What’s a good reduction factor?

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ArianSandra
ArianSandra Posts: 32 Forumite
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in Pensions, annuities & retirement planning
I’ve obtained an early retirement quote from a deferred final salary scheme assuming taking benefits 11 months early. NRA for the scheme is 60. The reduction factor applied is 0.928.

That’s much less than I was expecting. Is this a no brainer or am I missing something?

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  • Brynsam
    Brynsam Posts: 3,643 Forumite
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    Are you retiring from 'active' membership (i.e. leaving your current job and immediately taking retirement benefits from the scheme associated with your current employment)?
  • ArianSandra
    ArianSandra Posts: 32 Forumite
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    No I left the scheme in 2000 with deferred benefits.
  • Shedman
    Shedman Posts: 1,495 Forumite
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    edited 24 April 2018 at 11:10PM
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    Assuming I am understanding you correctly - that you would be taking pension at 59 years and 1 month old - then a 7.2% reduction seems a bit steep to me. It would mean that, ignoring any tax effects, there would be around about a 13 year breakeven point (ie if you live beyond 73 you'd be losing out rather than waiting to NRD).

    As a comparative my scheme appears to use around 5% reduction per year early from quotes I have had (so 11 months early would be about 4.6% or .954 in terms you've used). It also seems from what I have read on the forums that between 4% and 5% reduction per year is fairly common.

    Also another thing to consider is the impact on spouses pension if applicable as usually it would be 50% of the actuarially reduced sum.
  • ArianSandra
    ArianSandra Posts: 32 Forumite
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    Thanks, I think you are right. I was misunderstanding how the 0.928 factor would be applied.

    I appreciate the clarification!
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
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    Yes I agree with Shedman that's a harsh reduction, hang on for the 11 months.
  • Brynsam
    Brynsam Posts: 3,643 Forumite
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    I'd be tempted to ask the scheme when it last reviewed its early retirement factors - that seems very high, even for a deferred pensioner.
  • jamesperrett
    jamesperrett Posts: 1,009 Forumite
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    With the Civil Service pension schemes the scale factor isn't linear so it works out at something like 3.5% per year going 10 years early, going up to 4% per year retiring 5 years early and then goes to more than 5% for going a year early. I don't have access to the current figures but, while your figure may be slightly high, it isn't ludicrously high.
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
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    edited 25 April 2018 at 10:22AM
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    For the sake of 11 months I'd say even if the money was needed the OP should look at whatever it took to avoid taking the reduction

    Getting a loan, really cutting back expenditure, a job however mundane, a combination of all of those, whatever it takes to get by for less than one year.

    And given the OPs tone that they dont appear to be in immediate need, there would seem to be no reason to take such a cut over the rest of their retirement.

    Another way of phrasing your question, Arian, is as follows.
    If you could delay taking that pension by 11 months for a one-time opportunity to get a 7% increase in your pension for the rest of your life, would you?
  • ArianSandra
    ArianSandra Posts: 32 Forumite
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    AnotherJoe wrote: »
    For the sake of 11 months I'd say even if the money was needed the OP should look at whatever it took to avoid taking the reduction

    Getting a loan, really cutting back expenditure, a job however mundane, a combination of all of those, whatever it takes to get by for less than one year.

    And given the OPs tone that they dont appear to be in immediate need, there would seem to be no reason to take such a cut over the rest of their retirement.

    Another way of phrasing your question, Arian, is as follows.

    Very true. I only got the early quote to try to firm up the final figure for age 60 (they can’t do accurate estimates more than 6 months in advance apparently) and totally misunderstood what the application of the reduction factor meant, so at first it looked appealing. But the exercise has achieved the aim and I’m certainly not keen on that penalty so it looks like I’m hanging on for 11 months, which was Plan A!

    Thanks to all who contributed.
  • Brynsam
    Brynsam Posts: 3,643 Forumite
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    jamesperrett wrote: »
    With the Civil Service pension schemes the scale factor isn't linear so it works out at something like 3.5% per year going 10 years early, going up to 4% per year retiring 5 years early and then goes to more than 5% for going a year early. I don't have access to the current figures but, while your figure may be slightly high, it isn't ludicrously high.

    It is out of line with what might be expected when OP is so close to the scheme's NRA. The scheme must have a very curious investment strategy - or very out of date factors.
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