DB Bridging Pensions

Cobbler_tone

I have just stumbled upon the option of a bridging option in my scheme, within some newly published scheme booklets. I have been chasing this for two years and it kept getting delayed. There hasn't been any communication so found it by chance!

I'm looking for the experts who have experience in this and the pro's and con's. The immediate 'pro' is that you would get additional funds were you to meet your maker at a younger age! It could obviously enable an earlier retirement for someone factoring in the state pension.

My situation is that from a tax perspective I will always be firmly in the 20% bracket regardless of how I navigate my future. My original thought (to enable early retirement) was to make use of my DC pot via drawdown.

Is the impact of a bridging pension normally positive, negative or neutral...clearly dependant on life span? I know the spousal element isn't impacted.

There is no model (a basic illustration) so I will ask for my own scenario but this will take quite a while to get some numbers. It doesn't cover things like rises to the pension once in payment, i.e. if they are applied to the original base pension, enhanced bridging pension etc.

Any views, knowledge and experience appreciated.

bjorn_toby_wilde

I’m not an expert, so just a view, but it does seem quite attractive to me.  If you’re taking the pension early then it gives you more money when you need it before state pension age.

The down side is obviously less money later in life when you might need care or support in the home. The U shape curve theory.

I had that option with one pension (they referred to it as PIE) and didn’t take it, but only because I had other means available to bridge the gap.

Cobbler_tone

bjorn_toby_wilde said:

The down side is obviously less money later in life when you might need care or support in the home. The U shape curve theory.

Thank you 

I would say that anyone with a strategy to generate more and more wealth going into old age has their priorities the wrong way around. Especially if it is at the expense of enjoying your younger retirement where you are more able....but I take your point.
The impact for me would be that I wouldn't access my DC pot in a hurry.

Marcon

Cobbler_tone said:

I have just stumbled upon the option of a bridging option in my scheme, within some newly published scheme booklets. I have been chasing this for two years and it kept getting delayed. There hasn't been any communication so found it by chance!

I'm looking for the experts who have experience in this and the pro's and con's. The immediate 'pro' is that you would get additional funds were you to meet your maker at a younger age! It could obviously enable an earlier retirement for someone factoring in the state pension.

My situation is that from a tax perspective I will always be firmly in the 20% bracket regardless of how I navigate my future. My original thought (to enable early retirement) was to make use of my DC pot via drawdown.

Is the impact of a bridging pension normally positive, negative or neutral...clearly dependant on life span? I know the spousal element isn't impacted.

There is no model (a basic illustration) so I will ask for my own scenario but this will take quite a while to get some numbers. It doesn't cover things like rises to the pension once in payment, i.e. if they are applied to the original base pension, enhanced bridging pension etc.

Any views, knowledge and experience appreciated.

This is very much a decision based on personal circumstances and preferences. There is no 'normally...', so it really is a case of looking at the numbers and seeing what you think of them and how well they fit your objectives. Most bridging pensions are designed to be cost neutral, but as we all know, members rarely behave in line with actuarial projections!

Cobbler_tone

Marcon said:

Cobbler_tone said:

I have just stumbled upon the option of a bridging option in my scheme, within some newly published scheme booklets. I have been chasing this for two years and it kept getting delayed. There hasn't been any communication so found it by chance!

I'm looking for the experts who have experience in this and the pro's and con's. The immediate 'pro' is that you would get additional funds were you to meet your maker at a younger age! It could obviously enable an earlier retirement for someone factoring in the state pension.

My situation is that from a tax perspective I will always be firmly in the 20% bracket regardless of how I navigate my future. My original thought (to enable early retirement) was to make use of my DC pot via drawdown.

Is the impact of a bridging pension normally positive, negative or neutral...clearly dependant on life span? I know the spousal element isn't impacted.

There is no model (a basic illustration) so I will ask for my own scenario but this will take quite a while to get some numbers. It doesn't cover things like rises to the pension once in payment, i.e. if they are applied to the original base pension, enhanced bridging pension etc.

Any views, knowledge and experience appreciated.

