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  • FIRST POST
    • wrattej
    • By wrattej 10th Mar 18, 3:45 PM
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    wrattej
    Defined Benefit vs Defined Contribution Question
    • #1
    • 10th Mar 18, 3:45 PM
    Defined Benefit vs Defined Contribution Question 10th Mar 18 at 3:45 PM
    My Wife has just started a new job at age 50. She is planning to work another 5 years and then retire at 55. She already has a decent deferred final salary pension from her previous employment which has a normal commencement age of 60. She would prefer not to take this pension at 55 in order not to have it reduced for taking it early.

    The new job comes with a choice of pension options. By default, she becomes a member of the career average defined benefit scheme. This is non-contributory, has an accrual rate of 90ths, and is payable at age 65.

    She can choose to salary sacrifice to increase the accrual rate to 50ths. She can also choose to decrease the accrual rate to 120ths and receive a cash top up to her salary.

    In addition, there is a supplementary defined contribution scheme available.

    The dilemma: In order to finance the period between 55 – 60 before her FS salary kicks in, she’s considering going for the lower accrual rate in the new career average scheme (120th) and then aggressively contributing to the money purchase scheme (putting in about £2000 per month) to build up a nice pot that can be used between age 55 and 60.

    I’ve also got a decent deferred final salary entitlement so we’re not too concerned that we’re swapping some guaranteed income for a pot of cash that can be used to finance the “early retirement” years.

    Does this make sense? It’s seems like a very tax efficient and flexible way of doing things. A fair chunk of the income from the pot when she draws it down would be tax free (using the 25% tax free and her tax free earning allowance). Or are we mad in not max-ing out the defined benefits pension that she has available to her?
Page 1
    • Linton
    • By Linton 10th Mar 18, 4:04 PM
    • 9,394 Posts
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    Linton
    • #2
    • 10th Mar 18, 4:04 PM
    • #2
    • 10th Mar 18, 4:04 PM
    Meeting your objectives is far more important than maximising return. If you and your wife already have sufficient DB pension to finance your retirement in the long term it certainly makes sense to focus further pension payments on being able to retire early.
    • Brynsam
    • By Brynsam 10th Mar 18, 4:26 PM
    • 1,144 Posts
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    Brynsam
    • #3
    • 10th Mar 18, 4:26 PM
    • #3
    • 10th Mar 18, 4:26 PM
    An accrual rate of 1/50 could generate a very interesting transfer value after only a few years, particularly given her age... You don't say how much the salary sacrifice would be, but that could be a very tasty option indeed.
    • wrattej
    • By wrattej 10th Mar 18, 4:55 PM
    • 3 Posts
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    wrattej
    • #4
    • 10th Mar 18, 4:55 PM
    • #4
    • 10th Mar 18, 4:55 PM
    That is interesting indeed. So, basically she could pile into the DB scheme at 1/50 between now and 55 and then transfer out at 55. That takes away the risk between now and 55 too.
    • Brynsam
    • By Brynsam 10th Mar 18, 7:18 PM
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    Brynsam
    • #5
    • 10th Mar 18, 7:18 PM
    • #5
    • 10th Mar 18, 7:18 PM
    That is interesting indeed. So, basically she could pile into the DB scheme at 1/50 between now and 55 and then transfer out at 55. That takes away the risk between now and 55 too.
    Originally posted by wrattej
    Yes - although it is worth checking first whether she'd be better off staying in the scheme and retiring early (albeit with a reduction factor), depending on how she wants to access the cash. It's a decision which would need to be taken at the time, because nobody can guess what the transfer value would be (depends on prevailing market conditions).
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