should i take an old DB pension now or leave it?

sadexpunk

hi
been talking to some old workmates who have taken their frozen pension early as they say theyve done the sums and it works out better for them NOW, and only starts working out better to have left it until retirement date once they hit 80ish, which they say theyre not too bothered about as theyll have other pensions by then, inc state pension.  they took theirs as soon as they hit 55 so they get monthly pension now even tho still at work (pension changed from DB to DC) but..... they obviously pay 25% tax on their payments.

for context, im 60 and left this company 15 years ago.  i get the annual statements which never seem to grow by much, but rather than just take their word for it i thought id ask advice on here.

its an old engineering pension, no big numbers involved, but the statements say......

in 2019 it would have paid £5950 at 65 (2029)

2020 forecast – £6101 in 2029

2021 – £6186 

2022 – £6496

2023 – £6843

2024  – £7200 at 65

so in 5 years its grown about £1000 which doesnt seem great.

if i take it now i can either get £5788pa or £28,000 lump sum and £4211pa

leave it 5 years til 2029 when im 65 its £7200pa or £33,500 lump and £5000.

im not clever enough to work it out to nth degree but ive worked out figures for getting to 80 years old.  any lump sum im thinking to either add to a current SIPP or a current S&S ISA as i dont need it now, and id be confident that the cash would grow more in a SIPP/ISA than leaving it in for 5 years.

accounting for 25% tax loss on any payments until 65 i think ive worked out that id have had £75,000 in my hand either way at 80 years old, but im told the payments grow more with inflation once i take it rather than low growth by leaving it in at that poor % rate.

do you reckon those figures vaguely rack up?  bound to be out by a bit but i just reckon that by taking the pension now and sticking it in a SIPP or ISA until i do actually retire then it would gain me more money than leaving it in.

to be clear, i dont want the money to spend now, id invest it.

and if i take it now, is there any advantage to either a SIPP or ISA?  im not very financially minded but i hear that put it in a SIPP te government add 20%, but then its taxed when you take it out.  or ISA its just tax free to take out.  so much of a muchness?

my idea is to retire at 65 and try to live the best i can with monthly payments, i dont hanker after anything that a lump sum would get me.  if i took out a lump sum it would purely be financially based to make more money somehow if thats possible.

i have a current DB pension with current employer, and like i said, a S&S SIPP which i created from amalgamating a few rubbish DC pensions.  its only about £120,000 tho, so im never going to be rich :-)

i hope ive given enough information, id be grateful if you can let me know if my thinking is flawed please.

Dazed_and_C0nfused

hi
been talking to some old workmates who have taken their frozen pension early as they say theyve done the sums and it works out better for them NOW, and only starts working out better to have left it until retirement date once they hit 80ish, which they say theyre not too bothered about as theyll have other pensions by then, inc state pension.  they took theirs as soon as they hit 55 so they get monthly pension now even tho still at work (pension changed from DB to DC) but..... they obviously pay 25% tax on their payments.

for context, im 60 and left this company 15 years ago.  i get the annual statements which never seem to grow by much, but rather than just take their word for it i thought id ask advice on here.

its an old engineering pension, no big numbers involved, but the statements say......

in 2019 it would have paid £5950 at 65 (2029)

2020 forecast – £6101 in 2029

2021 – £6186 

2022 – £6496

2023 – £6843

2024 (take it now) – £7200

so in 5 years its grown about £1000 which doesnt seem great.

if i take it now i can either get £5788pa or £28,000 lump sum and £4211pa

leave it 5 years til 2029 when im 65 its £7200pa or £33,500 lump and £5000.

im not clever enough to work it out to nth degree but ive worked out figures for getting to 80 years old.  any lump sum im thinking to either add to a current SIPP or a current S&S ISA as i dont need it now, and id be confident that the cash would grow more in a SIPP/ISA than leaving it in for 5 years.

accounting for 25% tax loss on any payments until 65 i think ive worked out that id have had £75,000 in my hand either way at 80 years old, but im told the payments grow more with inflation once i take it rather than low growth by leaving it in at that poor % rate.

do you reckon those figures vaguely rack up?  bound to be out by a bit but i just reckon that by taking the pension now and sticking it in a SIPP or ISA until i do actually retire then it would gain me more money than leaving it in.

to be clear, i dont want the money to spend now, id invest it.

and if i take it now, is there any advantage to either a SIPP or ISA?  im not very financially minded but i hear that put it in a SIPP te government add 20%, but then its taxed when you take it out.  or ISA its just tax free to take out.  so much of a muchness?

my idea is to retire at 65 and try to live the best i can with monthly payments, i dont hanker after anything that a lump sum would get me.  if i took out a lump sum it would purely be financially based to make more money somehow if thats possible.

i have a current DB pension with current employer, and like i said, a S&S SIPP which i created from amalgamating a few rubbish DC pensions.  its only about £120,000 tho, so im never going to be rich :-)

i hope ive given enough information, id be grateful if you can let me know if my thinking is flawed please.

Why do you think it's frozen?  Deferred DB pensions don't "grow" in an investment sense, they usually have an annual inflation related increase.  Which you seem to be getting despite claiming its frozen.

