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Taking an early pension.
16 Answers
I am being made redundant by my employers at the age of 57 (just).
I have got the option of taking a pension now amounting to nearly 62% of my salary or a 15% higher pension from the age of 60.
I have worked for 36 years and have plenty of savings to last until I am 60 and beyond and feel it is best to wait and claim the higher pension.
Can anybody see any problems with this.
I do not intend to work.
I have got the option of taking a pension now amounting to nearly 62% of my salary or a 15% higher pension from the age of 60.
I have worked for 36 years and have plenty of savings to last until I am 60 and beyond and feel it is best to wait and claim the higher pension.
Can anybody see any problems with this.
I do not intend to work.
Answers
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Good for you Griptons! Enjoy this next phase of your life - you've earned it after 36 years. Check the small print of your pension particularly how secure it is - have the beggars invested it all in Icelandic shenanigans or whatever - but if it's secure, seems best to leave it to mature and reap the benefit.
Well I suppose looking at your savings pot as an "investement", then if it is going to increase by 15% over 3 years that is 5% a year, which is a decent interest rate in todays climate (and that is on your whole pension pot).
If you took the pension now, and invested what you got over the next 3 years you would probably not be able to get an increase of 15% on the amount.
The only thing you need to verify is if that 15% increase is a definate, or could they change the calculation in the next 3 years and you may not get as much.
The other consideration is your health. It would be a shame to wait till you are 60 then find you dont last very long after that.
If you health is poor then consider taking it now.
If you took the pension now, and invested what you got over the next 3 years you would probably not be able to get an increase of 15% on the amount.
The only thing you need to verify is if that 15% increase is a definate, or could they change the calculation in the next 3 years and you may not get as much.
The other consideration is your health. It would be a shame to wait till you are 60 then find you dont last very long after that.
If you health is poor then consider taking it now.
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Yes there is a problem Griptons, and it may be something you have not considered.
Although you will only be receiving 85% of your full pension, you will be receiving it for three years before age 60. This money is irrecoverable. If you do yourself a quick spreadsheet you will discover that you will be 76 before your cumulative pension receipts at 100% equal those you took early at 85%. Only after this age will you see a profit by parking your pension for three years. Also bear in mind that you will need less of your savings to live on this way (and so will earn more interest). Also, if your pension provides a lump sum as well as income although this may be similarly reduced by 15%you will also have use of that three years earlier.
This aspect is often overlooked when making a decision like this. What it amounts to is that you will be in profit for almost twenty years and during this time you are more likely to be able to enjoy your money that after age 76.
Although you will only be receiving 85% of your full pension, you will be receiving it for three years before age 60. This money is irrecoverable. If you do yourself a quick spreadsheet you will discover that you will be 76 before your cumulative pension receipts at 100% equal those you took early at 85%. Only after this age will you see a profit by parking your pension for three years. Also bear in mind that you will need less of your savings to live on this way (and so will earn more interest). Also, if your pension provides a lump sum as well as income although this may be similarly reduced by 15%you will also have use of that three years earlier.
This aspect is often overlooked when making a decision like this. What it amounts to is that you will be in profit for almost twenty years and during this time you are more likely to be able to enjoy your money that after age 76.
I think there is some misunderstanding, Jonathan.
The 15% reduction that Gripton is talking about is what is known as an “actuarial reduction”. This is standard procedure among defined benefit schemes and is designed to account for the fact that, in taking the pension early, it will be received for longer. Five per cent per annum is the standard reduction applied by most schemes.
Independently of this, depending on the rules of the scheme, Gripton’s pension will probably be enhanced by a cost-of-living increase annually. This will occur whether he takes it now (in which case he will actually receive the increased pension each month) or whether he defers taking his pension until age 60 (in which case the amount his pension stands at “in deferment” will increase). This means that the same increase will apply to his pension whether he takes it now or not and this calculation has nothing to do with the 15% reduction he will suffer if he takes the pension early.
The 15% reduction that Gripton is talking about is what is known as an “actuarial reduction”. This is standard procedure among defined benefit schemes and is designed to account for the fact that, in taking the pension early, it will be received for longer. Five per cent per annum is the standard reduction applied by most schemes.
Independently of this, depending on the rules of the scheme, Gripton’s pension will probably be enhanced by a cost-of-living increase annually. This will occur whether he takes it now (in which case he will actually receive the increased pension each month) or whether he defers taking his pension until age 60 (in which case the amount his pension stands at “in deferment” will increase). This means that the same increase will apply to his pension whether he takes it now or not and this calculation has nothing to do with the 15% reduction he will suffer if he takes the pension early.
My brother had a similar choice, I recommended that he hedge his bets and take it as soon as possible as it is no good getting a higher pension if you only get it for a couple of years then die. He died suddenly aged 67 from a vascular problem undetected despite being treated for high blood pressure and being regularly monitored.
