Early retirement next year, is it worth adding to my pension?

Sunshine_and_Roses

I am 54, looking to retire early next year when I am 55. I currently work part time and pay 5% into workplace pension, employer adds 3%. This pot has around £16k.

I have two DB pensions, one which I plan to start taking next year which will be approx £6k per year. I will top this up with savings for day to day living, should only need between £6k and £8k a year.

My question is, what should I do with the workplace pension? Should I use the next 6 months to add into it for tax relief? Hear it being mentioned but don't really understand it as I am more familiar with DB pensions.

For context, house and car paid off, no debts, have PB and ISA (both cash and S&S) and cash emergency fund.

Appreciate any advice, thanks.

Brie

How much of a discount is there for you taking the DB pension(s) early? Would you be better waiting and using savings instead for a couple of years?

Would your employer contribute more if you increased your contributions? If yes then do so asap at least to get the max from them.

Presumably you have checked when and how much you will be getting from your state pension. If not, do so now - see the link in my signature.

Sunshine_and_Roses

Thanks for your reply @Brie

It's a deferred pension, they told me that it would not increase though I find that strange. DB2 can be taken in full at 60 so will leave that there.

Employer contributions do not increase if I increase mine, so it was just the tax benefits that i was curious about.

Full state pension due, paid NI for 37 years so it says its the most i can get.

mrklaw

for your original question it seems there is little downside to piling what you can into a DC pension (doesn’t need to be your workplace, could be a SIPP). If you have the spare funds I’d be tempted to go up to your maximum allowed (including the tax relief). its ‘free’ money

af1963

Anything you add to the pension will attract tax relief, up to the limit of contributing your entire salary, gross. So each £80 that you put into the pension becomes £100 after tax relief is added.

(If you earn, say, £10k during this tax year, you would pay £8k into the pension and it would be topped up to the gross £10k with tax relief. Substitute this with your own figures and pay in 80% of your salary.)

The pension is taxable when you take it out, apart from a 25% tax free lump sum. That would normally reduce your £100 back to £85. ( still £5 more than you started with).

But it sounds like you'll have at least a few years where your income (6k) will be well below your tax allowance (12.5K). If so, you can use these years to take money out of the pension without paying any tax on it at all. You could get the current £16K out over three years, taking out 6K per year, and if you added more this year, you could get that out in later years.

If you don't take cash out of the pension until later, you may find your other pensions and state pension use up all the tax free allowance.

Brie

https://forums.moneysavingexpert.com/discussion/comment/82107110#Comment_82107110

double check. I was given incorrect information about one of my DB pensions (wrong normal retirement age, wrong amount that would be paid, likely all due to the scheme changing after I had joined so newer members had different rules.) Ask them for 2 quotes is possible. "what happens if I start receiving my pension in 2027 vs 2029?" or similar. If they are answering specific questions they may do better at answering. Ensure also that they are answering on the basis that you are not an active member so that no additional contributions are being made.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82107110#Comment_82107110

It's a deferred pension, they told me that it would not increase though I find that strange

You're right that does sound strange. What period of service does the pension relate to - pre 1986 or pre 1997?

There are two types of pension "increase" which they could be talking about. Increases to the pension when it is being paid - and they may not apply to pension relating to service before 1997 (but that could vary depending on the scheme rules). Or increases (aka revaluation) of the deferred pension between the date of leaving service and when the pension starts to be paid - and they may not apply to pension relating to service before 1986.

But @Brie was not talking about either of them. She was talking about early retirement reduction factors. If you have a normal retirement date of 60 and a pension at 60 of say £10kpa but you take it at 55 instead then there would usually be a reduction of the £10k to reflect the fact that you start getting the pension 5 years early. That might be say 5% pa so crudely you might get £7500 at age 55.

Sunshine_and_Roses

https://forums.moneysavingexpert.com/discussion/comment/82107137#Comment_82107137

https://forums.moneysavingexpert.com/discussion/comment/82107237#Comment_82107237

That is really helpful, thank you for a great explaination.

I have maxed out both my and my husband's ISA allowance for the year, and may incur some tax on other savings. A fixed saver is due to mature this tax year which will take me over the starter rate. Would it be better to reduce my salary at source by paying an extra amount direct into my workplace pension?

I have my ISA with T212, so it would be easier for me to stick with them if I opened a SIPP. Using your figures, I could put £8k out of my savings into a SIPP and this would be topped up to £10k. Is this each financial year - could I repeat this next April 7th if I retired later in the year? Could I then move my workplace pension to this SIPP when I retire, therefore giving me £36k plus growth? Or is this too good to be true?

Sorry for so many jumbled questions, appreciate your help.

Sunshine_and_Roses

My NRA is 67, however one DB pension matures at 60 as the normal age for actual pension. The other DB pension is due to mature at age 67, forecast at £11k per year but reduced to £6.7k at age 55.

DRS1

A fixed saver is due to mature this tax year which will take me over the starter rate. Would it be better to reduce my salary at source by paying an extra amount direct into my workplace pension?

How do contributions to your workplace pension work? Are they done by salary sacrifice? Or net pay? Those might reduce your taxable salary but they may not be the best contributions for you depending on how much you are paid.

A relief at source pension contribution such as you would make to a SIPP doesn't reduce your taxable salary so wouldn't help with the starter rate (I think). But it does make a lot of sense if you are earning less than your personal allowance - because you get the basic rate tax relief credited to the SIPP even though you haven't actually paid any 20% tax.

Brie

https://forums.moneysavingexpert.com/discussion/comment/82107305#Comment_82107305

That's a big reduction but then 55 is a long time before 67. Then again you get the £6.7k a lot longer so it might take you until your mid 80s for taking it early might begin to cost you. Assuming no increases but I suspect there will be some at some point. So I guess it comes down to your health and family history as to what might be the best option.

Have you checked what guarantees there are? The DB I have includes a "widow's pension" so as long as him indoors is still knocking about when I pop my clogs he'll get 50% of what I currently get. Likewise for me if he pops first. This is automatic in our DBs (same employer but different versions of their scheme).

There may also be the option of a guarantee to pay for 10 years after initiating the payments so if you start at 55 but die 3 years later your beneficiary will get the money for the remaining 7 years. Again - consider what guarantee you are comfortable with and whether your intended beneficiary will actually benefit or can it be switched via you will to someone else. I like the idea of a long guarantee period for my annuity (different product obviously) because I want to ensure "I" get my money's worth. It's unlikely to benefit my OH because despite being younger his health is not grand so I'll be finding a way for it to go to nieces and nephews instead.