Taking DB Pension Early & Continuing To Work
Discussion
Good afternoon all,
I was a little reluctant to put financial info like this in the public domain, but in the end figured that people don’t actually know me, so does it matter? In any case, I need some help!
I’m very fortunate to have a DB pension, to which I’ve been contributing to for around 25 years, and topping up via the AVC option. I’ve paid in the best part of 20% of my gross salary each year in total, so now seeing those numbers reflecting in the planner tool.
Our normal pension age is 62, I will be 56 next year so some way off yet, but I’ve been fiddling around on the planner and coming up with numbers I don’t understand, hence this post.
I pondered what would happen if I were to cash in next year at 56, using the lump to square off mortgage and a couple of loans racked up to do various upgrades to the house over time. There would still be a chunk leftover to get funds tucked away into our ISAs and that of our daughter, nicely tying in with me reaching 60 just before she becomes 18. Anyway, that’s a bit of justification for why I’m looking down this rabbit hole, now comes the bit I’ve found that is getting me a little confused.
Should I take this pension next year at 56, I would draw around £24.5K pa going forward. I would then continue to work, and found that if I were to take around £20K from my salary to put with the pension, I could start an IWDC and, I believe, pay in up to £60K pa, basically the rest of my salary.
It would appear that by squaring all the loose ends from my lump sum, we’d comfortably manage on having £44.5K pa (pension and taken salary), whilst I’d build up another pot of £240K in the 4 years from 56 to 60. I would then retire 2 years early, when drawn, £60K of that new pot (25%) would be tax free under current rules, the remainder could be drawn down over the 7 years from 60 to 67. Combined with the £24.5K pension I’d be looking at around £50K pa from 60 to 67. Then a drop as my drawdowns were exhausted, but State Pension would begin.
I’ve run various scenarios and it seems to indicate that the sooner I do this, the more I would get overall, and that somehow runs contrary to the idea of not touching my pension at all until I’m actually going to retire. I’m thinking that avoiding paying 40% tax at all, and the ability to build up that second pot so efficiently are the reasons, but fear I’m missing something.
A bit of a long one there then, but if anyone would like to help me understand whether I am correct or incorrect in the above conclusions, I’d be very grateful! I’ve requested a pension estimate via HR, once I get that then I should probably run it past some experts before I take the plunge…
I was a little reluctant to put financial info like this in the public domain, but in the end figured that people don’t actually know me, so does it matter? In any case, I need some help!
I’m very fortunate to have a DB pension, to which I’ve been contributing to for around 25 years, and topping up via the AVC option. I’ve paid in the best part of 20% of my gross salary each year in total, so now seeing those numbers reflecting in the planner tool.
Our normal pension age is 62, I will be 56 next year so some way off yet, but I’ve been fiddling around on the planner and coming up with numbers I don’t understand, hence this post.
I pondered what would happen if I were to cash in next year at 56, using the lump to square off mortgage and a couple of loans racked up to do various upgrades to the house over time. There would still be a chunk leftover to get funds tucked away into our ISAs and that of our daughter, nicely tying in with me reaching 60 just before she becomes 18. Anyway, that’s a bit of justification for why I’m looking down this rabbit hole, now comes the bit I’ve found that is getting me a little confused.
Should I take this pension next year at 56, I would draw around £24.5K pa going forward. I would then continue to work, and found that if I were to take around £20K from my salary to put with the pension, I could start an IWDC and, I believe, pay in up to £60K pa, basically the rest of my salary.
It would appear that by squaring all the loose ends from my lump sum, we’d comfortably manage on having £44.5K pa (pension and taken salary), whilst I’d build up another pot of £240K in the 4 years from 56 to 60. I would then retire 2 years early, when drawn, £60K of that new pot (25%) would be tax free under current rules, the remainder could be drawn down over the 7 years from 60 to 67. Combined with the £24.5K pension I’d be looking at around £50K pa from 60 to 67. Then a drop as my drawdowns were exhausted, but State Pension would begin.
I’ve run various scenarios and it seems to indicate that the sooner I do this, the more I would get overall, and that somehow runs contrary to the idea of not touching my pension at all until I’m actually going to retire. I’m thinking that avoiding paying 40% tax at all, and the ability to build up that second pot so efficiently are the reasons, but fear I’m missing something.
