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Should I take my Defined Benefit pension “into payment” immediately?

Relaxer
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Joined: January 16th, 2020, 5:07 pm

Should I take my Defined Benefit pension “into payment” immediately?

#411367

Postby Relaxer » May 12th, 2021, 1:51 pm

Should I take my Defined Benefit pension “into payment” immediately?
Are there any benefits in delaying or transferring it. At age 60 I have finished work – at least full time anyway. This old DB (Final Salary Pension) was from 3 years work I did in the eighties, it is quoting about £5k pa pension or £119k TV. …..what are the thoughts of the good people here? Are there any downsides to taking this pension now?

Supporting information
• Five other (DC) pensions which I will leave for now.
• No LTA issues – I am well below that sadly.
• I am unlikely to make future pension contributions
• I am very unlikely to work full time / pay higher tax rate again (even with the 5k)
• I will take the 25% lump – seems silly not to (thoughts?)
• It has inflation link, spousal after my death and 5 years of life insurance baked in.

Shall I hit the button?

ursaminortaur
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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411400

Postby ursaminortaur » May 12th, 2021, 3:42 pm

Relaxer wrote:Should I take my Defined Benefit pension “into payment” immediately?
Are there any benefits in delaying or transferring it. At age 60 I have finished work – at least full time anyway. This old DB (Final Salary Pension) was from 3 years work I did in the eighties, it is quoting about £5k pa pension or £119k TV. …..what are the thoughts of the good people here? Are there any downsides to taking this pension now?

Supporting information
• Five other (DC) pensions which I will leave for now.
• No LTA issues – I am well below that sadly.
• I am unlikely to make future pension contributions
• I am very unlikely to work full time / pay higher tax rate again (even with the 5k)
• I will take the 25% lump – seems silly not to (thoughts?)
• It has inflation link, spousal after my death and 5 years of life insurance baked in.

Shall I hit the button?


Is 60 the Normal Retirement Age for this DB pension or will you be taking it early and if so does that mean that there is an actuarial reduction which would be less if you delayed taking it ?

Older DB pensions often came with a tax free lump sum which followed some formula, eg a lump sum of 3 x the pension, which you got automatically. However this would often be less than the 25% tax free lump* which you are now entitled to take if you wish. The problem is that in order to give you that full 25% tax free lump sum you have to convert some of your annual DB pension to cash in a process known as commutation ie You get £x of lump sum for each £1 of annual pension you give up. Unfortunately the commutation rates can be pretty measly. For instance with public sector DB pensions the standard commutation rate is 12. A fairer rate would probably be at least double this. Hence it may well be better to forgo taking the 25% lump sum unless your life expectancy is limited or you know that the scheme provides a good commutation factor.

* There are a few older DBs where this automatic lump sum worked out as more than 25% and if you were lucky enough to have one of those your rights to take that larger lump sum tax free were preserved in the A-day legislation.

Relaxer
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Joined: January 16th, 2020, 5:07 pm

Re: Should I take my Defined Benefit pension “into payment” immediately?

#411412

Postby Relaxer » May 12th, 2021, 4:14 pm

thanks Ursaminator. Very helpful sounding board.

Lump Sum:
I have a quote from a couple of years ago which indicated a commutation rate of about 24. Fresh numbers on the way so i can check it again. There do not seem to be any special provisions over the lump sum. I would say by comparing the TV/Pension the TV appears to be yielding 4.2% and because it is indexed for inflation i would say call it 6.2%. So if i took the TFLS and invested it wisely they i am guessing i could get about the same (take 4 and reinvest 2 for inflation). The difference being - when I die the lump sum would still be there for my estate, whereas with the pension, there will be nothing to inherit. On that basis, lump sum wins every time? Note - the spousal part stays the same with or without lump sum (surprisingly).

