UKH

Hi hive mind.

My wife has, at the age of 57, left her public sector job for a host of reasons. She still expects to be working at something or other (yet to be decided) for another 10 years or so.

She has accumulated a pension and if she draws it at her normal retirement age (i.e. 67, in ten years) she would get £12k per annum.

If she draws it now she will get £8K per annum.

So back of the envelope says she'd have to draw the 12k pension from age 67 for 20 years to break even. There are other factors though such as what one could do with the money if received earlier (invest it, pay down the mortgage).

She's inclined to take it now. Any views on the wisdom or otherwise of that?

I AM NOT AN EXPERT.

If she takes 8K now but carries on working it will form part of her taxable income. 12K at 67 might still attract tax when added to any state pension but probably less. Current tax free allowance is about 12.5K, who knows what it will be in 10 years time or what the state pension will be.

Notwithstanding the above I'd be tempted to take it now. Life is too short.

It's just a guess but I'd of gone with probably more. At the moment the difference between the state pension and the personal allowance is less than 4k and getting smaller. Any reason you think it is going to increase? 

Even though the actuarial reduction for my DB pension is higher than the OP's , I'm still taking the early option.

Edit. Also it depends on whether she is going to work full-time. Mrs J is in a similar position at the moment, claiming her pension early, but her part-time work is more of a hobby so earns less than than the state pension, so she will definitely pay more tax when she is eligible for it. 

On the investment side of things, there are probably more profitable choices, but for us paying the mortgage off early has had psychological benefits as well. 

I wasnt clear was I. It was based on an assumption that her next job would likely earn more than a 2034 state pension. This may be nonsense.

A rise in the personal allowance is well overdue, it's become a massive stealth tax on the poorer and should really be indexed linked. 

I had a tiny private pot built up while I worked my last job. I cashed it in earlier this year as it was performing so poorly and put it in a fixed higher rate account. I'm now older than my dad when he died. He never reached state pension age but he packed a lot into his life. My advice: take it now and live while you can. No guarantees in life, no pockets in a shroud etc

Completely agree with this, but even with a new government can you see the personal allowance rising faster than the triple locked state pension? Personally I'd be in favour of it doing so, but I think people seem to care more about tax cuts than fiscal drag. 

 No guarantees in life, no pockets in a shroud etc

Correct. Another thing the OP should consider is that his wife will have taken £80K out of her pension by the time she's 67 if she takes it now.

Obviously the unknown is what the state pension will be, but I'd model whether I thought the £8k on top of state pension was likely to cover comfortable living mortgage free after 67. 

If the answer was Yes, I would take the money now and use it to pay off the mortgage, and enjoy life between now and 67.

If the answer was No, I would adjust the model.

I assume it is self evident that the above is not financial advice 😁

I'd take it now.

Since the break even point is at age 86 which is past average life expectancy of (is it 81 these days?), then on average you'd be better of taking the money early.

Beyond the age of 86 then taking it late would have been financially better, but then you need to ask if you need that money after the pace of life has slowed down.

I would take it early. Top up income with work I actually want to do.

As for tax, I don't think there's be much in it. Assuming per part time takes her over the £12500 threshold, she'll pay 15% on her pension (20% with 25% tax free). If she's entitled to full state pension, then there's almost no tax free allowance left. And since state pension increases more then tax thresholds, it wouldn't surprise me if full state pension and tax free allowance threshold are the same figure in 10 years.

I would take it now, enjoy it whilst you're young.

If it's a public sector pension possibly a more important factor may be the size of any lump sum paid with the pension. Assuming there is one, there usually is.

You would need to factor in how and where you would invest any lump sum and allow for an additional 10 years growth on that capital.

As others have said, I am not an expert. I would very much recommend you speak to one. We should be prepared to pay for such advice, the right decision could be worth the cost of the advice many times over.

That's probably correct

As it's a DB pension this isn't correct. As Andrew Lodge points out later their might be lump sum associated with the pension, but none of an annual DB pension above the threshold is tax free at the moment. 

We're agreed on both these points.

