Taking reduced DB pension early

AltaNate

Another DB question…

I have a small DB pension around £3000 that can be taken early by with a reduction of 3.4% per year if taken before aged 60 (NRA is 65th birthday but currently no reduction between 60 to 65). 

I’m not utilising personal income tax allowance as economically inactive approaching 55 and no plans to return to work. Therefore could take this early without tax liability in addition to drawdown from SIPP. Taking it early at age 55 reduces by 17% approx £500. It would supplement living expenses from savings and reduce the amount required to drawdown from SIPP to fully utilise tax allowances. This is to bridge to SPA when I’d receive full state pension based on current rules.

Running simple numbers in spreadsheet with various RPI (scheme max is 5%) over 25 years shows sum total differences at 1% £0, 2.5% £2600 and 5% £10000.

Sanity check - Anything else I should consider?

Thanks

Sarahspangles

I believe most DB schemes aim to pay out the same amount by the time the pensioner reaches average life expectancy. So an individual’s assessment of their likelihood of reaching that age is relevant. I’ve seen 82 or 83 quoted as the break even point.

There are advantages to DBs, like investment performance being the scheme’s responsibility rather than the pensioner’s. Something that is coming up on this board more often is a concern that pensioners may have reducing capacity to manage their own SIPPs as they age. There’s the option of converting SIPP funds to an annuity before that point, but it’s reliant on the pensioner seeing the health/capacity issue coming.

Hoenir

AltaNate said:

Running simple numbers in spreadsheet with various RPI (scheme max is 5%) over 25 years shows sum total differences at 1% £0, 2.5% £2600 and 5% £10000.

Sanity check - Anything else I should consider?

RPI ceases in 2030.  The new measurement will result in a lower rate of inflation being used. 

QrizB

Hoenir said:

AltaNate said:

Running simple numbers in spreadsheet with various RPI (scheme max is 5%) over 25 years shows sum total differences at 1% £0, 2.5% £2600 and 5% £10000.

Sanity check - Anything else I should consider?

RPI ceases in 2030.  The new measurement will result in a lower rate of inflation being used. 

As I understand it there will still be a statistic called RPI, it'll just be identical to CPIH?

leosayer

A couple of things to consider:

Does the DB scheme offer to exchange some of the annual pension for a tax free lump sum? This may be useful depending on your circumstances.

A 17% reduction for taking the pension 5 years early seems quite low (a good thing!) - most generally reduce by 4-5% per year.

Do you have a spouse/civil partner? If so, then there may be a spouse's pension.

AltaNate

I believe most DB schemes aim to pay out the same amount by the time the pensioner reaches average life expectancy.

Interesting idea about break even point. With my quick spreadsheet figures by 80 it is almost break even point using a 2.5% annual inflation increase. 

Something that is coming up on this board more often is a concern that pensioners may have reducing capacity to manage their own SIPPs as they age.

SIPP to annuity is food for thought for later in life as no dependants to consider for inheritance.

RPI ceases in 2030.  The new measurement will result in a lower rate of inflation being used. 

The change for RPI will be what it is and actually a lower rate brings it much closer to break even. 

Does the DB scheme offer to exchange some of the annual pension for a tax free lump sum? This may be useful depending on your circumstances.
…
Do you have a spouse/civil partner? If so, then there may be a spouse's pension.

There is a tax-free element available and I’d have to check what this would be. The spouse pension is 50% but that would only be reduced by about £250 pa in today’s money.

I wasn’t going to access until 60 but thinking the benefit of five additional use of tax allowance is appealing and out weighing some of the other points. 

QrizB

AltaNate said:

I believe most DB schemes aim to pay out the same amount by the time the pensioner reaches average life expectancy.

Interesting idea about break even point. With my quick spreadsheet figures by 80 it is almost break even point using a 2.5% annual inflation increase.

You can ignore the RPI increase when calculating breakeven as the money you get early is worth more than the money you get later. Just work in cash terms.

Universidad

Sarahspangles said:

 I’ve seen 82 or 83 quoted as the break even point.

This depends on the scheme and ERFs they're using but I can confirm that all the maths I've done for schemes myself or my wife have been involved with have landed thereabouts. 

LHW99

This is to bridge to SPA when I’d receive full state pension based on current rules.

What do you mean by "current rules"? If you mean the oft vaunted "35 years" then that isn't necessarily what you need, as you will be under transitional rules due to the change to NSP in 2016 Could be anything betwee around 28 to 50 years). Have you checked your forecast, and read it all?

You need it to say something like "You cannot improve your forecast any more".

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

AltaNate

LHW99 said:

This is to bridge to SPA when I’d receive full state pension based on current rules.

What do you mean by "current rules"? If you mean the oft vaunted "35 years" then that isn't necessarily what you need, as you will be under transitional rules due to the change to NSP in 2016 Could be anything betwee around 28 to 50 years). Have you checked your forecast, and read it all?

You need it to say something like "You cannot improve your forecast any more".

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

Still 12 years off SPA and could change however unlikely and very unpopular - never say never!

Certainly have checked:

Your forecast

• is not a guarantee and is based on the current law
• is based on your National Insurance record up to 5 April 2024
• does not include any increase due to inflation

You cannot improve your forecast any more.