access it early and take the penalty, I’ll see how my spending is in that period but I think it’s more than doable.

 If I defer at 60 it increases at 8% a year on top of RPI (the RPI increase is limited to 5%). I don’t have to make a decision about that now, I’ll have to do the sums. 

What do people think? I’ll probably claim it but interested in other opinions. It will be £37k when I retire and index linked so will be whatever at 60 (£40.5k at 60 if RPI is 3%)

Worth noting - add in the state pension and you will be in 40% tax territory so any deferral increase will be taxed at 40%.

That’s a good point

Marcon

pterri said:

Marcon said:

pterri said:

I’m 56, intend to retire next year at 57. I’ll be using a SIPP and ISA to bridge until I can claim my DB at 60, I don’t want to access it early and take the penalty, I’ll see how my spending is in that period but I think it’s more than doable.

 If I defer at 60 it increases at 8% a year on top of RPI (the RPI increase is limited to 5%). I don’t have to make a decision about that now, I’ll have to do the sums. 

What do people think? I’ll probably claim it but interested in other opinions. It will be £37k when I retire and index linked so will be whatever at 60 (£40.5k at 60 if RPI is 3%)

Not sure what other people would do/think matters one jot! It all comes down to what works for you - and you've said nothing about your other savings, spending habits etc. That's what you need to consider, not the random selection of responses you'll get from strangers.

It's not a 'penalty' for taking your pension early. Your pension is payable for longer, and payable sooner than expected, so the starting level is adjusted to take account of this. Normally the reduction factor is to ensure that early retirement is 'cost neutral', so by the time you die, you'll have received roughly the same overall amount as you'd have received had you retired at the scheme's normal retirement age. Don't forget you get 3 years of extra pension is you start taking it at 57 rather than 60 - in your case that could be around £100K.

One thing I'd do is double check the increases for late retirement. 8% on top of RPI sounds high, even if a lot of your pensionable service has built up a substantial GMP entitlement. Also bear in mind that unless that %age is hard wired into your rules, it could change - up or down - in years to come.

Out of interest, what's the %age per year reduction for early retirement?

From the guide…

Deferring your pension after age 60

As an alternative to drawing your pension at age 60 you will be offered the option to defer payment and receive a bonus of 2/3 of one per cent for each complete month (8 per cent a year) that your pension remains deferred 

it also does have the RPI link (limited to 5%). It’s a great scheme, and in well in surplus. I can’t remember what the reduction  is at 57, at 58 it’s 8%.

I’ve got £110k in a SIPP and £87k in an isa. I’m a simple soul so that will very easily cover me until I’m 60 with some left over. Also at 60 I’ll have 126k in AVCs to access, it’s linked to the DB so depending on the sums and how much I use my SIPP it could be tax free. Transfer to the SIPP or take some/all as a lump sum. I’ll probably take at least some as a lump sum and feed that into the isa.

plenty to think about over the next year but it’s all very doable. 

I doubt I will defer if at 60, you can’t spend it when you’re six feet under. 

Thank you - I think I can spot the TfL Scheme! As you say, great scheme.

pterri

Marcon said:

pterri said:

Marcon said:

pterri said:

I’m 56, intend to retire next year at 57. I’ll be using a SIPP and ISA to bridge until I can claim my DB at 60, I don’t want to access it early and take the penalty, I’ll see how my spending is in that period but I think it’s more than doable.

 If I defer at 60 it increases at 8% a year on top of RPI (the RPI increase is limited to 5%). I don’t have to make a decision about that now, I’ll have to do the sums. 

What do people think? I’ll probably claim it but interested in other opinions. It will be £37k when I retire and index linked so will be whatever at 60 (£40.5k at 60 if RPI is 3%)

Not sure what other people would do/think matters one jot! It all comes down to what works for you - and you've said nothing about your other savings, spending habits etc. That's what you need to consider, not the random selection of responses you'll get from strangers.