A bit of a long one there then, but if anyone would like to help me understand whether I am correct or incorrect in the above conclusions, I’d be very grateful! I’ve requested a pension estimate via HR, once I get that then I should probably run it past some experts before I take the plunge…
I’ll try and answer some of that but I’m no expert and is just based on my own ( at the time ) DB pension.
Taking any part of it early ( ie moving into drawdown and crystallisation ) MAY mean you can no longer pay into it per se albeit it is then still active and obviously / hopefully increasing in value and indeed the scheme rules may say this or dictate otherwise.
Taking any part early ( including just the lump sum / which again may or may not be actually possible ) will always mean a reduction in what would otherwise be payable at the normal retirement age.
This reduction would usually apply to both the lump and any annual drawdown.
From memory , taking it 5 years early made a considerable difference in reduction.
Just to throw another curve ball into the equation - it MAY be possible from your DB scheme to take a CETV of the whole thing but this obviously needs very careful consideration and you may find it hard to find someone ( a company ) to do this. The current multiples are also not the highest.
This also depends on whether your scheme is public or private sector obviously.
Taking any part of it early ( ie moving into drawdown and crystallisation ) MAY mean you can no longer pay into it per se albeit it is then still active and obviously / hopefully increasing in value and indeed the scheme rules may say this or dictate otherwise.
Taking any part early ( including just the lump sum / which again may or may not be actually possible ) will always mean a reduction in what would otherwise be payable at the normal retirement age.
This reduction would usually apply to both the lump and any annual drawdown.
From memory , taking it 5 years early made a considerable difference in reduction.
Just to throw another curve ball into the equation - it MAY be possible from your DB scheme to take a CETV of the whole thing but this obviously needs very careful consideration and you may find it hard to find someone ( a company ) to do this. The current multiples are also not the highest.
This also depends on whether your scheme is public or private sector obviously.
The Mad Jock said:
I could start an IWDC and, I believe, pay in up to £60K pa, basically the rest of my salary.
Don't know about IWDC, but HMRC don't like "recycling", so have a "MPAA" which limits new contributions to £10k pa after you take a (https://www.moneyhelper.org.uk/en/pensions-and-ret...
Edit as wrong!!!
Edited by davepen on Tuesday 22 September 17:43
Retiring six years early will see a huge hit to a DB pension, the one I took early was around 5% a year but was offset by the three I was taking late which increased in a similar way (retired at 62 3/4 with 3 schemes due at 60 and 1 at 65). As the change is in addition to any inflationary increases else will you get that GUARANTEED return on an investment.
Another angle is that you are taking money out of one pot which is increasing in value with inflation (all my db pensions did) to pay off a debt which is being reduced in value by inflation. Wait a year and the numbers will be better, then wait another year and the numbers will be better still….
If you go ahead you will end up with a money purchase pot which is entirely subject to market pressures, there are years when the value of my DC pot has fallen significantly.
Pension income is taxable, it gave me a significant problem when I took a contract role for 8 months.
Another angle is that you are taking money out of one pot which is increasing in value with inflation (all my db pensions did) to pay off a debt which is being reduced in value by inflation. Wait a year and the numbers will be better, then wait another year and the numbers will be better still….
If you go ahead you will end up with a money purchase pot which is entirely subject to market pressures, there are years when the value of my DC pot has fallen significantly.
Pension income is taxable, it gave me a significant problem when I took a contract role for 8 months.
I don’t know your numbers in detail but the gist of it sounds like it could work.
You don’t trigger the MPAA when taking a DB pension. So that’s fine.
You will need to consider whether you would fall foul of lump sum recycling rules. That might limit the amount by which you could increase contributions to your SIPP.
And, obviously, whether you end up better off or not depends on lots of factors, not least future investment returns.
Some pension schemes (I know Teachers does, for example) allow you to take partial (“phased”) retirement where you start to work part-time and also take part of your pension.
You don’t trigger the MPAA when taking a DB pension. So that’s fine.
