Laving a DB Pension for 2 years - Make Sense?
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Leaving a defined benefit pension for 2 years - Make Sense?
Im leaving work with VS next month aged 59 and in theory my severance payment would be enough to live on for 2 years. (my lump sum divided by 24 just about equals my take home now)
I have 2 pensions at the same firm, both defined benefit.
Is there an advantage to leaving my pensions for those two years, accessing it later so the monthly pension would be greater? Does it work like that? I know Id get Trustee inflationary rises etc, but nor sure it becomes more valuble due to later access.
My scheme has knockdown factors for every year you retire before 65
Another thought is to draw that cash every month and bank it.
Appreciate any advice please?
Cheers
Paul
Im leaving work with VS next month aged 59 and in theory my severance payment would be enough to live on for 2 years. (my lump sum divided by 24 just about equals my take home now)
I have 2 pensions at the same firm, both defined benefit.
Is there an advantage to leaving my pensions for those two years, accessing it later so the monthly pension would be greater? Does it work like that? I know Id get Trustee inflationary rises etc, but nor sure it becomes more valuble due to later access.
My scheme has knockdown factors for every year you retire before 65
Another thought is to draw that cash every month and bank it.
Appreciate any advice please?
Cheers
Paul
Edited by pauljdh on Friday 24th July 14:35
pauljdh said:
My scheme has knockdown factors for every year you retire before 65
Very much dependent on this I would have thought? What is the percentage reduction for each extra year prior to the normal retirement age that the pension will be in payment?Also worth considering - do you know the amount of the Tax Free Lump Sum and how much pension you will be giving up in exchange for this?
It is worth taking specialist advice (and I dont say that lightly!) as there may be lots of things to consider. For example is it possible that the company will offer you enhanced early retirement as part of your severance or could you trade part of your severance package for it? That may be very tax efficient. Or can you pay your severance payment into your pension? Depending on prior contributions again this may be tax efficient - take £30k severance which may well be tax free and effectively put the rest into your pension?
Generally taking a pension early can be quite expensive but a lot depends on the scheme rules, discount factors, your marginal tax rate etc (eg if you are just about to tip over into higher rate tax it may not be such a good deal).
Generally taking a pension early can be quite expensive but a lot depends on the scheme rules, discount factors, your marginal tax rate etc (eg if you are just about to tip over into higher rate tax it may not be such a good deal).
pauljdh said:
They'll pay for IFA (£500 + vat) and they are, fro the first time offering a bridging pension option - returning some of the severance payment and it you wish some of your lifetime pension - details are forthcoming...is that what you mean?
Yes that sort of thing exactly. I'm not an IFA but there are a couple who regularly contribute on here or those behind the IM sticky are knowledgeable and helpful.Hi Paul
Congratulation on exiting the rat race!
If you are mortgage free (i.e. don't need your severance to cover this) then it usually works out best for you to delay drawing your DB pension until the point you need to.
It boils down to the reduction rates for early access.
If the reduction is quite low then actually taking the two year's worth of income and then banking/investing it can make sense, but if the reduction is high then this generally makes no sense.
For example, a 10% reduction on a £50k pension income (just to use a random number) would give you £90k of income before tax.
However, it would also deprive you of £125k worth of index linked pension income over the next 25 years (again, before tax).
So at first glance delaying is far more sensible, but there are other considerations, as investing £90k over 5 years and getting a 7% average annual return would turn this into just over £125k before you hit 65.
Then there is the state pension to factor in which will provide a further income boost.
So whilst trying to be helpful here, there are a lot of variables and at the end of the day much of it comes to whether you are happy to take some degree of risk or would rather stick with the guarantees.
Please feel free to post on the IM sticky and Nik will run the calculations for you for free. Alternatively take up the offer of some pain for time with an IFA. Once you have the figures and some guidance it will all become quite simple for you.
Congratulation on exiting the rat race!
If you are mortgage free (i.e. don't need your severance to cover this) then it usually works out best for you to delay drawing your DB pension until the point you need to.
It boils down to the reduction rates for early access.
If the reduction is quite low then actually taking the two year's worth of income and then banking/investing it can make sense, but if the reduction is high then this generally makes no sense.
