Simple defined benefit pension explanation and basic strategy

af1963

I have modelled taking the DB pension at all ages from 55 to 60 (with max annual increase of 2.5% - linked to RPI) and the corresponding impact of total income at ages 80 and 85.
By 85 you have received £100k more if you took it at 60 as opposed to 55. By state pension age (67) it is marginal to take it at any age from 55 and the total income is roughly the same by then. 

I expect if you did the same modelling for taking it at 65, you'd find that (financially) that would make you 'better off' again.  But you probably can't do that and still retire earlier, as there's not enough in the DC funds to support that for 10 years. So it becomes a tradeoff between total expected money, and the ability to stop work earlier.

Another possible consideration: anything left in the DC pot is available to be inherited. The DB pension will stop after your ( and spouse's) death.

Triumph13

Cobbler_tone said:

tonydathome19 said:

Triumph13 said:

To meet your stated aims, this is probably one of those cases where you wouldn't delay taking the DB pension.  

If you were to retire in a year's time, assuming your DC had grown by the £20k you'll have contributed and that your wife is the same age as you, your numbers could look something like this:

£10k from wife's pension.  Tax free as below PA

£9.5k pa tax free by spreading wife's lump sum (£75k) and your DC TFLS (£30k) over the 11 years to your SP age.

£15.6k from your pension, excess over PA taxable

£8k pa taxable by spreading the remaining £90k from your DC over 11 years

After allowing for tax that gives you £41k pa spending money vs your target of £30 top £36k.  Once both SPs are on line that becomes £45k (£10k + £15.6 + 2 x £12k -tax).  Looking good.  The upcoming changes to allow a tapered pension in your scheme could make it even easier and let you avoid spending quite so much capital if you don't want to.

The other key question to consider though is will the survivor be okay financially after the first of you dies?

Thanks Triumph,
That is a great message and makes perfect sense. It is a clear direction to plot the spreadsheet.

After 3 major back surgeries (still good for 10k steps a day) there is no way I am waiting for 60+ just to accumulate a chunkier pot that is surplus to requirements. I also understand how many people/couples live to work but that isn't our mindset!

We do discuss the remaining party a lot and want to make sure the other is OK. Whilst I am working it is 4 x death in service. If taking the DB there is a 10k spousal pension. It is one of the considerations when looking at taking the DB out, although the CETV's have clearly plummeted of late. 

Requoting my own post as erroneous posting on another log in 

I have modelled taking the DB pension at all ages from 55 to 60 (with max annual increase of 2.5% - linked to RPI) and the corresponding impact of total income at ages 80 and 85.
By 85 you have received £100k more if you took it at 60 as opposed to 55. By state pension age (67) it is marginal to take it at any age from 55 and the total income is roughly the same by then. 

You can't just look at the £ amounts though.  You also have to consider the relative utility of money received at different ages.  After age 67, you already have plenty of money as you have two state pensions coming in as well as the two DB's.  The marginal utility of extra money at that point is relatively low.  Between now and then, things are a lot tighter.  If taking it early is the difference between being able to give up work, or having to slog on for longer, then, depending how much you enjoy your job, the utility of that early DB income stream could be massive.  Only you can answer that question.

Cobbler_tone

Triumph13 said:

Cobbler_tone said:

tonydathome19 said:

Triumph13 said:

To meet your stated aims, this is probably one of those cases where you wouldn't delay taking the DB pension.  

If you were to retire in a year's time, assuming your DC had grown by the £20k you'll have contributed and that your wife is the same age as you, your numbers could look something like this:

£10k from wife's pension.  Tax free as below PA

£9.5k pa tax free by spreading wife's lump sum (£75k) and your DC TFLS (£30k) over the 11 years to your SP age.

£15.6k from your pension, excess over PA taxable

£8k pa taxable by spreading the remaining £90k from your DC over 11 years

After allowing for tax that gives you £41k pa spending money vs your target of £30 top £36k.  Once both SPs are on line that becomes £45k (£10k + £15.6 + 2 x £12k -tax).  Looking good.  The upcoming changes to allow a tapered pension in your scheme could make it even easier and let you avoid spending quite so much capital if you don't want to.

The other key question to consider though is will the survivor be okay financially after the first of you dies?

Thanks Triumph,
That is a great message and makes perfect sense. It is a clear direction to plot the spreadsheet.

After 3 major back surgeries (still good for 10k steps a day) there is no way I am waiting for 60+ just to accumulate a chunkier pot that is surplus to requirements. I also understand how many people/couples live to work but that isn't our mindset!

