Timing and order of DB access and DC withdrawal

Cobbler_tone

I’m looking for opinions on some real life numbers. Whilst being a (self-confessed!) person of moderate intelligence, the options are numerous. I know there won’t be a perfect answer and I do fully understand the mechanics of DB and DC pensions. It'll be post that most look at the numbers and skip by...but some people love the numbers! Many may be in a similar situation.

I am looking for a hard stop in 12 months at age 57, although I haven’t ruled out working a bit, either to fill time or for pocket money. I’m sure I will do some voluntary dog walking, which won’t pay the bills! I just want a change on my terms and time to clock off. I could wind my contract down with my current employer (the most sensible option but you have to walk in someone’s shoes to understand the full motivation) but I’ve done 31 years and it’s time to bow out after a long career.

My wants and needs are modest compared to many. I want a ball park £2k a month net (which would still allow me to save a bit), maybe around £26k gross. My OH has slightly less to draw from but for this purpose her situation can be excluded. No real savings of note due to ‘life’s challenges’ now resolved and no current or future obligations. I’ll be carrying a bit of savings by next year. My OH is well covered in this respect.

Full state pension at 67. No housing costs (apart from running one)

Key notes on deferred DB pension. Roughly half is RPI protected up to 5% and the other half RPI up to 2.5%

For reference, full pension at 65 would be £38k, or £26,900 with £179 lump sum.

Based on planned retirement age of 57:

DB Option 1: Full pension £22,700.

DB Option 2: Reduced pension £17,000 with £113,000 (25% PCLS)

DB Option 3: BPO Pension from 57-67 £22,150, pension from 67 £10,200 with £147,700 (25% PCLS)

DB Option 4: BPO (no lump sum) from 57-67 £29,729, pension from 67 £17,750

The 25% PCLS can be adjusted to increase the pension/reduce the lump sum.

DC pot of c£130k

Share holding which will be gifted out.

I have the aim to have around £100k of accessible cash. Not really looking for advice on this, although I can see the timing would be important and the want to have this is a factor. I want some money behind me above my guaranteed income. Might be a car or two, might have a first class holiday or two (although my desire to travel has waned massively over the past couple of years), we may decide to move, I might gift some out. I might just want to count it.

This draws me to options 2 and 3. I know option 3 leaves me a little more exposed at 67 but I firmly believe that between 57-67 I would generate further wealth, either from life events, working a little and spending less. I could also reduce the 25% PCLS down to produce a larger pension in those two options.

The bit I am wrestling with is the order of accessing my funds. I could defer the DB for longer. E.g. for leaving it a year option 1 becomes £24,500 a year.

I could buy an annuity with the DC and use the lump sum from the DB, which probably wouldn’t make sense as I assume the DB options trump this. I could take option 2 and use the DC as a pot. I appreciate that some comes down to the timing of wanting a large amount of cash.

I could do nothing for a year and earn enough to cover my expenses. However, I am looking for the sensible options of going cold turkey and having these funds at my disposal.

In the (unlikely) event that everyone says the similar approach then it would definitely steer me.

Once you pick through a few of the posts, I find the forum an absolute font of knowledge and personal experience. It has helped me in numerous areas, so thank you.

ali_bear

Not sure about all those DB options (BPO?). But if you are deferring it and taking no other other income you will want to use up at least your tax free allowance each year, by drawing income from the DC fund.

You can get at least 32k of your intended 100k accessible cash from the DC fund and the remainder from PCLS. 

Cobbler_tone

ali_bear said:

Not sure about all those DB options (BPO?). 

Sorry, bridging pension option. i.e have the extra (equal to current state pension) at age 57-67 and then it drops to account for the state pension. Pretty common nowadays.

ali_bear

Right. So if it were me I would aim to flexibly use up the DC fund in the next decade for the additional moneys you would want in that period. Take enough PCLS from the DB scheme to make up the rest of your accessible cash fund. Then the remaining DB pension with BPO and SP in due course make for your regular pension income for life. 

Cobbler_tone

ali_bear said:

Right. So if it were me I would aim to flexibly use up the DC fund in the next decade for the additional moneys you would want in that period. Take enough PCLS from the DB scheme to make up the rest of your accessible cash fund. Then the remaining DB pension with BPO and SP in due course make for your regular pension income for life. 

Thanks. I have been reflecting on leaving the DB whilst drawing the DC down. I couldn't take the PCLS without putting the DB into payment. I also have to request a revised BPO manually if reducing the lump sum, the model doesn't facilitate that. 
I've also just bumped the DC contribution up even further as saving the tax and NI today is worth it. It should beat anything I would save.

ali_bear

I have not looked at the numbers in detail but I think probably I would put the DB into payment right away, with about 60k PCLS that puts you somewhere between option 3 and 4. Then the DC fund is there to flexibly access as and when you want the lump sum or top-up income. 

