To take pension at 60 or not that is the question?

Carolina_2

I am female aged 59 - intend to work until 65 for sure. Have recently changed from council employee to NHS Trust employee been tupeed over - job remains the same. Therefore now have a dilemma. Do I
1. Transfer council pension into NHS Scheme I have to
do this quickly before age 60 next March.
2. Freeze council pension - pay into NHS Scheme and
end up with 2 pensions.
3. Take Council pension at age 60 and pay into NHS
pension scheme for next 5 yrs. Again ending up with
two pensions.

Some figures:
I earn £24,000 per annum
Council pension if paid at 60 £3031
if paid at 65 £4152
Council Lump sum if paid at 60 £11,087
if paid at 65 £12,457
Both council and NHS pensions are similar i.e. one eightieth x length of service on final salary.

Same dilemma with state pension
If taken at age 60 will be £104.84 per wk (as forecasted)
Could earn an extra 7.5% per yr if left till 65 and possibly more with new govt. proposals.

Also have tiny FSAVC with Prudential - probably missold should have gone into Council AVC - however fund of £4,320 projected pension £253.44 PER ANNUM. Again what the hell shall I do with that??????????????

I will be terribly grateful for any assistance with this as it is driving me potty.......................

dunstonh

General rule of thumb, if you dont need it, dont take it.

Not giving any advice here as there isnt enough information but i would suggest you investigate transferring between the schemes and continuing it until 65. To me, based on what you have said, that would be the simplest option and most convenient in the long run.

Also, leaving the FSAVC until after April 2006 will allow a tax free lump sum from it which is not currently available.

Carolina_2

Thanks DD
I was having terrible trouble trying to work out if taking the pensions at 60 would be worth doing i.e. 5yrs of index linked income ( though taxable) versus how many years of increased income after 65 would it take to recover that 5 yrs income taken from 60. My head is spinning just trying to explain it. :-/

djohn2002uk

You need to think harder about this.
If you take your council pension at 60, by the time you reach 65 you will have received £15,155, if this was invested to average just 3% over the 5yrs it would add another £1419 making £16574.  By leaving it untill 65 it will give you an increase of £1121 per year, so it will take you untill you are between 79 and 80yrs old to have received the same amount.
The council lump sum if taken at 60 and invested in a 5yr building society bond should get you AT LEAST 5% per year, so at 65 it would be worth £13248.96 after paying tax at 22% Far better than the £12457 realised by leaving it where it is.
The rates of interest I've used are on the conservative side and you could do better but don't use risky investments, stick with Building Societies.
So you can see that you could have a really nice nest egg of almost £30,000 by the time you are 65 from the council.
Now the old age pension.
This if taken at 60 will give you £5451.68 per year. Again if invested at an average of just 3%, at the end of 5yrs you should have £29812, not including any pension rises during the 5 yrs. Leaving it untill 65 would give you an extra £408 per year but you will have lost £29812, that would take 60yrs to recoup that money, although I haven't taken tax into acount here and your government pension and the interest will attract 22% tax, but so will the £408 increase you would get by leaving it untill 65.
I was given this sort of advice when I retired early from the Civil Service with exactly the same pension scheme as yours, and I haven't regretted following that advice although I invested my lump sum differently in putting it into building a house and selling it. But I did have a large garden on which to do it.
So you can see, although the figures may not be exact they are close enough to say, take the money and run.

dunstonh

I should point out that i wasnt giving advice but saying it was a general rule of thumb.

There are many variables to take into account which is why you never get advice from a bulletin board or newsgroup.

For instance, how is the retirement income calculated?  Is it best 3 years in the last 10 or best 3 consecutive years in the last 10 or is last full years income or something different?    

If the income is higher now and will be for the next 3-5 years then it makes much more sense to stick with the scheme if the retirement income is based on best income over x number of years.

Equally, if your best years are going to drop off, then take it early and rejoin.  Making sure that you can actually rejoin before you comit yourself.

djohn2002uk

DD, wasn't contradicting your advice, just pointing out the experience I had with the same scheme. These schemes are not always exactly the same but the basics are. Mine was based on an average of the last 3 years, the NHS is based on the BEST of the last 3 Years and the council may be different again but it makes no difference to the calculations because she has been told what the pension and lump sum will be at age 60 and 65 (This employment is finished so no variables will apply, it's already calculated.) and what her government pension will be in both cases. Sorry if it looked like I was having a go at your advice but I can assure you I wasn't. Just passing on the benefit of the proffesional advice I was given, and I still had 8 years for mine to grow.

dunstonh

no problem at all. I was just clarifying that i wasnt recommending anything. In the case of one post, you cant give advice. You read it quickly and make a comment. Sometimes you read it too quickly

Carolina_2

DJjohn2002 you have clearly laid out the options that have been taxing my brain and calculator - so many bits of paper - so many sums - so that I now have a good understanding of "to take or not to take" situation.
You are right that the pension rules are the same for council and NHS ie. pension is based on final year salary or best of last 3 yrs. The only possible downside I can think of would be if my enhanced income at 60 ended up putting me into the next tax bracket of 40% ie. salary + council pension+state pension. No longer having to pay NI contributions currently about £130 per month would increase my income further adding to savings options . I think the limit is £30000 before 40% tax rate kicks in. I'm not sure if this is before or after tax allowance. I would like to thank you for taking the time and effort to work out those calculations and passing on the information to me. Cheers!!!!!!!!!!!!!!!!!

djohn2002uk

Your income would pass the threshold by £1,082 per year, which would cost you another £194 per year (thedifference between paying 22% and 40% on the £1082 that exceeds the threshold). Of course you will probably have increases in both pensions during the 5 years, and while this will incur more tax, you must remember that it also increases your nestegg.
If I am thinking correctly, your reason for working to 65 is more because you want to than have to, and because of this I would sugest that you maybe give some thought to perhaps cutting down your hours if possible. As a guess, 4 days a week might keep you in the 22% bracket for the whole 5 years (and give you a day for housework and shopping).
Another thing is that the chancellor may increase the threshold a little too, it went up £900 last time.
Take it into account by all means but don't get hung up on the fact you are paying more tax, we do that all our lives.
By my calculations you will have over £59,000 from both pensions by age 65 (without any increases in either) and probably considerably more. The increases in the pensions and lumpsums by deferring them wont come near that untill you are in your 80s and then you have the interest on that from 65 onwards towards your income too.

Pal

If I am thinking correctly, your reason for working to 65 is more because you want to than have to, and because of this I would sugest that you maybe give some thought to perhaps cutting down your hours if possible. As a guess, 4 days a week might keep you in the 22% bracket for the whole 5 years (and give you a day for housework and shopping).

I may have missed something here (if so I apologise in advance) but I cannot see any monetary advantage to reducing working hours simply to avoid moving into a higher tax bracket. Moving into the 40% tax bracket is a good thing, as it means that you are taking home more money and, as you point out, the higher rate is only payable on the earnings over the tax threshold.