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

pterri

poseidon1 said:

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.

poseidon1 said:

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.

Either way, I’m off next year. I can start drawing the DB anytime after that. Good advice everyone.