Take DB pension early or not as part of 'bridging the gap'? (inheritance vs longevity risk)

michaels

SO my plan was to take my DB unreduced (and obviously SP) at SPA using some of my DC to bridge the gap from 55 to 67 via an Index linked gilts ladder with the rest of the DC being taken over the whole retirement on a 'SWR' basis.  The thinking being that maximising guaranteed index linked income is the best longevity risk.

However now I am thinking that reducing the DB by taking it early gives a pretty similar 'safe' lifetime income but has the advantage that some of the DC pot spending is pushed back thus increasing the size of the 'heritable pot' in the case of a double early death with no real downside on income.

Has anyone else thought about this issue in their planning and come up with any insights I have missed?  Thanks

Triumph13

It depends a lot on the relative sizes of your DB/SP income, your DC funds and your spending requirements.  We are taking the DBs at NRA because otherwise our guaranteed income would feel a bit tight to us.  If our DBs were higher, then we might quite possibly have taken them early.

Yes it hurts burning capital in the meantime (although we've actually burnt much less than planned), but being able to cut drawdown way down in the future, if needed, greatly decreases the 'worst case' where it gets ravaged by SORR. The relatively healthy fixed income also means that, if spending decreases in later life, the DC funds get a chance to recover from what we spend now.

One other factor in favour of early DB is that the DC is 100% inheritable by the spouse, vs only a portion for DB and nothing for DC.

I would recommend doing the sums and then thinking about what it would feel like both as a pair and for the survivor with the two options and  varying assumptions on the drawdown eg how would you cope if you had to halve the drawdown, or stop it altogether?

ETA:  You may also feel that the higher your DB income, the higher the equity percentage you can afford in the DC, thereby increasing potential upside.

Notepad_Phil

Does the pension continue to be paid to your partner when you unfortunately are no longer around? If it does then personally that would have a considerable input into any decision that I would make - my partner is less interested in financial matters so I'm aiming (within reason) to have as much index linked pension as possible being passed onto Mrs Notepad (in our case we're similar ages and Mrs Notepad mother lived well into her 90s).

michaels

Notepad_Phil said:

Does the pension continue to be paid to your partner when you unfortunately are no longer around? If it does then personally that would have a considerable input into any decision that I would make - my partner is less interested in financial matters so I'm aiming (within reason) to have as much index linked pension as possible being passed onto Mrs Notepad (in our case we're similar ages and Mrs Notepad mother lived well into her 90s).

Thanks.  AM plannign on assigning a small amount of the DB to give DW a higher DB if I pre decease, only costs a few percent as she is older than me.  Plan for first death is that the survivor is only down by the lost state pension, so about 50k gross as opposed to 62k for the couple.

IN todays money the guaranteed index linked bit is 55k/43k without early access to the DB or 41k/29k with.  As we have been living on about 30k prior to retirement it might all be moot.

GenX0212

Your DB is most likely as long as it is short. i.e. Taking a reduced DB now of £10k a year over 30 years life expectancy or waiting until NRD to take £15k over 20 years life expectancy equates to the same £300k lifetime total. 

However not taking your DB early means you will be taking a bigger chunk of your DC pot earlier and therefore the opportunity for future growth on your DC pot is reduced.

Depends on your DC fund choices/strategy, how much your are planning to take from your DC and how much relative DB to DC you have.

I am planning on taking a reduced DB so that more of my DC remains invested and subject to future growth. The max my DB can grow by is inflation capped at 5% whereas I am hoping that over the long term my DC will grow by inflation+

pterri

GenX0212 said:

Your DB is most likely as long as it is short. i.e. Taking a reduced DB now of £10k a year over 30 years life expectancy or waiting until NRD to take £15k over 20 years life expectancy equates to the same £300k lifetime total. 

However not taking your DB early means you will be taking a bigger chunk of your DC pot earlier and therefore the opportunity for future growth on your DC pot is reduced.

Depends on your DC fund choices/strategy, how much your are planning to take from your DC and how much relative DB to DC you have.

I am planning on taking a reduced DB so that more of my DC remains invested and subject to future growth. The max my DB can grow by is inflation capped at 5% whereas I am hoping that over the long term my DC will grow by inflation+

This is the calculation I’m thinking about. I need to bridge three years before claiming my DB without reduction, I’ll see how my spending goes once I’m settled into to not working (still can’t quite say ‘retired’!) before deciding.  

Bluebell1000

That's an interesting perspective as I had been planning to use my DC pension to fill the gap to DB pension. I'd not thought about the potential for doing it differently and taking the DB reduced. I'll have to have a look at the sums when I get closer to making a decision, but thanks for the post, very useful.

nicknameless

I am taking one of my DB pensions 5 years early to reduce SORR for DC pots.  All my modelling showed this had the highest probability of success, even if it is not the tax optimal strategy.  Inherited spousal portion of DB unaffected by actuarial reduction in our case.

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GunJack

People get too hung up on "getting the biggest value" out of DBs - they are there for a level of income p.a., not the total of what you get out. Those of us with only or mainly DBs will get this, those who've got small/no DBs may struggle with the concept...

michaels

I'm happy that the actuarial reduction is fair for expected life span.  But where DB can win is if you are one of those who live longer than the average expectation - hence the normal advice to backload DB.

However if you then hit the other end of the longevity distribution then putting the DB off will mean you have spent more of the potentially inheritable resource (DC) whereas the DB dies with you (or on the second death anyway) so have less to pass on. 

Personally I don't buy the 'more time for DC growth' argument above - whilst on average DC will grow faster than inflation, what matters to safe retirement income is the reasonable worst case path not the average path.

bjorn_toby_wilde

Another consideration is tax.

When your DB kicks in would it mean more of your DC withdrawals being taxed at a higher rate? How much headroom will you have with the full DB plus SP?