You will need to consider whether you would fall foul of lump sum recycling rules. That might limit the amount by which you could increase contributions to your SIPP.
And, obviously, whether you end up better off or not depends on lots of factors, not least future investment returns.
Some pension schemes (I know Teachers does, for example) allow you to take partial (“phased”) retirement where you start to work part-time and also take part of your pension.
Thank you for the replies thus far.
The scheme I’m in doesn’t allow any separation of taking lump sum and drawing pension, they go hand in hand. The reduction factor in the scheme rules suggest that I’d get 68.7% of the pension due at 62, should I choose to pull the trigger at 56, so quite a chunk.
I’m waiting for an estimate to come through, and also have unanswered questions about the IWDC that we are then allowed to start, if continuing in employment. Not least of which would be what choices we have, if any, about where the contributions would be invested. Further, I’d assumed employer contributions would cease, but apparently not - so I need to know how much of that proposed £60K pa would come from them, I believe the £60K limit includes employer contributions.
As pointed out, I’d be taking my DB pension to pay off a debt which inflation is reducing. To be fair, the debt part is relatively small, but I do like the idea of getting all ducks in a row with ISAs over the next four years. The planner we have is perhaps pessimistic, it suggests that my AVC pot wouldn’t be growing by much more than I’d be contributing should I continue doing so until 60.
What got my attention was the ability to build a new pot from 56 to 60, at an apparently much more favourable rate than continuing as I am now. As said, MPAA isn’t an issue and I don’t believe recycling should be an issue - I could prove that I’m living comfortably on the £20K salary plus £24.5K pension whilst putting the other £60K into the new IWDC. I’d cease to pay 40% tax on any of my income and have a £240K pot, £60K tax free at 60. The other £180K drawn down gradually over 7 following years would equate to £25.7K pa. Add the £24.5K pa pension and I should just kiss under paying 40% on any of it.
Anyway, further comment is absolutely welcome, I guess I need to wait for the estimate but then obviously I’d need to consult ‘someone’ before committing, to be sure I wasn’t making a very big mistake!
The scheme I’m in doesn’t allow any separation of taking lump sum and drawing pension, they go hand in hand. The reduction factor in the scheme rules suggest that I’d get 68.7% of the pension due at 62, should I choose to pull the trigger at 56, so quite a chunk.
I’m waiting for an estimate to come through, and also have unanswered questions about the IWDC that we are then allowed to start, if continuing in employment. Not least of which would be what choices we have, if any, about where the contributions would be invested. Further, I’d assumed employer contributions would cease, but apparently not - so I need to know how much of that proposed £60K pa would come from them, I believe the £60K limit includes employer contributions.
As pointed out, I’d be taking my DB pension to pay off a debt which inflation is reducing. To be fair, the debt part is relatively small, but I do like the idea of getting all ducks in a row with ISAs over the next four years. The planner we have is perhaps pessimistic, it suggests that my AVC pot wouldn’t be growing by much more than I’d be contributing should I continue doing so until 60.
What got my attention was the ability to build a new pot from 56 to 60, at an apparently much more favourable rate than continuing as I am now. As said, MPAA isn’t an issue and I don’t believe recycling should be an issue - I could prove that I’m living comfortably on the £20K salary plus £24.5K pension whilst putting the other £60K into the new IWDC. I’d cease to pay 40% tax on any of my income and have a £240K pot, £60K tax free at 60. The other £180K drawn down gradually over 7 following years would equate to £25.7K pa. Add the £24.5K pa pension and I should just kiss under paying 40% on any of it.
Anyway, further comment is absolutely welcome, I guess I need to wait for the estimate but then obviously I’d need to consult ‘someone’ before committing, to be sure I wasn’t making a very big mistake!
The Mad Jock said:
The scheme I m in doesn t allow any separation of taking lump sum and drawing pension, they go hand in hand. The reduction factor in the scheme rules suggest that I d get 68.7% of the pension due at 62, should I choose to pull the trigger at 56, so quite a chunk.