Is what others are doing important to you?

25% tax is unusual.  Well, actually impossible as a direct tax rate.  Do you mean 20% or are they Scottish resident?

Is the annual increase fixed, capped or linked to a specific inflation rate such as CPI?

25% is "added" to a relief at source contribution to a SIPP.

Are you confident your investment choices would beat the annual increases your scheme provides?

sandsy

DB pensions aren't comparable to a SIPP or an ISA. SIPPs and ISAs are a pot of money which can grow depending on how they are invested. But a DB pension promises a specific level of income, based on the pension scheme rules. After you stop accruing new benefits (e.g. if you stopped working for the sponsoring employer), legislation sets out minimum increases that apply to the accrued income. The scheme rules may be more generous.

When you start taking a DB pension, it will usually increase each year too, in line with the scheme rules. As you don't know what those increases will be ( as they are usually linked to inflation with limits), it's hard to know the crossover point.

Suggest you do a bit more research to understand your DB pension.

p00hsticks

sadexpunk said:

its an old engineering pension, no big numbers involved, but the statements say......

in 2019 it would have paid £5950 at 65 (2029)

2020 forecast – £6101 in 2029

2021 – £6186 

2022 – £6496

2023 – £6843

2024 (take it now) – £7200

It would appear that the normal retirement age (NRA) for this is 65 - is this correct ? (I'm taking that from the fact that you say the majority of the figures quoted above are for taking it at that age). 

So what makes you think it would pay £7200 if you take it now at age 60 ?
 Usually you would expect to see a significant reduction in that figure for taking it five years before NRA.

sadexpunk

"Why do you think it's frozen?"
sorry, poor choice of words.  i suppose i just meant nothing gets paid into any more.

"Is what others are doing important to you?"
not personally no, only as a point of reference and advice given to me that its a poor pension and i could make more by taking it now and investing elsewhere.  ie, that even by paying tax on 5 years worth of payments, i could still make more with it than by leaving it where it is for 5 years at a poor growth rate.

"25% tax is unusual.  Well, actually impossible as a direct tax rate.  Do you mean 20% or are they Scottish resident?"
sorry a typo, yes 20%.

"Is the annual increase fixed, capped or linked to a specific inflation rate such as CPI?"
if you mean the payments theyre getting now, i believe its linked to CPI which is why they tell me that CPI growth is higher than my last 5 years forecast figures.

"Are you confident your investment choices would beat the annual increases your scheme provides?"
no, it looks close.  closer than what they believe it to be i think.  maybe because they took it out at 55, so more growth than id get now, 5 years later than they took it out.  thats why i came on here, to ask for expert thoughts on my figures.  if its really close ill probably leave it, but just wanted advice on whether my thinkings flawed.
they tell me that theyve done the sums and its about 80 years of age where it starts being worth more to have left it in.  id be happy if thats the case and would take it now as id prefer more available to me now in the 'early years' than at 80 when ill have SP and another DB pension too.

"The scheme rules may be more generous."
they tell me its capped at 2.5%.  im not very good with small print.  also not very good at maths, so would someone more knowledgeable be able to tell me the growth rate from my annual statement figures please? ^^^

"It would appear that the normal retirement age (NRA) for this is 65 - is this correct ?"
yes thats correct.

"So what makes you think it would pay £7200 if you take it now at age 60 ?
 Usually you would expect to see a significant reduction in that figure for taking it five years before NRA."
sorry, my mistake.  ive edited OP.  its £5788 if i take it now.

thank you very much for your time.

bjorn_toby_wilde

So 5% reduction for every year you take it early - taking at 60 means you only get 75%.  Put it another way, every year you leave it you get 5% more.

You need to know how it’s revalued every year until you take it (usually that would be inflation using RPI or CPI capped at 5%) and how it’s revalued once it’s in payment.  That might be the same or it might be that different portions of the pension are revalued in different ways. For example, in one of my pensions the pre-1997 portion increases are purely discretionary and the company has never increased them.

After that it really is down to you to do the maths on what the crossover point is and make the decision. Personally I’m leaving one of mine until I’m 65. I don’t need the money now and a 5% reduction for every year taken early is too much for me.

As for the lump sum, it may be a good thing or not depending on commutation factor (how much pension you give up for how much lump sum) and the rate of increase of the pension in payment. I took the lump sum on one of mine because the commutation factor was good (28:1 from memory) and the rate of increase was pretty poor.

Ask for some of the detail above from the company and post again. You may get some more help with more details.

sadexpunk

"So 5% reduction for every year you take it early - taking at 60 means you only get 75%.  Put it another way, every year you leave it you get 5% more."
that doesnt seem too bad put like that.  altho im sure my current SIPP performs better than that (im at work at present so cant access details to check).  as i mentioned, im purely looking at investment potential.  as in whats going to be available to me from the age 65.  end goal is to have a comfortable, moderate lifestyle post retirement and still be able to go to crete twice a year.  that may be pushing it  
so if im losing 5% per year by taking it early, can i make it accrue more than 5% somewhere else.

