Question about taking small DB pension early

handful

I have a small DB pension available for me to take at any time, the NRA is 65 and I am currently 62. The most recent figures I've been quoted is, take now and receive £3601pa without taking any TFC or £4147pa if I leave it until 2027, again with  no TFC .

Simple maths tells me I would need to be drawing for at least 20 years before being worse off but there are a few nuances to consider and I was wondering if there is a calculator available that would take these into account?

For example, I currently draw down my TA via UFPLS from my SIPP and top up with other savings so pay no IT currently. therefore, I could take this income and leave the equivalent amount in my SIPP and therefore be paying no tax on the DB pension until SP kicks in in 2029.

There is also the TFC factor to consider. If I take it now I would get £17858 and if I take it at 65 would get £20075.

I think I've decided not to take any TFC and leave this DB pension to give maximum returns with index linking etc. I believe that whilst I'm not taking benefits the index linking isn't subject to any limits but after drawing it's up to a max of 5% PA.

Is there anything else I need to factor in?

TIA.

Baldytyke88

handful said:

Simple maths tells me I would need to be drawing for at least 20 years before being worse off but there are a few nuances to consider and I was wondering if there is a calculator available that would take these into account?

For example, I currently draw down my TA via UFPLS from my SIPP and top up with other savings so pay no IT currently. therefore, I could take this income and leave the equivalent amount in my SIPP and therefore be paying no tax on the DB pension until SP kicks in in 2029.

There is also the TFC factor to consider. If I take it now I would get £17858 and if I take it at 65 would get £20075.

You should be thinking about income tax. Will claiming put you over the threshold for 20/40% income tax, do you already have taxable income?

I believe 25% of the pension will be tax-free, whether you get a lump sum or not.

DT2001

Were you contracted out and if so is there a GMP element? Not sure when you accrued this pension and if this is relevant. If there is any GMP there could be franking if taken early but would depend on terms of the scheme.

TFC  - what is the commutation rate?
If you commute part of your pension it often doesn’t affect the amount paid to your OH (assuming you have one and they live longer than you). 

I think you will have to sort your own spreadsheet to work out the likely benefit/loss of taking at any particular time.

The key is possibly your expected expenditure - are you doing any bucket list trips etc.

Phossy

Just focussing on the DB pension, it looks like the breakeven point is just under 20  years should you take the pension now (assuming you have 3 years left before NRA) That's without taking any tax into account (ie assumes the additional payments fall into the same tax bracket). If that is not the case then the breakeven point will be even higher than 20 years, but you'll need to model it in a spreadsheet to get the right number.

The breakeven may even be the same if you take the tax free cash from the DB, though you will have to run the numbers.

GMPEqCommenter

handful said:

I have a small DB pension available for me to take at any time, the NRA is 65 and I am currently 62. The most recent figures I've been quoted is, take now and receive £3601pa without taking any TFC or £4147pa if I leave it until 2027, again with  no TFC .

Simple maths tells me I would need to be drawing for at least 20 years before being worse off but there are a few nuances to consider and I was wondering if there is a calculator available that would take these into account?

One other nuance to think about is how the pension revalues whilst you haven't started taking it yet vs how it increases once it's in payment. Do you know if the £4,147 figure includes an assumption for revaluations between now and age 65, and if so at what rate?

There will be (for example), a difference between the situation where a figure of £3,601 at 62 receives no increases between 62 and 65 (and is therefore still £3,601 at 65) and one where it receives Fixed 5% increases between 62 and 65 (and is therefore £4,169 by 65) - the latter obviously makes taking the early retirement pension more desirable (although given the figures, I'm going to guess you don't get Fixed 5% pension increases unless you also get high revaluations before retirement which aren't included in the £4,147 figure).

There is also the issue that usually having money now is more valuable than having the same £ amount of money in 20 years time (but if you are getting increases on the pension, the gap will also be increasing...)

Marcon

handful said:

I think I've decided not to take any TFC and leave this DB pension to give maximum returns with index linking etc. I believe that whilst I'm not taking benefits the index linking isn't subject to any limits but after drawing it's up to a max of 5% PA.

Is there anything else I need to factor in?

TIA.

Find out for sure - it's important information.

Baldytyke88 said:

handful said:

Simple maths tells me I would need to be drawing for at least 20 years before being worse off but there are a few nuances to consider and I was wondering if there is a calculator available that would take these into account?

For example, I currently draw down my TA via UFPLS from my SIPP and top up with other savings so pay no IT currently. therefore, I could take this income and leave the equivalent amount in my SIPP and therefore be paying no tax on the DB pension until SP kicks in in 2029.

