To defer DB pension or ..?

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82077538#Comment_82077538

One thing maybe to consider.

AFAIK, many DB pensions increase with inflation before they are taken ( deferred or not), but can increase by less in the years after being taken. Maybe for example with inflation but capped at 3% . Something else worth checking.

Secret2ndAccount

To clarify, while you are building up the pension, the cap applies over the entire period as a whole. Therefore, if you have several years below the cap, then a year of 10% inflation still stays under the cap as a whole over maybe 20 years or more. Once in payment the cap applies each and every year. So a 10% year, as we had recently, if your cap is 4%, leaves you 6% worse off for the rest of your days.

So, if your cap is only 2.5% or 3%, you could still miss some inflation increase during the accrual phase because you never build up the headroom to cope with it.

Frezzer01

The pension will increase in the deferred period at the same rate as pensions in payment. Increases are based on CPI and the cap is 3%. If I take the pension later an increase will be made by the Fund actuary based on conditions at the time, ie how long I have deferred etc.

I have left the organisation so no longer making contributions.

So, is it better to use my savings to supplement my income rather than take this pension?

& thanks again for the comments, didn't know anything about the cap. My other DB pension is not capped so that's a good thing.

poseidon1

You indicate you are running down savings to pay off debt.

In that scenario I would be inclined to take the remaining DB pension rather than defer, to halt the erosion of current savings ( especially if held in cash isas).

Taking that remaining pension should hopefully help to rebuild savings whilst unemployed and as you indicated give you choices on what kind of contract work you are prepared to undertake.

Incidentally you don't indicate what tax free lump sum relative to the £8500 might be available from the scheme. Even if you went for max pension, I would still expect some measure of TFC payable in addition.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82078780#Comment_82078780

The pension will increase in the deferred period at the same rate as pensions in payment. Increases are based on CPI and the cap is 3%.

I think @Secret2ndAccount was saying that even though the increases may look the same they actually operate slightly differently. The deferment increases are measured over the whole period from when you left the scheme to when you take the pension (normal retirement age?) while the increases to the pension in payment are done on a single year basis.

So very crudely if you have CPI of 2.5% in year 1 and 3.5% in year 2 then with the deferment increases you would get 6% over the two years but with the pension increases you would only get 2.5% in year 1 and then 3% in year 2.

However I am wondering if the deferment increases would actually apply after you reach normal retirement age. If you delay taking the pension that would be something to double check.

Frezzer01

I'm using my payoff money to supplement my income so the "debt" is just using my credit card for convenience and helps to track my spending.

I've a DC, SIPP, will get full SP, cash & S&S ISAs, plus a few bits and bobs. I intend to buy an annuity so am not interested in the TFLS even though the commutation rate is 17:1 (maths done by Copilot) if I give up 25% of the pension I'd get approx £40k lump sum but the pension reduces to approx £6K which I do not want as I'd like some certainly in retirement.

It is so helpful to have your views - thanks @poseidon1

Frezzer01

Well spotted @DRS1 - I didn't quite understand @Secret2ndAccount post not sure I 100% understanding yours . this line was taken from the letter I received from the pension scheme:

The pension will increase in the deferred period at the same rate as pensions in payment

Realistically will this make much difference if I only defer for one or two years? When I spoke with the pension people this morning they said it hadn't been below 3% for some time (although I know they can't predict what will happen in the future)

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82078855#Comment_82078855

Sounds like you have comprehensively covered all bases, and unlike the vast majority of the populace have critically looked at your TFC option with the DB scheme and made a measured decision to commute for higher income.

Can't fault your reasoning so far, so it really is merely a question of the timing in taking remaining DB benefits, compared to living off savings.

Others may differ, but I do have a specific views about eroding your capital base where a guranteed income source can be deployed to avoid that.

Frezzer01

@poseidon1 - it is mainly due to this forum that I have learned so much about pensions and as demonstrated by my posts, are still learning. A few years back I read on this forum that the best thing is to educate yourself on what I previously thought was a very boring subject - this impact was huge - certainly in my last role, understanding salary sacrifice, chucking as much into the DB & DC pensions which is definitely going to pay off.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82078872#Comment_82078872

Well my example was a fairly crude one but was trying to illustrate that it is not just the rate that matters but the period over which it is applied. Anyway it may not make much difference to you - we have had some hefty years of inflation recently so depending on when you left service there may not be much "headroom".

On the rate of CPI, according to NS&I when they reported the rise in CPI for my Index Linked Certificates in June, CPI for the last year (up to April 2026) was 2.82%.