I'm just over a decade from being allowed to take the first part of the pension. The penalty is about 20% if taken 5 years early and 40% at 10 years. It's a big chunk but I get at least 5 years of healthy (Hopefully) life/time back and a decade of time back is almost priceless (Though clearly has a value).The biggest recurring cost to us at the moment is the mortgage, if sucks up 50% of my take home income but luckily it'll be gone in a few years. Providing we live within our means our combined household income even when taking part of the pension a decade early would be more to than adequate.
I love my job but none of us know what's coming tomorrow (or today). Money and material stuff really has no meaning compared to healthy and family.
We will reassess the situation when we hit 50 in a few years but early retirement is something I would prioritise over say a new car on the driveway, given after the house the car is most expensive thing we spend on that is the only real 'Sacarifce' we'll have to make.
Healthy life expectancy if you look after your health is easily into your late 70s these days, however physiological aging sets in as soon as we hit 30. Retiring at 67 gives you barely a decade before the inevitable decline in physical health is really felt, retiring at 57 doubles that time, and even earlier starts to really give your a noticable amount of life time back.
Just remember time and health are things none us of can get back once gone. My aim is to do complete an iron man when I retire, there is very much a physical time limit to that.
Edited by gangzoom on Wednesday 23 September 06:14
gangzoom said:
The Mad Jock said:
The scheme I m in doesn t allow any separation of taking lump sum and drawing pension, they go hand in hand. The reduction factor in the scheme rules suggest that I d get 68.7% of the pension due at 62, should I choose to pull the trigger at 56, so quite a chunk.
I'm just over a decade from being allowed to take the first part of the pension. The penalty is about 20% if taken 5 years early and 40% at 10 years. It's a big chunk but I get at least 5 years of healthy (Hopefully) life/time back and a decade of time back is almost priceless (Though clearly has a value).Edited by gangzoom on Wednesday 23 September 06:14
People sometimes look at the amount per year and think they're losing out but forget that they aren't because it's being paid for more years.
I've seen a lot of people die unexpectedly in their 50s and 60s. Fine one year, loads of plans then cancer comes calling and they're dead in 18 months.
Do not assume, as most seem to do, that you will reach or exceed average life expectancy. Old proverbs come to mind including chicken counts and handling birds.
Do not assume, as most seem to do, that you will reach or exceed average life expectancy. Old proverbs come to mind including chicken counts and handling birds.
The Mad Jock said:
The scheme I'm in doesn't allow any separation of taking lump sum and drawing pension, they go hand in hand. The reduction factor in the scheme rules suggest that I'd get 68.7% of the pension due at 62, should I choose to pull the trigger at 56, so quite a chunk.
Losing a third of your pension for, say, 30 years is one hell of a hit, although you do get it for an additional 6 years. Even on crudest guesstimate you're giving up 10 years of pension to get 6 years of "early cash".There must be a better way to "bridge the gap". Do you have other savings or investments you can call upon?
Or just send the other half out to work.
Question: The answer to this may well be "no" but are you able to take your AVC benefits separately from your main scheme benefits?
And don't forget you may be able to use the AVCs for tax free cash, leaving your inflation-proofed main scheme pension intact.
FWIW one of the advantages of "free standing AVCs" is the benefits can be taken whenever you like..
Another good ploy if you have a non-working spouse is to make sure they're doing a basic SIPP and getting the benefit of tax relief added. (i.e. relief for tax they've never actually paid.) Can work very nicely to get tax relief added to contributions and then draw the benefits before state pension age so probably completely tax free.
If you think you're going to want to retire early it's very beneficial to plan well ahead with things like free standing AVCs, ISAs and SIPPs. There's some good tax efficiency to be pocketed along the way.
And don't forget you may be able to use the AVCs for tax free cash, leaving your inflation-proofed main scheme pension intact.
FWIW one of the advantages of "free standing AVCs" is the benefits can be taken whenever you like..
Another good ploy if you have a non-working spouse is to make sure they're doing a basic SIPP and getting the benefit of tax relief added. (i.e. relief for tax they've never actually paid.) Can work very nicely to get tax relief added to contributions and then draw the benefits before state pension age so probably completely tax free.
If you think you're going to want to retire early it's very beneficial to plan well ahead with things like free standing AVCs, ISAs and SIPPs. There's some good tax efficiency to be pocketed along the way.
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