Actuarial Reduction :
You raise a good point. The pension firm quotes at a specific date so if am not sure how i can find out what the pension would be if I hung on until I was say 65. This is my main question actually. Would it me more? How can i find out? My assumption is that yes it would be more because i will be several years nearer to my life expectancy. But then you get to receive the pension for less time. So its a case of swings and roundabouts. My guess is that the pension firm will not want me poking about in its calculations so I just have to trust them that early retirement is a fair deal?

staffordian
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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411417

Postby staffordian » May 12th, 2021, 4:28 pm

From what I can see, if it's a company scheme, then I think pensioners in receipt of their pension fare better than the rest should the worst happen and the company go under without the pension being properly funded.

Not an issue with a Civil Service or LG pension, of course.

Just something to consider?

Relaxer
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Joined: January 16th, 2020, 5:07 pm

Re: Should I take my Defined Benefit pension “into payment” immediately?

#411421

Postby Relaxer » May 12th, 2021, 4:45 pm

thats a good point too.
So basically lock in now to become a higher priority should the scheme default. I never though of that.


staffordian wrote:From what I can see, if it's a company scheme, then I think pensioners in receipt of their pension fare better than the rest should the worst happen and the company go under without the pension being properly funded.

Not an issue with a Civil Service or LG pension, of course.

Just something to consider?

ursaminortaur
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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411434

Postby ursaminortaur » May 12th, 2021, 5:18 pm

Relaxer wrote:thats a good point too.
So basically lock in now to become a higher priority should the scheme default. I never though of that.


staffordian wrote:From what I can see, if it's a company scheme, then I think pensioners in receipt of their pension fare better than the rest should the worst happen and the company go under without the pension being properly funded.

Not an issue with a Civil Service or LG pension, of course.

Just something to consider?


Unfortunately the PPF doesn't work like that. If the organisation fails and its pension goes into the PPF then anyone who has not reached the normal retirement age for the scheme whether they are already in receipt of the pension or not will only be eligible for 90% of the DB pension.

https://www.ppf.co.uk/sites/default/files/file-2019-07/what_is_the_pension_protection_fund.pdf

Members who have not reached the scheme’s normal pension age at the assessment date will receive up to 90% compensation on reaching the normal pension age of their scheme. Members who have retired but have not reached their normal pension age at the assessment date will also receive up to 90% compensation

The closest example they give is for someone who had been in receipt of a much much bigger pension than you and hence was subject to a cap. That capped pension was then reduced to 90% since at the time the firm became insolvent he was still below the scheme's normal retirement age.

I’m 60 years old and took early retirement from my employer after 35 years service. My pension was £75,000 a year.The company became insolvent – and the PPF became involved – before I reached the scheme’s normal pension age of 65. The PPF will pay me 90 per cent of my benefits, capped at a specific level.

At that time the compensation cap was £34,285.88 at the age of 60. The cap is adjusted according to my age when the PPF assessment period began, as I was already receiving my pension. As I had 35 years’ service in my former scheme the cap is increased to £49,714.24*.As I hadn’t reached the scheme’s normal pension age when my employer became insolvent, my annual payments from the PPF will be £44,742.81 a year, after the cap and 90 per cent level have been applied.

ursaminortaur
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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411442

Postby ursaminortaur » May 12th, 2021, 5:42 pm

Relaxer wrote:thanks Ursaminator. Very helpful sounding board.

Lump Sum:
I have a quote from a couple of years ago which indicated a commutation rate of about 24. Fresh numbers on the way so i can check it again. There do not seem to be any special provisions over the lump sum. I would say by comparing the TV/Pension the TV appears to be yielding 4.2% and because it is indexed for inflation i would say call it 6.2%. So if i took the TFLS and invested it wisely they i am guessing i could get about the same (take 4 and reinvest 2 for inflation). The difference being - when I die the lump sum would still be there for my estate, whereas with the pension, there will be nothing to inherit. On that basis, lump sum wins every time? Note - the spousal part stays the same with or without lump sum (surprisingly).

