To defer DB pension or ..?

Frezzer01

Hello

I was made redundant this year, received a payoff and after a few months off have been looking for work which is proving more challenging than I thought it would be. I am in receipt of a DB pension of approx £10k per year - this could not be deferred.

I could start to receive another DB pension of only approx £8.5k later this year. I thought I would defer the £8.5 pension until the next tax year or later, depending on the length of the contract I hope to get. Am I right in thinking that by deferring this pension I will receive more when it does payout? Or should I take it this year even though it is likely I would pay 40% tax if employed.

Thank you.

DRS1

Not every pension scheme gives a late retirement increase for taking your pension late. You would need to check with the scheme. But are you thinking of taking it late? How old are you and what is the normal retirement age for this second pension? If you are proposing to take it early but just a bit closer to normal retirement age then the early retirement factors would reduce the closer you got to NRA.

If you are worried about 40% tax then what does the second pension say about the lump sum payable when you start the pension? Is that variable? Is there a good commutation rate (ie how much pension do you give up for each pound of lump sum)

Albermarle

Each scheme has its own rules on such matters. You need to get a copy of the scheme rules and read them.

Frezzer01

Thank you both - I have found the letter from the pension fund and it states that a delayed pension would be increased based on their rules so that is clear enough - apols I should have re-read before posting.

@DRS1 - just to clarify the £8.5k was without taking a lump sum and if I take the pension this year that would be at the normal age for this DB pension.

So I will defer for now, I can change my mind but they need a few months notice to start payment .

Thanks again.

DRS1

OK. And I hope you get that contract.

Some people who are more numerate than me would work out how long the late retirement increase would take to make good the pension you are not taking. Assuming you defer it for one year I think they would compare the £8500 you would have received in the coming year with the increase for delaying the pension (5%?) and say you would get back that £8500 over say 20 years (but that is a crude sum and you probably need to factor in tax on the £8500 and the increased pension and also pension increases which gets too complicated for me). I am not saying you should change your mind but it is worth thinking about the pay back period.

Cobbler_tone

Very limited info and unlikely to be a 'right/wrong' answer. It will depend on your age, the NRA of the scheme, the reduction factors etc. Ultimately, you should be able to glean enough info to make an informed decision.

DRS1

And at the risk of seeming to push you in one direction I should mention that if the job you get comes with a pension then you can always contribute enough to that pension to get you back to paying basic rate tax. - assuming it doesn't pay over £110k pa.

mrklaw

have you done the maths to estimate taking thr DB now and increasing pension contributions to keep you under 40%? Or simply enjoying the extra income despite a hit of extra tax?

Frezzer01

Good morning

I had never thought about the payback period or just taking the £ and paying the 40% when I get a contract. Whilst I continue to be unemployed I will pay 20% tax.

Currently I take approx £700 per month from my savings to pay my Amex in full (saving reward points to use for long haul travel early next year) so most of the £700 would be covered by the extra pension income.

This is making me think about the type of work I am looking for, contract work pays well but when I look at the job descriptions I am reminded of the things I did not enjoy. I could look at lower paying roles in sectors where I could make a difference (I know it sounds corny).

I am really grateful for your comments.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82076410#Comment_82076410

Some DB pensions in deferment only increase by inflation ( for example), and do not add any on to take account of the fact you will not be taking it for a while.

Whilst others will revalue to take account of the delayed start to taking it, and increase with inflation as well.

Unless the letter makes it crystal clear what will happen, you need to read the rules very carefully.

Frezzer01

Hi @Albermarle - this DB will revalue and increase with inflation.

Am seriously considering taking the pension now (I mean later this year when I reach the required age for payment).