Are you getting a decent redundancy payout?
I got redundancy aged 57 but received 2 years salary as my redundancy payment. As £30,000 was tax free it meant I actually got enough money to keep me until I was 60 when my occupational pension kicked in. If I'd taken mine early the lump sum would also have been significantly less.
I got redundancy aged 57 but received 2 years salary as my redundancy payment. As £30,000 was tax free it meant I actually got enough money to keep me until I was 60 when my occupational pension kicked in. If I'd taken mine early the lump sum would also have been significantly less.
I think you do suffer a misunderstanding, Jonathan, and to show you why I think so, since you seem to be unconcerned, I’ll explain it for the benefit of Gripton as I would not like him to suffer the same misunderstanding.
You asked: “Is it possible that three annual increases to a pension taken now will make up much of that 15% difference?”
That is not a consideration that Gripton needs to make. What he has to consider now is whether his total pension take will be more beneficial if taken immediately at 85% or in three years time at 100%.Since the pension will be increased by the same amount in both scenarios (i.e. whether it is deferred or whether it is taken now) the amount by which it is increased each year is irrelevant to Gripton’s calculations. Even if the three increases did amount to 15% that increase would apply to the 85% figure and to the 100% figure. In fact the only effect the cost of living increases make to Gripton’s calculations is that it brings forward the “break even” point by about a year if they average out at 2% pa. This is insignificant and is in any case indeterminate and that is why I did not mention it.
If you do understand Gripton’s dilemma any differently I think he would find it helpful if you could share your understanding with us. But my contention is still that he does not need to consider the question of annual increases as you suggested.
You asked: “Is it possible that three annual increases to a pension taken now will make up much of that 15% difference?”
That is not a consideration that Gripton needs to make. What he has to consider now is whether his total pension take will be more beneficial if taken immediately at 85% or in three years time at 100%.Since the pension will be increased by the same amount in both scenarios (i.e. whether it is deferred or whether it is taken now) the amount by which it is increased each year is irrelevant to Gripton’s calculations. Even if the three increases did amount to 15% that increase would apply to the 85% figure and to the 100% figure. In fact the only effect the cost of living increases make to Gripton’s calculations is that it brings forward the “break even” point by about a year if they average out at 2% pa. This is insignificant and is in any case indeterminate and that is why I did not mention it.
If you do understand Gripton’s dilemma any differently I think he would find it helpful if you could share your understanding with us. But my contention is still that he does not need to consider the question of annual increases as you suggested.
NJ is correct I believe, A crude calculation shows that if you wait till 65 to get the full pension, you will have to receive it for 17 years to equal the advantage of an extra 3 years at 85%, ie @ 82 years of age. If the money will be more useful to you when you are young or you might not make 82 years then go for the early option.
I agree with New Judge. The fact that pensions go up annually is not relevant here (assuming pensions go up more or less in line with prices)- to compare like with like we should just consider everything at present day values.
Two other factors to consider, Griptons, are tax and eligibility to benefits. You may want to time the start date for taking your pension so as to avoid having to pay tax altogether for the first tax year. You can also claim contribution based JSA for the first six months but if you take your pension at the same time you may not get any JSA so I suggest deferring your pension for at least 6 months and claim JSA for this period, bringing in around £1700. this JSA is not means-tested so you would get it even though you'll have savings income.
The big unknown in of course is the age you will live to. If you are going to live to 85 then to maximise lifetime earnings you should defer taking your pension until nearer age 65, but if you expect to live to only 70 then start taking it as soon as possible.
Finally, to minimise tax, consider taking up to 25% of your fund as tax free lump sum. This would reduce your annual pension income of course so get a calculation done and make sure you can get by adequately
Two other factors to consider, Griptons, are tax and eligibility to benefits. You may want to time the start date for taking your pension so as to avoid having to pay tax altogether for the first tax year. You can also claim contribution based JSA for the first six months but if you take your pension at the same time you may not get any JSA so I suggest deferring your pension for at least 6 months and claim JSA for this period, bringing in around £1700. this JSA is not means-tested so you would get it even though you'll have savings income.
The big unknown in of course is the age you will live to. If you are going to live to 85 then to maximise lifetime earnings you should defer taking your pension until nearer age 65, but if you expect to live to only 70 then start taking it as soon as possible.
Finally, to minimise tax, consider taking up to 25% of your fund as tax free lump sum. This would reduce your annual pension income of course so get a calculation done and make sure you can get by adequately
New Judge is spot on. On another point are you receiving a redundancy lump sum? You are probably full aware but I will mention it anyway, only the first £30k is tax free and any amount over that could push you into the higher tax bracket. Have you considered putting any taxable amount into your pension scheme thereby avoiding any tax. This will immediately increase both the tax free lump sum, which can go straight into your savings to increase their growth and increase your pension which will be taxed at the standard rate. (unless of course you have very big pension)
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