DB pension - take now and invest, or wait....?

Sweyn_Yellowhair

Hi all,

Looking for some views on options for a couple of small DB pensions I have from previous employers. In short, trying to decide whether to claim now and invest (currently plan to retire at 67) or leave them in place and claim later. I'll turn 57 in September, and am still working, self-employed, basic rate taxpayer. My aim is to maximise guaranteed income rather than take large tax-free lump sums.

One (A) is a Civil Service pension. It'd pay about £10,500 lump sum now, along with £3,301pa income. If I wait until the scheme's retirement age (60, when it tops-out) it's predicting £11,500 lump sum and £3,833pa income. It's linked to RPI or CPI, not sure which. I can't choose a zero lump sum with this.

The other (B) is a Bank of England pension, quite small as I was only there a couple of years from 1986. I can choose a zero lump sum with this one, which I'd prefer to do as it's small anyway and I want to maximise income. If I claim it now it would pay £1,030pa. If I wait until 67 it's currently projected at £1,568pa.

If I were to claim either of them now, I would invest any lump sum and the income in a stocks and shares ISA (in a Global equity ETF). Using The Calculator Site's compound interest calculator this gives:

Pension A - Option 1 (claim now and invest):

Initial deposit £10,500, monthly deposits of £220 (£3,301 less 20% tax / 12), growing at 6%pa (a reasonable annual return on global equities after inflation), compounded monthly over 10 years (i.e. 57 to 67),increasing by 3% per year (index-linking). Results in £59,837 after 10 years.

This buys an annuity (using MoneyHelper comparison calculator) of £3,461pa.
Adding the pension income = £6,762pa (pre-tax), compared to £3,833 if I wait until 60.


Pension A - Option 2 (claim when it tops-out at 60 and invest):

Initial deposit £11,500, monthly deposits of £255 (£3,833 less 20% tax / 12), growing at 6%pa (a reasonable annual return on global equities after inflation), compounded monthly over 7 years (i.e. 60 to 67),increasing by 3% per year (index-linking). Results in £46,330 after 7 years.

Annuity estimate = £2,663pa. With pension income = £6,496 (pre-tax), compared to £3,833 if I wait 'til 60.


Pension B:
Initial deposit £0, monthly deposits of £68 (£1,230 less 20% tax / 12), growing at 6%pa, compounded monthly over 10 years (i.e. 57 to 67), increasing by 3% per year (index-linking). Results in £12,590 after 10 years.

Annuity estimate = £674pa. With pension income = £1,904 (pre-tax), compared to £1,568 if I wait 'til 67.


So, allowing for assumptions (continued average global equity fund growth of at least 6%pa after inflation, and similar annuity returns to today's in 10 years), the options giving the maximum income seem to be to claim Pension A now (Option 1) rather than wait, and claim Pension B now.


Have I missed any major wrinkles in this? The only thing I can think of is that the projections for the lump sums and income payments for 60 (in the case of A) and 67 (in the case of B) might not include index-linking increases (because how can they predict future inflation? or do they use the current rate?) and only include actuarial increases, which I think are usually about 5%pa?


I'd go to a financial or pension planner, but given that most charge a percentage of your funds and mine are modest to begin with I thought I'd float this here instead. If anyone has the time and inclination to check my work and/or offer any thoughts/alternatives, I'd be very grateful.

Thanks!
S.

mrklaw

put it in a pension which you can already access so its no less accessible than an ISA and get the tax relief?

for your options the 3833 for the civil service pension you should uprate to 67 by estimated CPI. if you use 3% it’d be around £4700. still less than investing it though. And you can always just spend it if you want.

DT2001

Quick observation Pension A Option one. Are you comparing like with like? If you draw at 60 you will have £3,833(less tax) for 7 years to invest so at 67 you will have a smaller pot to buy an annuity plus £3,833.

If you want maximum guaranteed income you cannot presume a 6% return over 10 years. What happens if the market falls in the last 2/3/4 years of your 10 year period. It is a risk so that depends on the other side of your equation ‘your number for retirement’.

Albermarle

Have I missed any major wrinkles in this?

So, allowing for assumptions (continued average global equity fund growth of at least 6%pa after inflation, and similar annuity returns to today's in 10 years)

The wrinkle is that your assumptions could be over optimistic . The long term average for a global fund maybe in that ball park, but there have been many periods of negative returns.

In March 2000 the Nasdaq peaked. It recovered back to the same level only in April 2015 . I think the S&P 500 was a bit quicker to recover - about 13 years.

DRS1

When you say Pension A "tops out at 3833" at 60 do you mean that 60 is the Normal Retirement Age for Pension A? And that if you delay taking Pension A after age 60 it will not be increased for taking it late?

If that is the case then surely you would take Pension A at 60 at the very latest?

So why in the Pension A scenarios are you comparing a figure at age 67 with a figure for a pension at age 60 (eg 6762 vs 3833). Surely the comparison should be between Option 1 and Option 2? so 6762 vs 6496 - not such a great difference.

You may want to check your Normal Retirement Age under Pension B - is it really 67? It may be earlier (and if it is then are there late retirement increases under that scheme?)

A couple of thoughts

Are you married? What impact does taking either pension early have on any spouse's pension? Maybe the amounts are not big enough to matter.

Have you compared increases under the schemes for pensions in payment and pensions in deferment.