It's not a 'penalty' for taking your pension early. Your pension is payable for longer, and payable sooner than expected, so the starting level is adjusted to take account of this. Normally the reduction factor is to ensure that early retirement is 'cost neutral', so by the time you die, you'll have received roughly the same overall amount as you'd have received had you retired at the scheme's normal retirement age. Don't forget you get 3 years of extra pension is you start taking it at 57 rather than 60 - in your case that could be around £100K.

One thing I'd do is double check the increases for late retirement. 8% on top of RPI sounds high, even if a lot of your pensionable service has built up a substantial GMP entitlement. Also bear in mind that unless that %age is hard wired into your rules, it could change - up or down - in years to come.

Out of interest, what's the %age per year reduction for early retirement?

From the guide…

Deferring your pension after age 60

As an alternative to drawing your pension at age 60 you will be offered the option to defer payment and receive a bonus of 2/3 of one per cent for each complete month (8 per cent a year) that your pension remains deferred 

it also does have the RPI link (limited to 5%). It’s a great scheme, and in well in surplus. I can’t remember what the reduction  is at 57, at 58 it’s 8%.

I’ve got £110k in a SIPP and £87k in an isa. I’m a simple soul so that will very easily cover me until I’m 60 with some left over. Also at 60 I’ll have 126k in AVCs to access, it’s linked to the DB so depending on the sums and how much I use my SIPP it could be tax free. Transfer to the SIPP or take some/all as a lump sum. I’ll probably take at least some as a lump sum and feed that into the isa.

plenty to think about over the next year but it’s all very doable. 

I doubt I will defer if at 60, you can’t spend it when you’re six feet under. 

Thank you - I think I can spot the TfL Scheme! As you say, great scheme.

I cannot wait to leap, seems mad to stop working at 57 but the numbers work for me. My local hipster bakery does bread delivery by cargo e-bike, they’re always looking for staff to do the few hours early morning. They pay the London living wage and are very flexible, my do that for 3-4 days per week as a bit of extra pocket change. 

(TfL for the win)

af1963

The psychology of this is quite interesting ... the available DB pension goes up for every year that you don't take it, but taking it before 60 is presented as a reduction in annual entitlement compared to what's available at 60, and seen as a 'penalty', while taking it after 60 it's seen as an increase.  But in both cases, the effect is the same -a higher annual payment, but paid for fewer years.

Suppose it's a 12% reduction at 57 based on the reduction for two years being 8% ...

On gross figures: Taking it at 57, for every £1000 of pension available at 60, you'd receive three years payments of £880 up front for a total of £2640.  If you waited till 60 instead, you'd miss out on this but get an extra £120 per year from then on, which would take about 22 years to match the money you could have got up front.


Tax also affects this: if you're not earning elsewhere between 57 and 67 when state pension starts, possibly makes sense to use as much of your annual tax free allowance as you can ?

On your total figures you'd get about £32.5k per year taking it early, and an extra £4500 annually for waiting to 60.  The extra £4500 would all be subject to tax at 20% ( and in later years after SP begins, a little of it maybe at 40%).  Assuming 20% tax, that's a net extra amount per year of £3600.

The early years payments would also be taxable but £12.5K each year falls within the tax allowance. So you'd pay £4k in tax on the remaining £20k, leaving a net amount of £28.5k .  That means you'd get about £85.5k over three years, and it would take about 24 years for the higher annual payments at 60 to match that,

No surprise that both calculations work out that you'd 'break even' in your early 80s, as that roughly matches life expectancy.  Your choice about which is better - more more earlier or after age 84 !

pterri

af1963 said:

The psychology of this is quite interesting ... the available DB pension goes up for every year that you don't take it, but taking it before 60 is presented as a reduction in annual entitlement compared to what's available at 60, and seen as a 'penalty', while taking it after 60 it's seen as an increase.  But in both cases, the effect is the same -a higher annual payment, but paid for fewer years.