We do discuss the remaining party a lot and want to make sure the other is OK. Whilst I am working it is 4 x death in service. If taking the DB there is a 10k spousal pension. It is one of the considerations when looking at taking the DB out, although the CETV's have clearly plummeted of late. 

Requoting my own post as erroneous posting on another log in 

I have modelled taking the DB pension at all ages from 55 to 60 (with max annual increase of 2.5% - linked to RPI) and the corresponding impact of total income at ages 80 and 85.
By 85 you have received £100k more if you took it at 60 as opposed to 55. By state pension age (67) it is marginal to take it at any age from 55 and the total income is roughly the same by then. 

You can't just look at the £ amounts though.  You also have to consider the relative utility of money received at different ages.  After age 67, you already have plenty of money as you have two state pensions coming in as well as the two DB's.  The marginal utility of extra money at that point is relatively low.  Between now and then, things are a lot tighter.  If taking it early is the difference between being able to give up work, or having to slog on for longer, then, depending how much you enjoy your job, the utility of that early DB income stream could be massive.  Only you can answer that question.

Triumph13 said:

Cobbler_tone said:

tonydathome19 said:

Triumph13 said:

To meet your stated aims, this is probably one of those cases where you wouldn't delay taking the DB pension.  

If you were to retire in a year's time, assuming your DC had grown by the £20k you'll have contributed and that your wife is the same age as you, your numbers could look something like this:

£10k from wife's pension.  Tax free as below PA

£9.5k pa tax free by spreading wife's lump sum (£75k) and your DC TFLS (£30k) over the 11 years to your SP age.

£15.6k from your pension, excess over PA taxable

£8k pa taxable by spreading the remaining £90k from your DC over 11 years

After allowing for tax that gives you £41k pa spending money vs your target of £30 top £36k.  Once both SPs are on line that becomes £45k (£10k + £15.6 + 2 x £12k -tax).  Looking good.  The upcoming changes to allow a tapered pension in your scheme could make it even easier and let you avoid spending quite so much capital if you don't want to.

The other key question to consider though is will the survivor be okay financially after the first of you dies?

Thanks Triumph,
That is a great message and makes perfect sense. It is a clear direction to plot the spreadsheet.

After 3 major back surgeries (still good for 10k steps a day) there is no way I am waiting for 60+ just to accumulate a chunkier pot that is surplus to requirements. I also understand how many people/couples live to work but that isn't our mindset!

We do discuss the remaining party a lot and want to make sure the other is OK. Whilst I am working it is 4 x death in service. If taking the DB there is a 10k spousal pension. It is one of the considerations when looking at taking the DB out, although the CETV's have clearly plummeted of late. 

Requoting my own post as erroneous posting on another log in 

I have modelled taking the DB pension at all ages from 55 to 60 (with max annual increase of 2.5% - linked to RPI) and the corresponding impact of total income at ages 80 and 85.
By 85 you have received £100k more if you took it at 60 as opposed to 55. By state pension age (67) it is marginal to take it at any age from 55 and the total income is roughly the same by then. 

You can't just look at the £ amounts though.  You also have to consider the relative utility of money received at different ages.  After age 67, you already have plenty of money as you have two state pensions coming in as well as the two DB's.  The marginal utility of extra money at that point is relatively low.  Between now and then, things are a lot tighter.  If taking it early is the difference between being able to give up work, or having to slog on for longer, then, depending how much you enjoy your job, the utility of that early DB income stream could be massive.  Only you can answer that question.

Exactly what I thought. I don’t think £100k is a lot of difference between the age of 55 and 85 if it means retiring up to 5 years earlier and the boost of state pensions at 67. Especially the more you get the more tax you are likely to pay. 

It’s a classic case of why so many people think they have to work to 65 (or until they drop) when with the right planning they don’t.

bjorn_toby_wilde

af1963 said:

Saw a friend's DB pension which had rules for annual increases (on one part of the deferred pension) something like:

Before taking the pension: annual increase of a fixed 6% 
After taking the pension: no annual increase

Taking it early in that case would have frozen that part of the pension at its level at that time, as well as incurring the actuarial reduction for taking it at 55 or 60.  So it's worth checking what your particular scheme does for increases, both pre and post retirement. If one is better than the other, it might make it more suitable to take it early, or to wait.

That’s a good point that’s often overlooked with private sector DB pensions. Annual increases aren’t always that great. In the case of one of my pensions, all of the pension accumulated pre1997 has annual increases only at the discretion of the company.

My old employer was taken over by a US multinational and they have never given a discretionary increase since. It influenced my decision to take the maximum lump sum.

Qyburn

Can you forego the DB pension lump sum in exchange for higher annual amount?