Drawing pension at earliest opportunity

JoyOvenGlovesDivision

Hello. In a previous job I was paying into a Defined Benefit scheme for several years. We were then moved onto a Defined Contribution scheme. I no longer work there so I have a DB and DC pension that I am no longer paying into. In a year I will be 55 and will be able to start drawing from these pensions. For the DB scheme, my understanding is that drawing it at 55 would result in a reduced amount (compared with 67). But I would gain the extra 12 years of payments. So, waiting until 67 would only benefit me financially if I lived long enough to draw enough of the higher amount to overtake the 12 years I would have missed.  Is this a correct interpretation? I think that I should start claiming at the earliest opportunity but I'm wondering if I'm missing something important.
The DC scheme is less complicated. The amount I have saved there can go up or down according to where it's invested, so that's a straightforward call on my part, I think. But again, please let me know If I'm missing something.
My thinking is to start drawing the DB as soon as possible and to leave the DC to (hopefully) increase in value. Does this sound right?
Many thanks in advance.

Brie

I would have done it the other way - start taking the DC in drawdown if it doesn't cause any other pension issues (if still working and contributing it might limit the tax free element?).  And leave all the lovely DB benefits to max out for when you can take them in full.

Thing to watch out for is obviously if something might take you into a higher tax bracket.

Dazed_and_C0nfused

JoyOvenGlovesDivision said:

Hello. In a previous job I was paying into a Defined Benefit scheme for several years. We were then moved onto a Defined Contribution scheme. I no longer work there so I have a DB and DC pension that I am no longer paying into. In a year I will be 55 and will be able to start drawing from these pensions. For the DB scheme, my understanding is that drawing it at 55 would result in a reduced amount (compared with 67). But I would gain the extra 12 years of payments. So, waiting until 67 would only benefit me financially if I lived long enough to draw enough of the higher amount to overtake the 12 years I would have missed.  Is this a correct interpretation? I think that I should start claiming at the earliest opportunity but I'm wondering if I'm missing something important.
The DC scheme is less complicated. The amount I have saved there can go up or down according to where it's invested, so that's a straightforward call on my part, I think. But again, please let me know If I'm missing something.
My thinking is to start drawing the DB as soon as possible and to leave the DC to (hopefully) increase in value. Does this sound right?
Many thanks in advance.

Personally I wouldn't say you are drawing anything, it is more akin to deferred salary. 

There isn't a pot of money for you to use up like there is with a DC pension.

But the bit highlighted in bold is broadly correct yes.

Have you checked what the reduction is for taking it 12 years early?  Just because you can take it early doesn't mean that will be the best outcome.

Does this DB have an automatic PCLS and if so are you happy with getting significantly less tax free cash?

All the above is assuming that the DB schemes normal pension age is 67.  You haven't explicitly  said that hence the assumption.

xylophone

Have you checked your statement of deferred DB benefits?

GMP (pre/post 1988)? Excess over GMP?

Have you read your scheme guide for details of Normal Scheme Pension/Retirement Age?

How does your pension revalue in deferment?

Actuarial reduction for taking pension pre NSPA?

Have you checked your State Pension Forecast?

https://www.gov.uk/check-state-pension

Sarahspangles

JoyOvenGlovesDivision said:

Hello. In a previous job I was paying into a Defined Benefit scheme for several years. We were then moved onto a Defined Contribution scheme. I no longer work there so I have a DB and DC pension that I am no longer paying into. In a year I will be 55 and will be able to start drawing from these pensions. For the DB scheme, my understanding is that drawing it at 55 would result in a reduced amount (compared with 67). But I would gain the extra 12 years of payments. So, waiting until 67 would only benefit me financially if I lived long enough to draw enough of the higher amount to overtake the 12 years I would have missed.  Is this a correct interpretation? I think that I should start claiming at the earliest opportunity but I'm wondering if I'm missing something important.