"You need to know how it’s revalued every year until you take it (usually that would be inflation using RPI or CPI capped at 5%) and how it’s revalued once it’s in payment.  That might be the same or it might be that different portions of the pension are revalued in different ways."
the figures for this are in each statement, there are 3 elements to it, all different as you say.  one of these elements states that it will not grow, and further statements show that to be true.

" I don’t need the money now and a 5% reduction for every year taken early is too much for me."
interesting.  sounds the same as me then, i dont need it now.  and you dont believe that its worth re-investing yours elsewhere, taking a 20% hit on early payments and finding something better?  written down like that i get the feeling im better off leaving it.  as i mentioned before, im rubbish at financial matters and maths, so couldnt work out that my pension is growing by 5%.  the figures seemed very low when i think of how my SIPP is performing say.

"As for the lump sum, it may be a good thing or not depending on commutation factor (how much pension you give up for how much lump sum) and the rate of increase of the pension in payment. I took the lump sum on one of mine because the commutation factor was good (28:1 from memory) and the rate of increase was pretty poor."
i dont understand CF, so i think i need to go googling.  as previously stated, i dont NEED the money, and even at 65 i dont hanker for a motorhome or anything spendy, so taking a lump sum would be a decision based purely on 'will it help me go to crete twice a year.  can i make it work better in a SIPP/ISA' say.

"Ask for some of the detail above from the company and post again. You may get some more help with more details"
apologies, i wouldnt know what to ask them.  im not sure what information im short of.  they may have already provided everything i need to know in the annual statements, the shortfall is in my understanding.

thank you

Sarahspangles

It sounds like yours is a defined benefit pension which is index-linked with a cap.  If it is capped at 2.5% as you think then its future buying power will not have kept pace with inflation through the recent couple of years that have had high inflation.  Your friends who had started their pensions may have lost less overall if they had taken a lump sum and had some payments already extracted from the pension. But whether their money actually retained its buying power in the face of inflation depends where and how they invested it. 

Inflation, the Bank of England base interest rate and bank and building society rates for mortgages and savings are all interlinked. The BoE increased the base interest rate to get inflation down and savings interest rates increased as well.  But the BoE are now reducing base rates and savings rates are falling. For a long time prior to the cost of living crisis, the interest you could get on cash savings was below inflation.  We could end up back there relatively quickly.

So taking a short term view that you could do better with savings than leaving your cash in a pension may not pay off.  Taking money out and moving it into investments exposes you to risk as investments can be volatile.

I wouldn't pay too much attention to what other people are doing. If and when they aren't doing so well, it's likely you won't hear about it!

Retireinten

Very simply, using the higher pension amounts and no inflation... you will receive just under £29k gross, between ages 60 and 65 if you take it early. By contrast you will receive an extra £1,400 a month from 65 if you take it at that age. So that's 20 years or so of higher pension payments from 65 to 'match' your 5 years of extra pension income if you had taken it at 60.

There are other factors obviously.  You will pay tax on your pension at 60 and probably at 65, but will you pay more tax at 60 given you still have earned income? If yes, how does this change the figures?

Does accessing this pension limit how much you can save into pensions whilst working? 

Do you have enough pension in your later years or do you need that £1,400? You could invest the £5,788 pension from 60 and use it as a drawdown pot at 65 onwards.

sadexpunk

*hurriedly doing some sums before work starts in earnest  

"By contrast you will receive an extra £1,400 a month from 65 if you take it at that age. "
i assume you mean per year!

thanks

sadexpunk

" you will receive just under £29k gross, between ages 60 and 65 if you take it early. By contrast you will receive an extra £1,400 a month from 65 if you take it at that age. So that's 20 years or so of higher pension payments from 65 to 'match' your 5 years of extra pension income if you had taken it at 60."
right, and converting that to net, or cash in my hand, id get £23,200 if taking it early.
struggling with the alternative sums as itd be part taxed, as per.......

"There are other factors obviously.  You will pay tax on your pension at 60 and probably at 65, but will you pay more tax at 60 given you still have earned income? If yes, how does this change the figures?"
yes, therell be some tax paid as id be drawing this pension, plus a firefighters DB pension that id take at 65.  i joined late so sadly not the golden pension that some of my mates are taking now at 55 :-( 
forecasts show that id get circa £12000 at 65, so ill be above the tax threshold with both pensions combined but obviously only paying tax on the bit above the £12.500 theshold is it?  

"Does accessing this pension limit how much you can save into pensions whilst working?"
nah, sadly i shant be bothering anyone with any high figures

"Do you have enough pension in your later years or do you need that £1,400?"
not sure, thats what i need to look into.  what i take now vs what ill have at 80+
thats why im looking into trying to make it 'worth more' in some way when i take it.  altho if by later years you mean 80+, then i guess ill be 'slowing down' and will also have SP, so id rather take money between 65-80 if you see what i mean.

"You could invest the £5,788 pension from 60 and use it as a drawdown pot at 65 onwards."
which is exactly what i need to look into, compared to £1400 extra per year if left alone.  either by investing that £5788 (£4630 after tax) for the next 5 years as i get it, or by investing a £28,000 pot plus £4211 (£3368 after tax) per year.

thanks