Actuarial Reduction :
You raise a good point. The pension firm quotes at a specific date so if am not sure how i can find out what the pension would be if I hung on until I was say 65. This is my main question actually. Would it me more? How can i find out? My assumption is that yes it would be more because i will be several years nearer to my life expectancy. But then you get to receive the pension for less time. So its a case of swings and roundabouts. My guess is that the pension firm will not want me poking about in its calculations so I just have to trust them that early retirement is a fair deal?


You should be receiving annual pension statements from all your DB pensions which should give a figure for what you get at the normal retirement age. That figure will be in today's currency. If you actually waited until normal retirement age the nominal amount you would actually receive would be greater as it will increase each year with inflation.

If you haven't received that information then the company should be able to provide that information and also confirm what the normal retirement age is for the scheme (It is possible it is actually 60 which might explain why they didn't provide figures for both taking it at the normal retirement age and taking it early with an actuarial reduction).

Relaxer
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Joined: January 16th, 2020, 5:07 pm

Re: Should I take my Defined Benefit pension “into payment” immediately?

#411449

Postby Relaxer » May 12th, 2021, 6:10 pm

thanks Ursaminator

the pension fund rather sniffilly says that they dont provide annual statements for company pensions like it was some law of physics rather than a shortfall in customer services.

i am working on the assumption that they are unlikely to go bust so i am not too worried about my recovery rate should that happen.

sounds to me like i should pull the trigger and take the TFLS. i will take a hard look at the final quote when it comes in 10 days.

These guys are so unbelievablly antiquated - all this should be instantly available on a portal. every enquiry has to be submitted by email and you can expect a 10 day turnaround.

Getting old is so low-tech

Alaric
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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411452

Postby Alaric » May 12th, 2021, 6:45 pm

Relaxer wrote:sounds to me like i should pull the trigger and take the TFLS. i will take a hard look at the final quote when it comes in 10 days.


You perhaps need to establish whether 60 is the "normal retirement age". If it is and you don't have an immediate need for the income, deferring your retirement is likely to trigger a rule which enhances your ultimate TFLS and pension income.

PhaseThree

Re: Should I take my Defined Benefit pension “into payment” immediately?

#411455

Postby PhaseThree » May 12th, 2021, 7:00 pm

One other point to consider is what happens if you don't make it to the schemes normal retirement age for some reason.

One of my small DB schemes (GEC) would return your contributions to the scheme on your death before 65 but nothing more.
At 55 I transferred the DB out to a DC scheme at a ratio of around 30x. The risk of dying early although small was too big to run with.

It's definitely worth reading the small print - some schemes have some very bizarre clauses when looked at in hindsight.

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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411471

Postby ursaminortaur » May 12th, 2021, 8:44 pm

PhaseThree wrote:One other point to consider is what happens if you don't make it to the schemes normal retirement age for some reason.

One of my small DB schemes (GEC) would return your contributions to the scheme on your death before 65 but nothing more.
At 55 I transferred the DB out to a DC scheme at a ratio of around 30x. The risk of dying early although small was too big to run with.

It's definitely worth reading the small print - some schemes have some very bizarre clauses when looked at in hindsight.


Since the OP's transfer value is £119k advice would have to be taken and paid for from a suitably qualified financial adviser if a transfer to a DC scheme was being contemplated - such advice is now required for any transfer where the transfer value is £30k or more.

The advice would likely be to leave it with the DB scheme. However the client can, once advice has been taken, ignore the advice and carry out the transfer as an insistent client provided the client can find a DC provider prepared to accept the transfer. Unfortunately many pension providers are no longer prepared to accept insistent clients - I believe A J Bell still accept DB transfers from insistent clients into their SIPP.

PhaseThree

Re: Should I take my Defined Benefit pension “into payment” immediately?

#411473

Postby PhaseThree » May 12th, 2021, 8:58 pm

ursaminortaur wrote:
PhaseThree wrote:One other point to consider is what happens if you don't make it to the schemes normal retirement age for some reason.