Most bridging pensions are designed to be cost neutral

Thanks Marcon, that is the information I was looking for. I will of course run my own projections and comparisons when I receive my quotations.
I am certainly not 'loose' with my finances. It could mean a flat guaranteed income of £30k a year, as opposed to adding the state pension boost when I don't really need it. Not forgetting the added flexibility of a DC pot to add annuities/drawdown.

Phossy

I have a bridging option and all my calculations show that is neutral to about the age of 82, this is the same as if I were to take a lump sum or take the bridging option and the lump sum. All options have no impact on my wife should I pop my clogs before her. For me it is all about managing the income flow from when I retire to state pension age. I don't know exactly what I will choose to do, but I am absolute in my intent to take more money in the go-go years, be it through taking the lumpsum, bridging or both. 

optoutDB

I need to check some fundamentals in my model because my analysis shows my break-even point around 85,86 whereas I have read 82 a few times now.

Early taking benefits additionally if I have unused tax allowance from 55 to 65

And even more if I get above inflation returns on the money received (instead of spending it). The investing part isn't particularly neat at the moment as it doesn't allow for spending of savings easily.  

If anyone wants to try my model let me know (the number crunching is all in an excel macro) . It will help me confirm its correctness (or not) 

edit: The output is a columnwise heatmap showing %performance relative to the option that pays out most.

edit2: heatmap deleted.  I'm assuming now that the L&G forecast values from 2023 were wrong as well. New values later in thread.

Phossy

optoutDB said:

I need to check some fundamentals in my model because my analysis shows my break-even point around 85,86 whereas I have read 82 a few times now.

Early taking benefits additionally if I have unused tax allowance from 55 to 65

And even more if I get above inflation returns on the money received (instead of spending it). The investing part isn't particularly neat at the moment as it doesn't allow for spending of savings easily.  

If anyone wants to try my model let me know (the number crunching is all in an excel macro) . It will help me confirm its correctness (or not) 

edit: The output is a columnwise heatmap showing %performance relative to the option that pays out most.

Couple of things:
1) All DB schemes are different, your 'breakeven' may be different from one scheme to another
2) Having said that. I note that your lump sum looks the same in both models. A Bridged Pension usually comes with a bigger lump sum too.

Cobbler_tone

I will study my numbers carefully when they come through. I think in my particular set of circumstances it will be a no-brainer and allow greater flex with my DC at a later date. My main concern was losing lots of value from the overall DB scheme, which I haven't read or seen anything here or online to suggest that would be the case....outside of reduction factors for taking it early.

Sarahspangles

With OH’s scheme the additional options were stepped payment and commencement lump sum. The scheme provided a forecast of the four permutations, using the max lump sum, though this was flexible. We modelled these, I can’t remember what age they converged at, but it turned out this wasn’t the deciding factor.

We also looked at the tax position - including tax on savings income - and inflation risk. OH decided to take the max lump sum so he wouldn’t pay income tax on that element, with the intention of getting this into ISAs and investments as quickly as possible. He decided against taking the higher pension up front, on the basis that
a) he didn’t actually need the income and
b) his scheme provides some inflation proofing, whereas if he took the pension and saved/invested it, its value might erode more quickly.

We’re currently in a phase where savings interest beats inflation but we’re not banking on that lasting long.

We’re happy it was the right approach although bereavements mean we haven’t yet moved house, and inheritance means we’re currently juggling savings and investments to minimise tax.

optoutDB

Phossy said:

Couple of things:

1) All DB schemes are different, your 'breakeven' may be different from one scheme to another
2) Having said that. I note that your lump sum looks the same in both models. A Bridged Pension usually comes with a bigger lump sum too.

I just checked, the Illustrator is still giving the same Lump sum for stepped and straight. 

This makes sense to me as the max lump is probably based on a percentage of the total pension value. Maybe even legislated ??

The bigger problem here is that when I questioned the illustrator values (back when they were badly wrong) they said they were estimates and only a guide.  So I get the feeling that I'm going to have to obtain the full rules of the scheme and check everything myself.