Why you should take your pension at 55

Marcon

theoldmiser said:

Exodi said:

My wife has a DB civil service alpha pension and I'm pretty sure taking the pension earlier than the standard pension age absolutely decimates the annual pay-outs. I think it was something extreme like losing nearly half the amount for taking it at the minimum retirement age, but I don't have the letter in front of me.

My view is pretty identical to Marcon's (sorry, didn't read the whole thread but I'm guessing the responses are similar).

"decimates" means "to reduce by one tenth".

Oxford Dictionary definition: 'kill, destroy, or remove a large proportion of'.

Historical usage: 'kill one in every ten of (a group of people, originally a mutinous Roman legion) as a punishment for the whole group.'

zagfles

Grumpy_chap said:

theoldmiser said:

That is not correct. You're saying that the amount of pension I receive each year (£7,200) is the same as 3% of £11,500... I don't think so.

Here are the figures for you, even IF that £11.500 goes up with inflation

I think you are conflating amounts expressed in "today's money" with amounts adjusted for inflation.

I think you are saying:
 - retire at age 55 and receive £7.2k per year in "today's money"
 - retire at age 67 and receive £11.5k per year in "today's money"

So, any comparisons can be assessed in "today's money" and can ignore inflation.
 - If you retire at age 55 and take £7.2k per year in "today's money", you will receive £230k by age 87
 - If you retire at age 67 and take £11.5k per year in "today's money", you will receive £230k by age 87
It all then becomes a judgement that you need to make about whether you will depart for the next world younger or older than age 87.
There are other factors such as whether you will suffer more income tax by taking the money younger.

I don't see any need to apply inflation to the above comparison as both annual payments will be similarly affected by inflations (except DB scheme in payment and in deferral do not always follow the same indices as each other - this can be another complication to consider).

Obviously, the above comments only refer to a DB scheme.  A DC scheme would have wholly different considerations in assessing the early / normal retirement age options - in particular, funds retained in a DC scheme may well grow and out perform the inflation, so making the future "tomorrow's money" higher in "today's money".

Not an issue in the LGPS, but most private sector schemes cap inflation increases, but deferment increases capped over the entire period whereas in-payment increases are capped each year.

What that means is that high inflation in deferment isn't a problem as long as average inflation over the entire deferred period is below the cap. But once in payment high inflation will permanently dent the pension. 

So someone with a private sector scheme they left in say 2010 if they took the pension in 2020 it would have suffered a real terms reduction of probably about 10% due to the cap on inflation increases in the last few years. But if they'd deferred till 2025 they wouldn't as the average inflation over that 15 years would have been under the cap. 

Cobbler_tone

I’ve done the exact model the OP is alluding to. It 100% depends on your circumstances. It could be a means to retiring, so you take it as soon as it is needed (as part of a strategy) and at some point will be ‘worse off’ than not taking it until later. Mine is something like £15k PA now and £25k PA (in today’s money) at 65 in 10 years. I know the sweet spot I intend to take mine, to coincide with retirement. Pushing my income from £65k to £80k now wouldn’t do me any good.

af1963

Also, I'd also do this analysis without compensating for inflation. If it's an indexed pension the purchasing power of every payment stays the same.  If you add inflation, it makes the later payments count for more than the early ones.  They aren't really more valuable.  Doing it based on purchasing power would push your 'break even date' a bit further into the future. 

At 3% inflation it is not a big effect, but here's a more extreme example.

  Imagine yourself at 65 with an indexed pension in 1920 Germany. Prices and wages and pensions have been stable for 10 years.  Your pension pays 1000 marks per year, and a pint of good German beer costs 1 mark. So you can buy 1000 pints. 

Your twin brother took his identical pension 10 years earlier at 55, at an actuarially reduced 500 marks.  

By 1921, a year of sudden hyperinflation has increased your pension to 1 million marks per year, and your brother's pension to 500,000 - but a beer now costs 1000 marks. You can still buy 1000 pints with your pension.

Now - when would you be better off than your twin brother?  Looking at it in money terms including inflation, he has had 11 years of 500 marks ( 5500) then 1 year of 500,000.   You get 1 year of 1000 marks followed by 1 year of 1 million.  It looks like you are already better off ...you have had 1.1 million and he has had 0.5055 million ... 

But you both spend your pensions on beer. The nominal value is irrelevant.  He has had 500 pints for 12 years (total 6000 pints) and you have had 1000 pints for 2 years ( total 2000 pints).  He is still ahead of  (and drunker than) you. It will take you a few more years to catch up in real, drinkable, beer terms.

AlanP_2

No one size fits all answer, far more nuanced and complicated.

Pre 2008 LGPS service is subject to different pension rules compared to the 2008-2014 scheme and the 2014 onwards CARE scheme.

Which one are you talking about OP?

I had a private sector DB scheme that was deferred and receiving 7.5% pa increases, once the pension commenced increases were ZERO percent and have been for all but 1 (when it was 1%) of the last 20 years.

Would your blanket advice apply to me?

Marcon

Really not worth posting any more. OP simply hasn't grasped the concept of 'actuarially neutral' early retirements and there's no point wasting time explaining it when googling will give them a perfectly good explanation, were they prepared to read and learn.

Archerychick

theoldmiser said:

This only applies to pensions which you are no longer paying into.

For example: if you worked for a company for ten years and left when you were 35, or 45, or 50, and are now working somewhere else, and have a new pension with your new employer - you should start taking your pension from your previous employer AS SOON AS YOU CAN. Which, for many pensions, is the age of 55.

I have spoken to two people in the last two years about pensions, and found out from them that they had worked at a company for twenty years, but changed jobs ten years ago, and they are now 60 years old, and I asked them if they had started taking their old company pension when they were 55. They said "Oh no, I thought I should wait until I retire, which will be when I'm 66". Then I told them that they had lost five years of that pension money already, and I told them that it isn't going to be increasing by anything more than inflation each year, because they aren't paying anything into it each month.

I know many people who are over 55, who don't even want to talk about their pensions, as if it's a taboo subject. I started planning my retirement when I was 45, and I retired at 55, taking my pension immediately. It's incredible that so many people have pensions which they SHOULD start taking at 55, because they are no longer paying into them, and if they wait until they actually retire, which could be at 66 or 67, they will literally lose ten years of that pension, it's crazy.

This is not true! If I do not take my pension at 55 (or 57 soon), it will remain invested and therefore hopefully continue to grow in value. Why would I draw down from a pension if it will push me into the 40% tax bracket - this makes no sense either!

This would apply whether I was still paying into it or not…..

Cobbler_tone

I think there is enough here to show why people normally 'shouldn't' take their pension at 55! 

If I take mine at 55 vs say 57, on paper it might take me until 85 until I technically receive more money. However, there are just so many caveats depending what scheme you are in and your personal circumstances. 'Not paying in anymore' doesn't cover it. Tax liability is huge, reduction factors, linked growth....etc, etc all play a part.

The OP has taken his stance and I doubt anyone would take action based on the advice here, although who knows what friends/colleagues have. 

I personally only advise on the impact of making different decisions, even then only if I confidentially understand them.
Maybe the OP has realised that no matter how many times you say something is true, it doesn't make it true.

pterri

I think it’s been said in the thread but to reiterate, it’s a completely different scenario depending on whether it’s a DB or or DC pension. 

FIREDreamer

I took my private sector DBs early in 2019 and 2020 due to lifetime allowance issues. With no lifetime allowance I would have kept them til NRD of 62 and 60 respectively.