Drawing pension at earliest opportunity

bjorn_toby_wilde

GunJack said:

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".....

A very good point.

Just to add that Albemarle’s point is generally correct but, as a deferred member, the terms may be very different to retirement from active service (you indicated you had left the company).

One of my deferred schemes had reductions of 3.5% for every year if retiring from active service but once you left the company (or they made you redundant) the reductions became 5% per year.

Cobbler_tone

GunJack said:

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".....

This is one of my most accessed spreadsheets and something that is not too complex to model.
I always look at taking the tax free lump sum, as I have plans for it. I am still working at 55 and don't need the money now. A big benefit of getting to 55 is having a live view of a growing DB pension, although I have requested a quote to calibrate what the platform is showing. I don't want any nasty surprises!
I have rules around increases of 2.5% & 5% linked to RPI both in the scheme and once in payment. I use 2.5% annual growth, so there is a slight exposure there but I'm sure it won't be far off.

If I took it today (55) I would technically be 'worse off' at around 67.5 in terms of total income received.
If I take it at 58 (my plan) then the break even is around 70.
Compared to taking at 60 (at 58) the lump sum is £20k less and worth around £50k less by the time you get to 80, with the implied 2.5% growth. Clearly, the bigger your pension is, the greater the gap will become depending on reduction factors.

You have to remember the impact of receiving the state pension at 67 and added income/tax liability. 
For me it will be about how I use my DC pension of around £150k and timing compared to the DB. It is counter intuitive to leave the DB alone once you stop working, mainly (I think) because once you have gone it's gone! With the caveat of the spousal pension if that is important to you. 
I'm going to up size, so I think I'll take it (with the lump sum) as soon as I decide to retire.

For context, my starting pension (post lump sum) is £14,995 today (55) and would be £20,872 at 60. So it all depends on your wider strategy and income, or else we may as well all carry on going until we drop! 

pterri

Interesting convo, I’m still pondering taking my DB next year at 57 with the reduction or waiting until 60 for the ‘full’ pension.  Although there’s nothing magic about 60, I could  delay taking it and get I think 8% a year more. Either way I’m in a fortunate position so not overly stressed 

Hoenir

One of my deferred DB schemes had a guaranteed 5% per annum uplift. Doesn't sound much but compounding over a full 25 year period was rewarding. 

Cobbler_tone

Hoenir said:

One of my deferred DB schemes had a guaranteed 5% per annum uplift. Doesn't sound much but compounding over a full 25 year period was rewarding. 

I think this highlights perfectly why decisions like this are scheme (and needs) dependant. If mine had that protection I would certainly bridge any gap to 60.

DT2001

Cobbler_tone said:

Hoenir said:

One of my deferred DB schemes had a guaranteed 5% per annum uplift. Doesn't sound much but compounding over a full 25 year period was rewarding. 

I think this highlights perfectly why decisions like this are scheme (and needs) dependant. If mine had that protection I would certainly bridge any gap to 60.

Getting the correct information from the scheme is important. I took my DB pension at 51 (protected right) but didn’t ask the right questions to understand the impact of the GMP element. As it happens the rules in 2016, I think, have altèred the situation as almost half my pension at 65 will not have any uplift GMP pre ‘88.

I did a spreadsheet at the time and made some assumptions being a stay at home father re receiving the early years income tax free. The crossover point for deferring was about 73. As it happened we were able to fund OH’s pension more so that worked out better than forecast.

We will when SP’s are in payment have enough guaranteed income to cover ‘essential’ requirements which can be another criteria to add to the process of deciding when suits an individual best.

Albermarle

bjorn_toby_wilde said:

GunJack said:

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".....

A very good point.

Just to add that Albemarle’s point is generally correct but, as a deferred member, the terms may be very different to retirement from active service (you indicated you had left the company).

One of my deferred schemes had reductions of 3.5% for every year if retiring from active service but once you left the company (or they made you redundant) the reductions became 5% per year.

Another point is that although you would expect that each year you took a DB pension early, there would be the same % drop in pension income.
However that seems to be not always the case, and in some cases the earlier you take it, the more you lose in pension income for each year.
There was a thread a long time ago where someone highlighted that one of the public sector pensions did this( perhaps more than one) I do not remember the exact figures, but it was something like if you took the pension one year early it reduced by 3.5%, but if you took it 10 years early it reduced by 45%.

Nebulous2

The figures for the public sector schemes are readily available. The LGPS ones are here for instance. 4.9% reduction for 1 year and 35.6% for 10. 

Taking your pension :: LGPS

People may well have several different parts of their pension, with different normal retirement ages, so the length of time to be reduced needs to be calculated separately for each part. 

I took mine, before 60, with a breakeven point between 83 and 84. I've no regrets, and I'm glad I replaced 40 years as a wage slave with another guaranteed payment into my bank every month. 

cloud_dog

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.

Do you need the income or is this an academic, psudeo efficiency, or other type question?

pterri

Hoenir said:

One of my deferred DB schemes had a guaranteed 5% per annum uplift. Doesn't sound much but compounding over a full 25 year period was rewarding. 

That’s good, are you sure it’s not CPI or RPI but limited to 5%?