Triumph13

I would probably lean towards option 4 if you aren't desperate to have your £100k immediately as it makes life very simple.  The DC pot translates to £110k post tax if you stay in the basic tax band.  You could take £32k immediately as TFLS then £20k gross / £16k net each year until you have it all out, if that's what you want.

If you need the cash in a hurry, then it should be reasonably neutral to take a lump sum from the DB and buy an annuity with 75% of the DC.  The commutation rate is about 20x, so it's the equivalent of a 5% annuity rate, but with the proviso that you are trading tax free cash for taxable income.  That means you come out equal if you can buy an equivalent annuity for 4% from the taxable part of your DC.

Cobbler_tone

Triumph13 said:

I would probably lean towards option 4 if you aren't desperate to have your £100k immediately as it makes life very simple.  The DC pot translates to £110k post tax if you stay in the basic tax band.  You could take £32k immediately as TFLS then £20k gross / £16k net each year until you have it all out, if that's what you want.

If you need the cash in a hurry, then it should be reasonably neutral to take a lump sum from the DB and buy an annuity with 75% of the DC.  The commutation rate is about 20x, so it's the equivalent of a 5% annuity rate, but with the proviso that you are trading tax free cash for taxable income.  That means you come out equal if you can buy an equivalent annuity for 4% from the taxable part of your DC.

That’s excellent, exactly the kind of thinking I was looking for. Sometimes it is hard to see the wood for the trees. I figure I should look at maximising the DB before buying annuities. I doubt if an annuity would beat what I could get (if so not by much) and I could do a hybrid of 3. i.e. maybe take a bit of tax free and a bridged pension, with drawdown from the DC. That feels like my most sensible option. They will do that as a quote, as the model doesn’t show that. I can do it in reserve…e.g. say I want £26k a year and see what tax free amount that produces. 

Secret2ndAccount

Your commutation rate is in the 19-20 range. So if you look at option 3, but reduce the lump sum to 100k, you will increase the pension by about £2400, so £24,550 per year. After tax that’s £22150, so a bit below your target. You have to dip into the cash, or take a small supplement out of the DC every year.

Reduce the lump sum to 68k, and you increase the pension after tax to £26,200 gross,  £23,500 nett, which matches your target. You can take 32k TFLS out of the DC any time you choose, so you still have ready access to 100k.

Unless your needs change or inflation runs rampant, your needs are met for life, so the remaining DC pot is entirely yours to deploy as and when you choose. Therefore, you could choose to take a smaller lump sum from the DB, and a slightly larger guaranteed income, knowing that you can safely access the DC if you want a bit more cash at any point. For example, if you want exactly 24k, you need another £500pa, that's £625 before tax, so about £12k or so less lump sum.  You can use that multiplier of 24x (£1 after tax income = £24 lump sum) to move along a sliding scale if you want to look at multiple possibilities. When you eventually request a quote, it won't be far off.

Cobbler_tone

Secret2ndAccount said:

Your commutation rate is in the 19-20 range. So if you look at option 3, but reduce the lump sum to 100k, you will increase the pension by about £2400, so £24,550 per year. After tax that’s £22150, so a bit below your target. You have to dip into the cash, or take a small supplement out of the DC every year.

Reduce the lump sum to 68k, and you increase the pension after tax to £26,200 gross,  £23,500 nett, which matches your target. You can take 32k TFLS out of the DC any time you choose, so you still have ready access to 100k.

Unless your needs change or inflation runs rampant, your needs are met for life, so the remaining DC pot is entirely yours to deploy as and when you choose. Therefore, you could choose to take a smaller lump sum from the DB, and a slightly larger guaranteed income, knowing that you can safely access the DC if you want a bit more cash at any point. For example, if you want exactly 24k, you need another £500pa, that's £625 before tax, so about £12k or so less lump sum.  You can use that multiplier of 24x (£1 after tax income = £24 lump sum) to move along a sliding scale if you want to look at multiple possibilities. When you eventually request a quote, it won't be far off.

Thank you for your feedback...that is almost exactly the model I built today. I figured around £70k lump sum, with the bridging pension and then drawdown the DC (after lump sum) over 5 years.

Shadyocuk

My first task would be to get an idea of the timescale from requesting the DB to actual payouts , then delay the decision until just before needing to make it. 

Given that you show option 1 would increase in value by 7.9% if deferred for one year , have you got the figures for how the other options would increase and what the cummutation rates would be if also deferred by 1 or more years?
If all options increased by a similar rate then I would be tempted to fund year 1 , possibly years 2 and 3 from the DC pot and take the baked in increase , a lot would depend on how this alters the lump sums available and the likely timescales between requesting and receiving payouts, if a short timescale then you could reguard the deferred DB Lump sum as your £100K fund and if you took funds from the DC pot by monthly UFPLS , you could switch to the DB at when ever the sweet spot is or when ever you "need" the lump sum.