For example, a 10% reduction on a £50k pension income (just to use a random number) would give you £90k of income before tax.
However, it would also deprive you of £125k worth of index linked pension income over the next 25 years (again, before tax).
So at first glance delaying is far more sensible, but there are other considerations, as investing £90k over 5 years and getting a 7% average annual return would turn this into just over £125k before you hit 65.
Then there is the state pension to factor in which will provide a further income boost.
So whilst trying to be helpful here, there are a lot of variables and at the end of the day much of it comes to whether you are happy to take some degree of risk or would rather stick with the guarantees.
Please feel free to post on the IM sticky and Nik will run the calculations for you for free. Alternatively take up the offer of some pain for time with an IFA. Once you have the figures and some guidance it will all become quite simple for you.
^^^ What Julian said.
The key point being how the pension fits with your overall financial position.
Statistics say a 65 year old retiree probably has 20 years of "retirement" ahead. Retire at 60 and that becomes 25. The pension reduction for drawing pension early can work out expensive over that length of time.
Notional figures:
There's often a lot to be said for holding off as long as you can....
If you have savings or other investments - consider spending them first. You can always replenish those reserves from the tax free cash lump sum when you eventually draw your pension. It all depends on your circumstances.
(N.B. Keep an eye on tax rates. In the example above it would look less aggressive a difference if the £30k was taxed at 20% but the extra £10k would be taxed at 40%. It all depends on your circumstances. And don't forget State Pension will eventually kick in which may swing your net position again.)
The key point being how the pension fits with your overall financial position.
Statistics say a 65 year old retiree probably has 20 years of "retirement" ahead. Retire at 60 and that becomes 25. The pension reduction for drawing pension early can work out expensive over that length of time.
Notional figures:
- Pension at 65 would be £40,000
- Early retirement reduction, say, 5% for every year you draw it early
- Retire at 60 = 5 years early, so 5 x 5 = 25% = £10k pension reduction. That's a pension of £30,000 p.a. at 60 instead of £40,000 p.a. at 65
- "Cost" = 25 years at £10,000 p.a. = £250,000
- But you've received 5 years of early pension = 5 x 30,000 = £150,000
- Net cost of early retirement = £250k - £150k = £100,000
There's often a lot to be said for holding off as long as you can....
If you have savings or other investments - consider spending them first. You can always replenish those reserves from the tax free cash lump sum when you eventually draw your pension. It all depends on your circumstances.
(N.B. Keep an eye on tax rates. In the example above it would look less aggressive a difference if the £30k was taxed at 20% but the extra £10k would be taxed at 40%. It all depends on your circumstances. And don't forget State Pension will eventually kick in which may swing your net position again.)
pauljdh said:
Here's a summary of my knockdown factors
The bit you've cut off at the bottom of that scan can also be very relevant. I think you'll find it says some of your pension in payment will get no annual indexation, some will get a limited form of indexation and some will get an even more limited form of indexation - it all depends on your length of service etc. You need to get your head around this because the effects could be significant over a 20 year time-frame, especially if inflation were to accelerate from the current low level. You may find you get better indexation before you draw your pension than you will get when it's actually in payment - which might be another good reason to defer drawing your pension for as long as possible.This sort of stuff all dovetails into why some members can justify transferring out of a DB scheme while others can't. There's a lot to consider - and always in the context of your overall family/financial situation.
[quote=pauljdh]how does that look?[url]
It looks exactly as expected - your employer has reduced indexation to the legal minimum. However, the implications are entirely dependent upon your period(s) of service, overall financial situation and your thoughts about how the future may unfold (i.e. future inflation). A good IFA might be useful to you - there are some pretty sensible ones who post in this forum from time to time. You could drop a PM to a couple of them and see what they would charge as a one-off fee to review and discuss your situation.
It looks exactly as expected - your employer has reduced indexation to the legal minimum. However, the implications are entirely dependent upon your period(s) of service, overall financial situation and your thoughts about how the future may unfold (i.e. future inflation). A good IFA might be useful to you - there are some pretty sensible ones who post in this forum from time to time. You could drop a PM to a couple of them and see what they would charge as a one-off fee to review and discuss your situation.
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