"Cashing in" a defined benefit pension

DRS1

Keep_pedalling said:

The normal pension age for the scheme is also likely to be 60 so you need to see how much your annual payments are being reduced by to take it early as that may also not be a good deal.

Or possibly 65 (so taking it 10 years early which would mean quite a big reduction)

OP Early retirement factors are not usually spelt out in your scheme booklet or even the rules so you will need to ask the administrator.  They do change from time to time so also worth asking if a change is coming (and what it will be if it is imminent and known).

QrizB

If you were to "cash it in" (and I also think this would be a crazy thing to do) you wouldn't get £50k as you'd have to pay income tax on 3/4 of it. Depending on your tax situation you might get £40k or less.

Aretnap

bjorn_toby_wilde said:

You’re giving up £900 a year for a lump sum of £11000.

£11,000 divided by 900 is approximately 12 and that’s the commutation factor - 12:1

That’s a poor commutation factor.  If it was around 20:1 or more you might think it was more worth taking.

It's an atrocious commutation factor. A 55 year old man can expect to live another 29 years on average, so can expect to receive £26000 from that £900 pa income - more if you account for the fact that the pension will presumably increase in line with inflation.

Giving up £26000 for £11000 is not a good deal, whatever rate of tax you pay on the pension income and whatever value you place in getting money now rather than in the future.

Cobbler_tone

DRS1 said:

Keep_pedalling said:

The normal pension age for the scheme is also likely to be 60 so you need to see how much your annual payments are being reduced by to take it early as that may also not be a good deal.

Or possibly 65 (so taking it 10 years early which would mean quite a big reduction)

OP Early retirement factors are not usually spelt out in your scheme booklet or even the rules so you will need to ask the administrator.  They do change from time to time so also worth asking if a change is coming (and what it will be if it is imminent and known).

This must be in the ‘Hall of Fame’ for regular topics. If the OP searches they will find tons of content to trawl through.
Just to add, reductions are not usually designed to be punitive and you can normally calculate a rough ‘break even’ point. For many it might mean the difference of being able to retire or not, which is more than numbers on a spreadsheet.

daveyjp

My usual response.  Being paid off to reduce the pension providers liability is rarely a good idea.  It will cost you thousands in both advice and tax payments.

Decide your future financial priorities.  Work up a plan that allows you to meet your financial goals whilst keeping the very valuable DB pension.

First job is to fully understand the DB pension you are a member of.  In particular the ongoing benefits whilst in receipt.

Dazed_and_C0nfused

daveyjp said:

My usual response.  Being paid off to reduce the pension providers liability is rarely a good idea.  It will cost you thousands in both advice and tax payments.

Decide your future financial priorities.  Work up a plan that allows you to meet your financial goals whilst keeping the very valuable DB pension.

First job is to fully understand the DB pension you are a member of.  In particular the ongoing benefits whilst in receipt.

100% this ⬆️.

The op started this thread thinking about £50k.

After the unavoidable adviser costs and similarly unavailable income tax they would realistically be looking at seeing less than £40k

silvercar

Dazed_and_C0nfused said:

daveyjp said:

My usual response.  Being paid off to reduce the pension providers liability is rarely a good idea.  It will cost you thousands in both advice and tax payments.

Decide your future financial priorities.  Work up a plan that allows you to meet your financial goals whilst keeping the very valuable DB pension.

First job is to fully understand the DB pension you are a member of.  In particular the ongoing benefits whilst in receipt.

100% this ⬆️.

The op started this thread thinking about £50k.

After the unavoidable adviser costs and similarly unavailable income tax they would realistically be looking at seeing less than £40k

Simplistically, £11k now and £1.7k a year gives a break even point of age 72. 

MyRealNameToo

Hantrail said:

El_Torro said:

Since your DB pension is worth more than £30k you will need advice from a Financial Advisor to move it to a DC pot. This advice usually costs at least £4k and the findings will probably be that you shouldn't transfer it to a DC pot. Most DB pension schemes won't do the transfer unless you get advice saying that it is a good idea. 

So you're probably out of luck. Or in luck perhaps, because cashing it in is likely to be a bad idea.

Wow that's an eye watering fee for a relatively modest pension pot. I didn't know that my scheme administrators might be able to refuse a transfer, if advised not to do it by a financial advisor.

They can't but you may struggle to find someone willing to receive it given that it's against the advice of a professional. 

Hantrail said:

Hantrail said:

El_Torro said:

Since your DB pension is worth more than £30k you will need advice from a Financial Advisor to move it to a DC pot. This advice usually costs at least £4k and the findings will probably be that you shouldn't transfer it to a DC pot. Most DB pension schemes won't do the transfer unless you get advice saying that it is a good idea. 

So you're probably out of luck. Or in luck perhaps, because cashing it in is likely to be a bad idea.

Wow that's an eye watering fee for a relatively modest pension pot. I didn't know that my scheme administrators might be able to refuse a transfer, if advised not to do it by a financial advisor.

I meant to add that I thought that I just had to get the advice, rather than take it, before a transfer would be allowed.

Technically correct but the receiving DC scheme does have a choice and many won't take people who arent following the advice. 

Hantrail said:

Aylesbury_Duck said:

What's the reason for wanting to cash it all in?  Is there a serious health concern?  That might provide options. Otherwise it's almost certainly a bad idea.

No health concerns at the moment, I want to cash in in mainly because of how inflexible it is and if anything happens to me before I start drawing my pension/after I start drawing my pension then my beneficiaries won't get anywhere near the full value of my pension pot.

There is no "pot" with DB, it's a promise to pay you a pension for life not a fixed value pot like DC. 

If nothing does happen to you and you live to 120 you will continue receiving your pension until that date getting out vastly more than you ever paid in or what you "pot" would be valued at. 

If you get the £50k and spend it over the next decade then not only do you not receive a pension but your relatives also still get nothing. With a DB scheme there are often spousal benefits and so they would receive benefits if they out survive you unlike the DC pot that you already spent. 

snowlaser

Something that seems to be missing in this discussion is - what money are you planning to live off in retirement: do you have lots of other pensions or other income?  If so then I can understand the thoughts behind wanting this pot to be more of an inheritance idea.  But if not, why are you are so concerned about what happens if you die young / about passing money on - what about how you will fund your own expenditure?

katejo

DRS1 said:

Keep_pedalling said:

The normal pension age for the scheme is also likely to be 60 so you need to see how much your annual payments are being reduced by to take it early as that may also not be a good deal.

Or possibly 65 (so taking it 10 years early which would mean quite a big reduction)

OP Early retirement factors are not usually spelt out in your scheme booklet or even the rules so you will need to ask the administrator.  They do change from time to time so also worth asking if a change is coming (and what it will be if it is imminent and known).

The normal retirement age on my scheme has been gradually going up for several years and will be 67 from Easter next year.