There is also the TFC factor to consider. If I take it now I would get £17858 and if I take it at 65 would get £20075.

You should be thinking about income tax. Will claiming put you over the threshold for 20/40% income tax, do you already have taxable income?

I believe 25% of the pension will be tax-free, whether you get a lump sum or not.

Not clear if you're referring to the DB pension, but I think you are. If so, there is a one-off opportunity to take a tax free lump sum at the point OP starts to take their benefits from the DB scheme, but that's it in terms of tax free cash from that source.

handful

Baldytyke88 said:

handful said:

Simple maths tells me I would need to be drawing for at least 20 years before being worse off but there are a few nuances to consider and I was wondering if there is a calculator available that would take these into account?

For example, I currently draw down my TA via UFPLS from my SIPP and top up with other savings so pay no IT currently. therefore, I could take this income and leave the equivalent amount in my SIPP and therefore be paying no tax on the DB pension until SP kicks in in 2029.

There is also the TFC factor to consider. If I take it now I would get £17858 and if I take it at 65 would get £20075.

You should be thinking about income tax. Will claiming put you over the threshold for 20/40% income tax, do you already have taxable income?

I believe 25% of the pension will be tax-free, whether you get a lump sum or not.

Thanks, I am as I stated not planning to pay any income tax until SP kicks in. Before that I am just making an UFPLS of £16670 to include TFC so the remainder of my SIPP is not crystallised. As Marcon says, I have to choose whether to take TFC at the start and then it's just taxable income. I don't expect to be hitting the 40% threshold, I expect to be needing about £38-40k unless so should remain under that threshold unless there are changes going forward.

handful

Phossy said:

Just focussing on the DB pension, it looks like the breakeven point is just under 20  years should you take the pension now (assuming you have 3 years left before NRA) That's without taking any tax into account (ie assumes the additional payments fall into the same tax bracket). If that is not the case then the breakeven point will be even higher than 20 years, but you'll need to model it in a spreadsheet to get the right number.

The breakeven may even be the same if you take the tax free cash from the DB, though you will have to run the numbers.

Thanks. It gets a bit complicated trying to factor in everything and I was hoping there was a ready made tool available somewhere!

handful

GMPEqCommenter said:

handful said:

I have a small DB pension available for me to take at any time, the NRA is 65 and I am currently 62. The most recent figures I've been quoted is, take now and receive £3601pa without taking any TFC or £4147pa if I leave it until 2027, again with  no TFC .

Simple maths tells me I would need to be drawing for at least 20 years before being worse off but there are a few nuances to consider and I was wondering if there is a calculator available that would take these into account?

One other nuance to think about is how the pension revalues whilst you haven't started taking it yet vs how it increases once it's in payment. Do you know if the £4,147 figure includes an assumption for revaluations between now and age 65, and if so at what rate?

There will be (for example), a difference between the situation where a figure of £3,601 at 62 receives no increases between 62 and 65 (and is therefore still £3,601 at 65) and one where it receives Fixed 5% increases between 62 and 65 (and is therefore £4,169 by 65) - the latter obviously makes taking the early retirement pension more desirable (although given the figures, I'm going to guess you don't get Fixed 5% pension increases unless you also get high revaluations before retirement which aren't included in the £4,147 figure).

There is also the issue that usually having money now is more valuable than having the same £ amount of money in 20 years time (but if you are getting increases on the pension, the gap will also be increasing...)

The increases are not fixed but capped at 5% although I am trying to find where I saw that, just to check my understanding is right. If I just look at the period between now and my SP kicking in, I think it's a no brainer to take it  now and drawdown less from my SIPP but it's when the SP kicks in and uses all of my tax allowances where it gets complicated. I know I can then take the 25% TFC from my SIPP and use that to top up my earnings until it runs out but looking that far ahead is a bit tricky!

handful

Marcon said:

handful said:

I think I've decided not to take any TFC and leave this DB pension to give maximum returns with index linking etc. I believe that whilst I'm not taking benefits the index linking isn't subject to any limits but after drawing it's up to a max of 5% PA.

Is there anything else I need to factor in?

TIA.

Find out for sure - it's important information.

Thanks Marcon I will check. I'm pretty sure I have that right but can't find the details right now and the website on Benpal is next to uselelss.

xylophone

 I believe that whilst I'm not taking benefits the index linking isn't subject to any limits 

Are you sure of this?

What does the scheme booklet have to say about how the pension revalues in deferment?

It is almost certain that this scheme was contracted out.

Were you a member between 6/4/78 and 5/4/97?

If so, what does your statement of deferred benefits on leaving show as pre 88 GMP/post 88 GMP/excess?