Considerations of when to take DB Pension

fcjf

I am targeting retiring in spring next year when I will be 57. I have a deferred DB pension with the PPF which I had fully intended to commence payments from at the start of my retirement however I’ve started reviewing the timing of this and would appreciate any thoughts / comments.  

The last PPF statement I obtained showed the following based on current figures and not allowing for future inflation.

What I’m entitled to at age 60

NRA 60 Pre April 97 entitlement       £4,580

At age 65

NRA 60 Pre April 97 entitlement       £4,450

NRA 65 Post April 97 entitlement     £15,990

The PPF early retirement factors change on 01/10/25 so I obtained two quotes for commencing the payments either side of this date. These are.

At 30/09/25                                 £19,062

At 01/10/25                                 £17,952 (when new factors apply).

If I was going to stick with the option of drawing the DB pension at the outset of retirement it would seem sensible to actually start this from 30/09/25 given the drop off just 1 day later (I’m salary sacrificing down to NMW so this income would be in the 20% band whilst I am still in employment) however I’m wondering if I need to take a step back and consider my options given the current and short term predicted level of inflation.

Whilst not in payment, both pre and post 97 parts increase by CPI capped at 5%. When in payment the pre 97 element doesn’t increase at all and the post 97 element increases by CPI capped at 2.5%. Would I be making a mistake taking the compensation now as opposed to leaving it until say 60 when the pre 97 element will be at full value and the remainder will have been revalued at CPI capped at 5%, which could well have been above the 2.5% cap?

Searching similar discussions, I see a lot of views that irrespective of when you start drawing a DB pension, most schemes should even themselves out in terms of total payments received at or around mid-age 80’s and my rudimental modelling based on the PPF online quotes and benefit modeller seems to align with this view. I also see views that it is better to leave it until closer to the NRA of the original scheme.

The change in early retirement factors is also in my thinking, the new factors from 01/10/25 increase the reduction of the post 97 (NRA 65) at age 57 from 0.738 to 0.692 so 4.6% difference. Does this make the current early retirement factor at age 57 26.2% (3.275% per year) and is this a good rate? Will life expectancy keep improving, and economic conditions deteriorating so taking this now is a good deal? I know nobody knows the answer to this!

My wife will retire at the same time as me and she will be 55. We are both in reasonably good health. In April next year, based on current valuations + additional contributions, we should have approx. £920k in SIPP’s (£800k me, £120k wife), £130k in S&S ISA’s and £150k in cash ISA’s / cash savings. I will get full SP; my wife is 6 years short (still waiting for the DWP call back to sort out the shortfall). We also have a number of BTL properties with approx. £300k of post CGT equity (conservative post CGT valuation) with 90/10 ownership in favour of my wife.

In terms of annual income, we’re looking at around £50k and the original plan was to use the DB income supplemented by cash savings whilst taking TFC and taxable income from my SIPP (to max 20% income band) to backfill cash buffer and top up ISA’s. I would be fairly comfortable changing strategy to use the SIPP’s or ISA’s for income if I didn’t start drawing the DB pension but this would reduce the cash buffer and potential investment gains; but on the other hand taking later I’d have a higher fixed income and my wife’s 50% entitlement if I die before her would be higher than taking now. Would  this all even itself out so there’s no right or wrong answer?

Any thoughts or other considerations to help me decide if I should pull the DB trigger by the end of September?

 

leosayer

In general, I generally believe that DB pensions should be started soon after retirement because that's what they're for however in your case, the inflation increases in payment do present an inflation risk.

Firstly, you should note that pension increases in deferral are usually compounded, so your 5% cap is unlikely to have had an effect on your annual increases so far even given recent high inflation. However once in payment, the caps will take effect and a period of high inflation could have a material impact, particularly given the pre-97 element.

To see the true impact inflation could have, you need to do some cashflow modelling that compares different inflation scenarios and starting your pension early vs. NRA. My instinct is that that might scare you into delaying until NRA, particularly give the impact on the spouse's pension.

The amount of savings and alternative sources of income you have give you a lot of flexibility which could include buying a fully index-linked joint life annuity that will hedge some of the inflation risk. You don't say how they are invested but hopefully these will also offer some kind of inflation hedge as well.

Personally, I wouldn't be rushing to start my DB until I had done that analysis. There isn't much time left in any case.

