Early retirement from a DB is a bad deal?

p00hsticks

Isthisforreal99 said:

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.

For many, it's not so much a question of if or when they retire, but whether they take a DB pension earlier than the NRD or fund the gap some other way. 

I deliberately built up funds in both ISAs and a SIPP so that I could use them to plug the gap between when I chose to retire and the NRD of my DB pension, and then add to that income until I reached State Pension Age.

Farside71

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.

I'm not discounting this, I'm carrying on working past 55 anyway because I have a minimum wage job I actually like, but I think it's valid to know what you are potentially missing out monetary wise when the often quoted figures are break even in the 80s.

hugheskevi said:

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.

Yes, I know it's quite high inflation but even if I reduce that a bit I don't think it changes things too dramatically and I think CPI for the last 5 years has been 24% in total.  Obviously pension is growing a lot less than that due to caps, I reckon maybe 16% as a guess.

The actuarial reduction I've been quoted is 24% which I fell is quite high and the driving factor for this and it's a private scheme, not government.  

My intention is to live off minimum wage income and use the bulk of DB income to supplement pension contributions so your point about investing are valid.

Farside71

Cobbler_tone said:

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"

Agree with all this...it is just that if the break even is in early 70s then by the time you are in late 70s, the differences do start to become very significant.  I am trying to avoid the endless spreadsheet approach personally as I want to just live my life with whatever I decide but want to make sure that I am understanding the consequences at least at a high level.   I think I am just struggling a bit with how stingy my scheme's early retirement factors are when generally it is a decent scheme otherwise.  I need to get over that first.

Farside71

Triumph13 said:

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.

It is a useful way of visualising it, but I think what you can miss is the divergence from that point because the inflation protection from 75 is being applied to one value significantly larger than the other? I think that helps for me a lot but does mean obviously you're using assumptions about inflation.

Pat38493

Other factors to consider:
- In some cases it can be worth taking the DB earlier to manage long term higher rate tax exposure in a more even way.
- In some cases, taking the DB earlier, possibly with a PCLS, can be a good strategy to somewhat reduce sequence of return risk whilst bridging to state pension.  I decided to put my DB pension into payment at 56 even with a hefty reduction for this reason.

Fundamentally if taking your DB earlier allows you to have the confidence to retire earlier, does it really matter if you are slightly worse off over your whole life?

Cobbler_tone

Pat38493 said:

Fundamentally if taking your DB earlier allows you to have the confidence to retire earlier, does it really matter if you are slightly worse off over your whole life?

That is always going to be the common, underlying theme. Plus if you don’t need it then leave it for a bit if it makes sense, or the reduction factors seem punitive. 

Silvertabby

From my LGPS days, a very rough rule of thumb is a break even point of 12 years.  But there are many other factors to consider.....for instance, could your lump sum clear your mortgage X years early, and how much would you save by not paying mortgage interest over this period?

I was often asked by soon-to-be LGPS pensioners  which option would give them the most money from the fund.  And I would reply by saying that yes, I could work that out for them - but only if they could give me one vital piece of information.  Their date of death.

Vitor

The “mid-70s” breakeven is plausible, even conservative, given today’s longer deferment revaluation and tight early-retirement factors. If inflation stays high or real revaluation (CPI-linked) continues at 3–4%, the penalty for taking early can widen further.

However, spreadsheets don’t account for the value of time when you have health to enjoy the freedom!

GunJack

Another thing, I really don't get why people are so hung up on how much in total they get out of a dB pension - they're all about the level of income you get.

I've got two, one from 60, one from 65, both will be taken at those NRA's with no reduction. That gives me the level of income I want, really don't care what the total amount I get out of them.

GunJack

Forgot to add, they will be taken either side of my actual retirement, the first will help stuff the current work DC for 2 years, and that DC will bridge between 62, 65 and 67 for SP to start.  Total amount out? Who cares, it'll be a comfy retirement income 🙂