DB pension planning

Wobble101

I am about to retire at 60, having been considerably helped in my thinking by the good folk on this board. I've been taking another look at my pension plan - I'd be interested in views on where I've got to and whether I have missed anything.

I'm lucky in having 3 DB pension schemes. My original plan had been to take pension 1 (the biggest DB entitlement) first, obviously with a reduction for early retirement. I would initiate pension 2 (second biggest amount) next year as it is the civil service scheme which is in administrative meltdown having been passed to Crapita - so waiting for those issues to get as resolved as possible seems sensible. I was then going to leave pension 3 (the smallest - current value c £6k per year from age 66) until age 66, without any reduction for early retirement. I would make up the difference between what we need and what we are getting from the pensions with savings and investment.

I then wondered whether I should consider taking pension 3 now as well, so I have been modelling what that means. There are two obvious factors to consider.

The first is tax. Waiting until age 66 to claim pension 3 means I only just stray into higher rate tax bands in those earlier years before age 66. Whereas if I take pension 3 early, my tax bill goes up in the early years; my estimate is I'd pay around £2k more in tax each year. However, as you'd expect this does even out in the long run - by the time I'm 80 the two options are pretty similar in terms of the cumulative tax paid.

On the other hand, taking pension 3 early means needing to draw down less from savings and investments (as we will need less to fill the gap between income and spending). This means that by the time I'm 80, the delayed pension 3 option results in our having used up all our savings and investments (which is ok, as we will have enough for our needs once state pension kicks in). But in contrast, under the early pension 3 option scenario we'd have £120k remaining.

This analysis suggests I should go ahead and claim pension 3 now rather than wait - but I'd be interested in whether anyone thinks I'm missing anything obvious. Thanks so much.

leosayer

Other factors to consider:

Do any of your DB pensions have a commutation option for a tax free lump sum?

Why you intend to take the DB pension early rather than living off your savings and investments first? Are they in a pension eg. DC or SIPP?

What are the actuarial reduction factors for your DBs?

Do you have any inheritance plans for your savings and investments?

Moonwolf

That looks like a similar position to me, except my biggest DB was at 67 and my savings and investments were mostly a DC pension. Drawdown less now or have a higher guaranteed pension at 67. In the end I have taken them all at 60.

I think most plans came out better taking the pension early except for a very big market crash early in my retirement, I thought I wanted the comfort of a larger definite income but decided to go with enough and better potential growth instead.

So as long as taking them early leaves you with enough income in the worst case.

hugheskevi

I think it is very difficult to guess future tax thresholds and rates at the current time, at least beyond the next few years.

As a principle, keeping combined DB and State Pension income as smooth and as low as possible in all future years will almost certainly result in the lowest tax bill. There is a significant risk of adverse policy change if you choose a lower taxable income in the next 6 years followed by a higher income. Things could in theory improve due to policy change, but that seems unlikely.

I know I will be a higher rate taxpayer in all years after age 55 from a combination of DB, DC, and State Pension, but not far into the band. In theory, it doesn't matter much what I do around date of commencement of DB pension, but I prefer to take DB pension as soon as possible unless there is a compelling reason not to in order to protect against future policy change, as DC pension is far more flexible to respond to any policy change.

Wobble101

Thank you all.

@leosayer I am taking a TFLS as part of pension 1; £100k. Rationale being protection for my husband in case I die first (he would only get 50% of my DB pension) plus a generous commutation rate. All my other assets are in ISAs; my husband has a small DC pension which he will continue to draw down, within the nil rate band. So me not taking any pension early would mean I wasn’t making use of my tax allowances at all for the first few years of my retirement.

Bostonerimus1

When I was looking at managing my retirement income I found that a good general principle is to fully use your tax allowances/bands and try to avoid peaks and troughs in your income. So I would do what's necessary to use your tax allowances now as you'll never get them back.

snowlaser

Firstly you're in a great position for retirement - so no matter what you do it sounds like you will be OK. Good spot to be in.

Secondly, and this is a touch morbid but worth noting, the average life expectancy for a 60 year old is 84 (men) and 87 (women). Even if you're in the luckier half of the coin toss, and live beyond that, spending (apart from on healthcare) dramatically reduces in your 80s and 90s. There is a very real logic to making sure you are making the most of those good years in your 60s and 70s and not saving lots of money for a time you may never reach, or if you do reach will just spend most of your time in an armchair reading and watching TV. So if you're on the fence about taking money now or later that might influence me more than a few pounds more or less of tax.

hugheskevi

https://forums.moneysavingexpert.com/discussion/comment/82054382#Comment_82054382

Worth noting that average life expectancy is an underestimate for members of DB schemes.

Pension Regulator data on Life Expectancy shows scheme assumptions of life expectancy that are about 2-3 years higher than the average. That reflects that folk with a DB pension have been able to work for several years (due to preservation rules) in jobs that are usually above average salary and by and large in less physical industries, with some notable exceptions such as the coal miners schemes, or schemes with a high concentration of members in very deprived areas.

So a 65 year old individual with a large DB pension and with no adverse health conditions should be expecting to live to around 90 years of age.