One of my small DB schemes (GEC) would return your contributions to the scheme on your death before 65 but nothing more.
At 55 I transferred the DB out to a DC scheme at a ratio of around 30x. The risk of dying early although small was too big to run with.

It's definitely worth reading the small print - some schemes have some very bizarre clauses when looked at in hindsight.


Since the OP's transfer value is £119k advice would have to be taken and paid for from a suitably qualified financial adviser if a transfer to a DC scheme was being contemplated - such advice is now required for any transfer where the transfer value is £30k or more.


I can't see where I suggested anything otherwise.
Whether or not the advice would be to transfer or not transfer would depend entirely on his/her financial and health circumstances to which we are not privy and should not be guessing.

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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411478

Postby ursaminortaur » May 12th, 2021, 9:21 pm

PhaseThree wrote:
ursaminortaur wrote:
PhaseThree wrote:One other point to consider is what happens if you don't make it to the schemes normal retirement age for some reason.

One of my small DB schemes (GEC) would return your contributions to the scheme on your death before 65 but nothing more.
At 55 I transferred the DB out to a DC scheme at a ratio of around 30x. The risk of dying early although small was too big to run with.

It's definitely worth reading the small print - some schemes have some very bizarre clauses when looked at in hindsight.


Since the OP's transfer value is £119k advice would have to be taken and paid for from a suitably qualified financial adviser if a transfer to a DC scheme was being contemplated - such advice is now required for any transfer where the transfer value is £30k or more.


I can't see where I suggested anything otherwise.
Whether or not the advice would be to transfer or not transfer would depend entirely on his/her financial and health circumstances to which we are not privy and should not be guessing.


I was just pointing out that such advice is now mandatory if the transfer value is more than £30k. That wasn't the case before 2015.

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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411573

Postby Relaxer » May 13th, 2021, 10:01 am

thanks folks
I will have a look at the small print when i get the final quote for immediate "retirement". I will be trying to work out if i am giving up any significant benefits by not waiting until my defined retirement age or whether it is just actuarial and inflation adjustment.

I wont do Transfer as i dont want to pay for financial advice and the resultant hassle

But I will take this "into payment" asap and take the TFLS as I believe that i can invest that 25% at 6-7% return and thus simulate the payout and inflationary growth of the pension I would be giving up. The advantage being that my estate will inherit the original lump sum plus inflation at the end of the journey, however long or short that journey is.

Feels to me that the TFLS option is the logical default unless one is sensitive to cash flow (ie poor) or highly risk averse or simply cant handle money.
If I could transfer the lot out without paying for financial advice I probably would too.

thanks for your input

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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411744

Postby monabri » May 13th, 2021, 7:57 pm

For me I looked at my pension with and without taking the 25% tax free lump sum. Could I use the cash to generate the same return (no) and with the same degree of surety (no). I elected not to take the 25% TFLS.

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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411752

Postby mc2fool » May 13th, 2021, 8:23 pm

monabri wrote:For me I looked at my pension with and without taking the 25% tax free lump sum. Could I use the cash to generate the same return (no) and with the same degree of surety (no). I elected not to take the 25% TFLS.

Just curious ... by "return" do you mean immediate income or are you taking into consideration the end lump sum, and over what period? I.e. redemption yield.

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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411778

Postby monabri » May 13th, 2021, 9:52 pm

mc2fool wrote:
monabri wrote:For me I looked at my pension with and without taking the 25% tax free lump sum. Could I use the cash to generate the same return (no) and with the same degree of surety (no). I elected not to take the 25% TFLS.

Just curious ... by "return" do you mean immediate income or are you taking into consideration the end lump sum, and over what period? I.e. redemption yield.


Immediate return. By taking the TFLS, I couldn't invest it to compensate for the reduction in income.

Kantwebefriends
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Re: Should I take my Defined Benefit pension “into payment” immediately?

#411932

Postby Kantwebefriends » May 14th, 2021, 3:23 pm

I believe that i can invest that 25% at 6-7% return

Faint heart never won fair lady but it's probably pretty good for preserving wealth.


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