Advantages of taking civil service pension before NPA?

[Deleted User]

Sorry if this is a dithering question but I often read that actuarial reduction for taking Classic before 60, and Alpha before 67 (SPA), is a big hit (4-5% reduction per year before NPA). Therefore many people defer taking them until NPA, using ISAs etc to bridge the gap.

Coming up to 56 and am considering the reduction over deferral.  I could live on the actuarially reduced pension (Classic/Alpha combined) and might even save a bit each month too with no NICs and commuting/lunch costs. This would leave my savings intact that would otherwise be for unforeseen events etc. At current lifestyle/health, current savings should last 20 years at least.

Early Classic/Alpha pension payment still adds CPI increase and there will also be the Classic tax free lump sum (actuarially reduced). I don’t want a bigger lump sum in exchange for lower pension. I have some Alpha added pension that would be put into early payment also.

State pension entitlement at 67, due to NICs record, should be near max.

I understand that people value time, money etc, differently. But aside from other commitments like dependents/housing, are there any other factors in favour of taking the actuarial hit? Currently I can think of:

• It isn’t that bad as it’s just to compensate for the pension being paid out for longer.
• Why defer pension if you can still live on it and meanwhile keep savings intact (with no higher tax liability issues).

Reasons not to retire now - current chaos at Capita. My pension projections came from the MyCSP modeller however.

TIA.

indiasign

I’d say go for it, if you’re not enjoying the work - you only get one life! 😀

I’ve had enough (been coasting for the last few years!), so me and my wife are both retiring from the CS this May. Like you, we took the view that the reduction wasn’t TOO bad when viewed in the long term - neither of us have any major health issues (fingers crossed!) so, having crunched the numbers (again), I figured we had enough savings to bridge the gap between this May and my State Pension kicking in in 5 years to pretty much maintain our current lifestyle. I don’t think we could defer taking the pension, but consider the reduction manageable.

Just hoping Capita has sorted themselves out by April so that we get our quotes in time, but even if it’s a little late, we should still be ok

[Deleted User]

Nice one indiasign - congrats to you both on taking the plunge and hope Capita gets back to you soon. This is the sort of comment I am hoping for.

Things are indeed rubbish at work but don’t know if I would feel differently in a new role from the slim pickings out there.

Have a great time!

hara____

I agree, why wait for NPA if you can make it work earlier, accounting for the actuarial reduction?

There's a lot to be said for mapping out expected cash flows by year. Ideally, you want a decent floor of reliable cash flow from DBs and state pension, then enough in savings to cover any lumpy costs and/or extra income for the years before the state pension is available.

GunJack

However, consider that you're baking in the reduction, which is then compounded over time. This is why I'm leaving my deferred CS pension till 60....

Plus it gives Crapita another 18 months to sort themselves out before I need to claim 🤣🤣

hugheskevi

(1) Survivor benefits are based on the unreduced pension, so are higher as a proportion of pension in payment if taken early with reduction. As the survivor pension isn't particularly good, this can make managing the step-down in pension income at death easier to smooth.

(2) More likely to avoid higher rate tax in future (more headroom for fiscal drag and Triple Lock effects)

(3) Factors for reduction are the best they have been in years.

(4) Wins in the event of earlier than expected death.

Universidad

You say "Alpha before 67 (SPA), is a big hit (4-5% reduction per year before NPA)", but that's honestly not a huge reduction for taking the payments a year earlier. (On average, as actuarially calculated, it shouldn't really be a reduction at all).

Remember that every year earlier you take the pension is an extra year of pension you wouldn't otherwise have got. Throw that all back in the mix, and it starts to look pretty similar, unless you die particularly young or particularly old.

Unless you have a good idea of your future, it almost always comes down to whether you can afford to retire at age X, rather than whether you're better or worse off in the long run.

Something @hugheskevi said a while ago stuck with me, in relation to Alpha pension, which I'll paraphrase to the effect that "there isn't really a retirement age, per se".

Outside of the bounds of minimum retirement age, there's really just when you have enough annual pension to retire, and when you want to retire.

[Deleted User]

Thanks for all your replies. Universidad’s point: “Throw that all back in the mix, and it starts to look pretty similar,” was my gut feeling.

I do understand that the actuarial reduction may be too much for some people but I think I had allowed that to sway me. 

I agree that having enough to retire on at age X is a good way to boil it down to, rather than chasing numbers and milestones for the sake of them.

ljayljay

I finished working at 58 & initially put off taking my pension due to the acturial reduction. However, I changed my mind at 59 when I realised that taking the pension early a few months into the tax year would be within my personal tax allowance so tax free.

So I agree that it is worth looking at the bigger picture, to include future as well as current income & decide as an individual what works best.

horsewithnoname

all you can do is what it suits you to do, unless you happen to know future inflation rates, future government decisions, and when you will die.
so unless you have a working crystal ball, do what is best for you now, with an eye on the future so that you are not going to leave yourself impoverished in future

michaels

As mentioned above, especially with the frozen tax bands there may be tax advantages to taking a lower pension for longer. For example it would not make sense to solely use ISA funds before state pension whilst having unused personal allowance.

Also if you die young you/your estate get more benefit from the pension.

The spouaal pension benefit mentioned above is also a free win

Main downside is that dB pension with no inflation cap is a good hedge against longevity risk (it can't run out unlike a DC pot) so some take this as a reason why you should defer and spend other retirement savings (sipp, ISA) first.

There is no one correct answer.