It's worth a closer look at the overall DB package. People often say "But what if I die in the first year of retirement" without understanding that many schemes guarantee to pay out a certain amount as a lump sum in this scenario.  Basically paying out what would have been received if you'd made some specific age like 70. A 'gotcha' for early retirees would be if the pension scheme's guarantee only lasted for e.g. five calendar years, given we're less likely to go at 60 than 70. There are so many different ways that DBs can be drafted it's not possible to generalise.

The other consideration is that a DB may have good inflation-proofing and be hands-off in needing no management on your part. Lots of people find admin harder as they age so having a decent level of State and DB pension automatically paying into your account is a positive.

For either pension, there is no point in accessing them if you don't really have plans for the money, particularly if you are still working and they might take you close to paying higher rate tax. With a DC pension though, if you have plenty of headroom (and won't want to pay in more than £10k per annum into a pension in future) you could start to access the pension and use a S&S ISA to invest in the same type of funds. With the DB pension you need to be confident you can invest it and make enough to keep pace with inflation so it doesn't lose buying power.

Marcon

JoyOvenGlovesDivision said:

Hello. In a previous job I was paying into a Defined Benefit scheme for several years. We were then moved onto a Defined Contribution scheme. I no longer work there so I have a DB and DC pension that I am no longer paying into. In a year I will be 55 and will be able to start drawing from these pensions. For the DB scheme, my understanding is that drawing it at 55 would result in a reduced amount (compared with 67). But I would gain the extra 12 years of payments. So, waiting until 67 would only benefit me financially if I lived long enough to draw enough of the higher amount to overtake the 12 years I would have missed.  Is this a correct interpretation? I think that I should start claiming at the earliest opportunity but I'm wondering if I'm missing something important.

Not sure what's making you think that and there's not enough information in your thread to work out why?

LHW99

I don't think taking the DB pension would make you subject to the MPAA (f that is important) whereas taking taxable cash from a DC would.

Albermarle

For the DB scheme, my understanding is that drawing it at 55 would result in a reduced amount (compared with 67). But I would gain the extra 12 years of payments. So, waiting until 67 would only benefit me financially if I lived long enough to draw enough of the higher amount to overtake the 12 years I would have missed.  Is this a correct interpretation? I think that I should start claiming at the earliest opportunity but I'm wondering if I'm missing something important.

It varies from scheme to scheme but in very general terms the reduction for taking it early is calculated on the basis that you will live to an average age.
In other words if you take a reduced pension at 55 or the full pension at 67, then if you live to an average age you will be pretty equal in how much money overall you will receive.

squirrelpie

AIUI defined benefit schemes mostly increase with some measure of inflation both before you put them into payment and afterwards. But the particular measure of inflation used can differ in the two situations as well as between pension schemes. There may be caps on rates, for example. So calculating the breakeven may be more complicated than just will I live to an average age. Whether any possible difference matters is another question entirely!

Hopefully somebody will correct me if I've misunderstood.

Albermarle

squirrelpie said:

AIUI defined benefit schemes mostly increase with some measure of inflation both before you put them into payment and afterwards. But the particular measure of inflation used can differ in the two situations as well as between pension schemes. There may be caps on rates, for example. So calculating the breakeven may be more complicated than just will I live to an average age. Whether any possible difference matters is another question entirely!

Hopefully somebody will correct me if I've misunderstood.

You are right that exactly calculating the break even is not simple.
However as a general rule, you do not really lose or gain much either way , by taking it earlier or later, assuming death at the average age for your gender .

GunJack

BUT....it's a DB, so the total amount of money paid out isn't really the point, it's the level of income it provides that's the important bit. Other posters have mentioned the inflation increases before & after commencement, but no-one's mentioned that you could be reducing the income by around 48-60% of it's current value if you take it 12 years early, e.g. if the current value is 10k pa and you take it 12 years early, you may only get 4k pa. Also, there are 12 years for that 10k pa to be growing with (whatever method the scheme uses for) inflation in deferrement. Taking a DB so early really is a double-whammy in terms of the level of income it provides.

Do you really need any more income at the moment? Are you currently working? Will the DB if taken early put you in a higher tax bracket? Much to consider before rushing in "just because you can".....