Early retirement from a DB is a bad deal?

Farside71

I am struggling a bit to understand the consequences of early retirement from a DB pension with NRD 60.  Previously I'd gone along with the consensus that you need to live to mid 80s before early retirement starts to lose out.

But if you factor in increases in deferment, I am struggling to see how you get past mid 70s.

These are just hypotheticals....but based on someone maybe wanting to take early retirement in the next year or so.

Leave the scheme at age 50 with a pension payable at age 60 of £30k

Early retirement at age 55.

At age 55, with increases in deferment  the pension is worth £35k.  Early retirement factor of 25% (5% per year) would reduce that to £26.5k

Meanwhile, if left to grow in deferment to age 60, the pension is payable at say £42k at age 60.

I've put these kind of numbers into spreadsheets and calculators, and can't see how don't start to lose out by your mid 70s and if you live to mid 80s you are way down.

Is it because I'm using an earlier NRD  for the DB than people typically assume?

Isthisforreal99

Are you sure it's 5% a year actuarial reduction. I see this figure often quoted in Civil Service but it's not quite that and it makes a difference.

Also if you are saying the deferred pension will grow by CPI (or other factor) then the reduced pension taken early will also grow increasing the 'break even' point

Farside71

Yes, I'm using an example I've got, it was actually a 24% reduction, I know every inaccuracy doesn't help, but in the scheme of things I am not sure it's making a massive difference to the overall results.

I'm just using a very rough calculation of 3% per year of growth for the past 5 years, or thereabouts, to allow for the fact a pension is split between 2.5% and 5%, and assuming that's a potential growth for the next 5 years as well for both a early pension in payment, and also for a pension remaining deferred for the next 5 years.

Farside71

Isthisforreal99 said:

Also if you are saying the deferred pension will grow by CPI (or other factor) then the reduced pension taken early will also grow increasing the 'break even' point

Basically I'm saying that because the deferred pension will also grow for the next 5 years at roughly the same rate as an early pension in payment would, the percentage increases on both mean that they diverge quickly after the age of 60 because the deferred one starts significantly larger.

Unless I'm missing something which is quite possible.

Officer_Dibble

My (very old and long closed) DB pension has a reduction of 19.4% for early retirement at 55 instead of 60. Presumably actuarial reductions should be similar between schemes unless there are clear reasons why people in different jobs have different life expectancies?

sheslookinhot

Don't worry about what you would "lose". Just make sure you have enough to live on then retire happy. No one knows how many days of post retirement life they have. So the sooner you start it the better.

Cobbler_tone

Farside71 said:

I am struggling a bit to understand the consequences of early retirement from a DB pension with NRD 60.  

I have wrestled with this for a couple of years and my personal perspective may/may not help! 
Firstly, all schemes are different. For example, mine has split NRA's of 60 and 65, along with difference annual increases. To complicate things further, technically the sections of the pension with different NRA's can be taken separately. Then there is a bridging option to take the amount of the current state pension now, until the age of 67 (in my case) before it dropping away to a lower pension...i.e. flat lining your income from today to the grave, with the appropriate increases.

The big question for me is always what are you trying to achieve?
If it is a means to retiring 3,5 or 10 years earlier, does it really matter if you are 'technically' worse off when you are 75? By that time will you even know (or care) that you are worse off? 
If your motivation is to be as wealthy as possible at 65+, then it makes sense not to take it early. If it is a key factor in enabling early retirement (and you want to) then you have to look beyond future 'losses'. 

I have spreadsheets coming out of my ears on lump sums, retirement ages, bridging pensions etc and ultimately the decision is far from being an exact science. That is without considering what other accessible income you may/may not have that can influence decisions and timings.
Once you pull the trigger, don't look back!
I very much doubt there are many 70-80 year olds are sitting there thinking "I wish I'd left my DB pension a couple of years longer"

FWIW my personal approach is to take a bridging pension, with a modest lump sum and this gives me a solid base from 57 to my demise. Depending what inflation does, I'll be 'worse off' in my mid-late 70's. On the flip side I've suffered with a life time of back pain and who knows what shape I'll be in then...if I get there!

I could of course work to 65, have a base pension of £40k a year and then £50 odd grand a year from 67...but it is not a race to be the richest to the grave.

All the best!

Isthisforreal99

sheslookinhot said:

Don't worry about what you would "lose". Just make sure you have enough to live on then retire happy. No one knows how many days of post retirement life they have. So the sooner you start it the better.

Exactly this, people retire early to enjoy life (and other reasons) and not wonder if I live to 75 I woukd have been better of working till 60.

If the numbers work, go for it.

I'm 53 and going partially retired in January.

hugheskevi

You are working with quite a high inflation rate, around 3.7% p/a, an actuarial reduction that is probably a bit higher than it would be in practice, and looking at values in real terms. 

Playing around with spreadsheets, I get a breakeven point using assumptions as stated at age 74.

However, you may well not wish to look at it in real terms, ie, using a discount rate of inflation. Typically, you could either invest the money at a higher growth rate, or the time value of money to you is greater than the value implied by the use of inflation as the discount factor.

The discount rate used in the public sector is CPI+1.7%. In the private sector it will usually be based on yields of gilts and corporate bonds, typically higher than CPI.

If you used a lower actuarial reduction and a higher discount rate, that is going to push the breakeven point up from age 74 closer to life expectancy of 85-90.

Increasing the deflator to inflation plus 1.7% increases the breakeven point to 77 (using other assumptions as stated). Using an actuarial reduction of 24% pushes it out to 79. Using a reduction of 19.6% which applies in Civil Service scheme for a reduction from age 60 to 55, pushes the breakeven point to 86, very much in line with life expectancy.

So the difference lies in the discount rate and actuarial reduction factors used.

Andy_L

I've seen it said that those who retire early (and actually stop/reduce working) live longer than those who work all the way to retirement age.

Triumph13

If the pension increases in deferment at the same rate as it does in payment, and said rates are basically matching inflation, then it becomes a whole lot easier if you just do the sums in today's money.

If you assume a pension at age 60 of 100, then 25% reduction for five years early makes it 75.  In those five years you collect 5 x 75 = 375.  The age 60 option then catches up at 25 per year, which takes 375 / 25 = 15 years, so you are ahead from age 75.