Suppose it's a 12% reduction at 57 based on the reduction for two years being 8% ...

On gross figures: Taking it at 57, for every £1000 of pension available at 60, you'd receive three years payments of £880 up front for a total of £2640.  If you waited till 60 instead, you'd miss out on this but get an extra £120 per year from then on, which would take about 22 years to match the money you could have got up front.


Tax also affects this: if you're not earning elsewhere between 57 and 67 when state pension starts, possibly makes sense to use as much of your annual tax free allowance as you can ?

On your total figures you'd get about £32.5k per year taking it early, and an extra £4500 annually for waiting to 60.  The extra £4500 would all be subject to tax at 20% ( and in later years after SP begins, a little of it maybe at 40%).  Assuming 20% tax, that's a net extra amount per year of £3600.

The early years payments would also be taxable but £12.5K each year falls within the tax allowance. So you'd pay £4k in tax on the remaining £20k, leaving a net amount of £28.5k .  That means you'd get about £85.5k over three years, and it would take about 24 years for the higher annual payments at 60 to match that,

No surprise that both calculations work out that you'd 'break even' in your early 80s, as that roughly matches life expectancy.  Your choice about which is better - more more earlier or after age 84 !

Thanks, I’ll take another look. What I’d really like is a financial advisor I can trust for a couple of hours of effort. Most only want to work if they are selling investments, no issue with that, we all have to earn a living, but I want to pay for advice knowing it’s in my interest and not for commission. 

Also, I realise I’m lucky to be having these dilemmas. 

poseidon1

af1963 said:

The psychology of this is quite interesting ... the available DB pension goes up for every year that you don't take it, but taking it before 60 is presented as a reduction in annual entitlement compared to what's available at 60, and seen as a 'penalty', while taking it after 60 it's seen as an increase.  But in both cases, the effect is the same -a higher annual payment, but paid for fewer years.

Suppose it's a 12% reduction at 57 based on the reduction for two years being 8% ...

On gross figures: Taking it at 57, for every £1000 of pension available at 60, you'd receive three years payments of £880 up front for a total of £2640.  If you waited till 60 instead, you'd miss out on this but get an extra £120 per year from then on, which would take about 22 years to match the money you could have got up front.


Tax also affects this: if you're not earning elsewhere between 57 and 67 when state pension starts, possibly makes sense to use as much of your annual tax free allowance as you can ?

On your total figures you'd get about £32.5k per year taking it early, and an extra £4500 annually for waiting to 60.  The extra £4500 would all be subject to tax at 20% ( and in later years after SP begins, a little of it maybe at 40%).  Assuming 20% tax, that's a net extra amount per year of £3600.

The early years payments would also be taxable but £12.5K each year falls within the tax allowance. So you'd pay £4k in tax on the remaining £20k, leaving a net amount of £28.5k .  That means you'd get about £85.5k over three years, and it would take about 24 years for the higher annual payments at 60 to match that,

No surprise that both calculations work out that you'd 'break even' in your early 80s, as that roughly matches life expectancy.  Your choice about which is better - more more earlier or after age 84 !

Excellent analysis! Did something similar for a relative who opted to take DB pension 3 years early despite the reduced starting figure compared to age 60. In his case it would have taken around 19 years to get back the early pension payments if he deferred until age 60.

However, by doing so it effectively scuppered his intention to take a small part time job at around £22k per year. The £22k would have largely fallen within 40% tax bracket not to mention NI on top.

BikingBud

I did it as a graph for my USS projections, there was a change in Comm Factors and Early Retirement Factors from 31 Mar to 1 Apr so I modelled the 2 dates and three basic lump sum options comparing against the NPA date. 

Lines are cumulative and include lump sums, I have inflated @2.5%, USS are capping inflation, and as can be seen it takes until around late 2051 for the USS NPA Nominal payment to cross over with the other lines. 



Not sure if that was the correct way to do it but looked reasonably robust to me.