Triumph13

A key consideration is higher rate tax.  Say you take the DB at 30/09/25 for £19k pa.  Add in state pension gets to £31k.  £800k SIPP, less TFLS is £600k.  Less £120k for bridging to the state pension is £480k.  That would buy you an indexed annuity that would use up all your remaining 20% band. 

That gives you >£42k pa post tax.  £8k pa from wife's SIPP for 12 years gets you to your £50k, rising to £54k when her state pension starts.  And that's without factoring in the BTLs and the £0.5M of other funds you'll have from ISAs, savings and SIPP lump sums.

fcjf

leosayer said:

To see the true impact inflation could have, you need to do some cashflow modelling that compares different inflation scenarios and starting your pension early vs. NRA. My instinct is that that might scare you into delaying until NRA, particularly give the impact on the spouse's pension.

Personally, I wouldn't be rushing to start my DB until I had done that analysis. There isn't much time left in any case.

I have produced many a spreadsheet using the benefit modeller forecasts and different inflation rates trying to work out the best option and certainly applying an inflation rate higher than the 2.5% cap makes some significant differences to future real term income.

The amount of savings and alternative sources of income you have give you a lot of flexibility which could include buying a fully index-linked joint life annuity that will hedge some of the inflation risk. You don't say how they are invested but hopefully these will also offer some kind of inflation hedge as well.

Overall we have a 70 / 30 equities to Cash ISA's / Gilts / STMMF with the equities in Passive Global accumulating funds.
Annuities hadn't really been on my radar, I had always been thinking of keeping funds invested and using drawdown to get the TFC out over a number of years combined with taxable income up to the max available at 20%. I'll revisit this.  

fcjf

Triumph13 said:

A key consideration is higher rate tax.  Say you take the DB at 30/09/25 for £19k pa.  Add in state pension gets to £31k.  £800k SIPP, less TFLS is £600k.  Less £120k for bridging to the state pension is £480k.  That would buy you an indexed annuity that would use up all your remaining 20% band. 

That gives you >£42k pa post tax.  £8k pa from wife's SIPP for 12 years gets you to your £50k, rising to £54k when her state pension starts.  And that's without factoring in the BTLs and the £0.5M of other funds you'll have from ISAs, savings and SIPP lump sums.

Thank you. I obtained an indicative quote from Moneyhelper for using £480k to buy an indexed joint annuity and this came back with a figure of £19k, is this what you had assumed so 19 + 12 + 19 gets to £50k which uses up the 20% band?

I hadn’t really considered an Annuity before but that should come into my thinking.

Triumph13

fcjf said:

Triumph13 said:

A key consideration is higher rate tax.  Say you take the DB at 30/09/25 for £19k pa.  Add in state pension gets to £31k.  £800k SIPP, less TFLS is £600k.  Less £120k for bridging to the state pension is £480k.  That would buy you an indexed annuity that would use up all your remaining 20% band. 

That gives you >£42k pa post tax.  £8k pa from wife's SIPP for 12 years gets you to your £50k, rising to £54k when her state pension starts.  And that's without factoring in the BTLs and the £0.5M of other funds you'll have from ISAs, savings and SIPP lump sums.

Thank you. I obtained an indicative quote from Moneyhelper for using £480k to buy an indexed joint annuity and this came back with a figure of £19k, is this what you had assumed so 19 + 12 + 19 gets to £50k which uses up the 20% band?

I hadn’t really considered an Annuity before but that should come into my thinking.

Yep, that's the way I was thinking.  HL best buy table suggests maybe a smidge more, but basically it's a cast iron way to give you £50k a year.  With that floor, you can then afford to be very high equity percentage on the ISAs and take say 4% of portfolio value from the ISAs etc for another £20k pa tax free, plus any profits from the buy to lets - although I personally would be selling them as they fall vacant to give you more time to concentrate on having fun

fcjf

Triumph13 said

Yep, that's the way I was thinking.  HL best buy table suggests maybe a smidge more, but basically it's a cast iron way to give you £50k a year.  With that floor, you can then afford to be very high equity percentage on the ISAs and take say 4% of portfolio value from the ISAs etc for another £20k pa tax free, plus any profits from the buy to lets - although I personally would be selling them as they fall vacant to give you more time to concentrate on having fun

Thanks, I've never really considered annuities but I'll look at HL and do some more research.
Regarding the BTL's, I'm planning to sell at worst by the end of the mortgage terms which start from next year to 2035 or if there's a good opportunity as tenancies come to an end.