Same here

If you go down this route put some thought into what you want and the questions to ask. I spent a couple of days over Christmas going through one of my brothers pension plans, it took me a couple of days and at the end of it he was a bit angry that he had been badly advised. I eventually convinced him that wasn't really the advisors fault, it was more that he hadn't explained his situation/plans in enough detail for the advisor to give him the best advice. 

The lump sum is about £9k I think. It's more in ten years'' time but not significantly more...

Thanks for the correction. I always figured you could. I know with a DC pensions that even if you don't take any as a lump sum, you still get the 25% tax free as you draw down in regular payments (subject to how you choose to split it).

It doesn't make sense to me that with many DB pensions you can take a lump sum tax free, but then loose that tax free benefit if you choose not to. Hmmm. I think that needs changing.

To be fair, by definition, the benefits of a DB are clear when you sign up. One change amongst many, for current teachers at least, is that there in no longer a lump sum. Not sure of the rules for the new scheme but I have the option of taking a bigger lump sum, but the effect on the annual pension means, for me, it's not worth it. Taking a smaller lump sum for a bigger annual pension isn't an option?

Edit pretty sure a reduction of 1k in my annual pension will increase my lump sum by 14k. Seems pretty poor value to me. 

That’s maybe an overall average life expectancy but the life expectancy of a 57 year old woman is 87 according to the ONS. Perhaps unsurprisingly close to the OP’s fag packet break even point.

A good point, although I don't think the distribution will be symmetrical, so unfortunately you are more likely to pass away aged  57 than live to 117, so I'd still err on the side of taking it early.

Edit due to a lack of numeracy skills. 

The lump sum is (in my DB scheme at least) independent of the annual pension. There's no option not to take it or to convert it into additional annual pension.

Not officially part of your scheme, but doesn't an annuity do that, if you want? 

You need to be careful with this. For a woman, life expectancy from birth is about 83. But that includes the chances of dying in childhood, adolescence, childbirth and so on (as an aside, this is why the "medieval life expectancy was 30" sorts of statements tell you very little about the number of people in middle age and beyond in those societies, because it's massively depressed by horrendous infant mortality).

Always look for life expectancy from current age, if possible, although expectancy from 65 is the most commonly produced number. For a women reaching 65 in about ten years time, it looks like about 88-ish.

"People aged 65 years in the UK in 2020 can expect to live on average a further 19.7 years for males and 22.0 years for females, projected to rise to 21.9 years for males and 24.1 years for females aged 65 years in 2045"

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriage...

How have you calculated the £12 k at 67.Presumably you get inflation increases on that over the next 10 years.  It could be worth a lot more. 

Generally the guidance is postponement is always financially better. 

Even just waiting say another 3/5 years would help.

It might be a bigger number, but by definition it will only buy, the same amount of goods/services as you can for 12k now. Does that make it worth more? 

12k is at today's prices I believe . Both figures will go up over time - I will check.

They never really catch up though in comparison.i just come across alot of people who took such things early and financially now regret it. It’s too easy to be optimistic on the numbers and once you have taken the benefit- that’s it- there is no going back.

And in some schemes you may( note may)) also get a death benefit if you die before you take it or the benefit passes to your spouse/partner.  All these have to be assessed and considered as well. 

I'd also check what you get if the worst happens.

Naively, I thought a spouse gets 50% of a DB pension, but depending on the scheme I've seen it vary from 70% down to 37% 

I not sure I understand that, if the increase is linked to inflation, I don't see how it can either catch up or fall further being. 

Were they in DB schemes like the OP? One of their advantages is that the numbers are fixed so you don't have to take the gamble people with DC schemes do, particularly those that are drawing down rather than buying an annuity. 

Yes, both figures are linked to the CPI. The pension went up by 10.1% in 2023, incredible when I compare it to my own SIPP!

Which measure of inflation though and most people’s experience is that it helps off set it but never really matches what you actually experience. 
 

You  play the good cop, I will play the bad. 

Same as the OP, although I share your concern that although10% might sound a lot, and compared to most it is, I'd question is it's keeping up with the cost of living? Still not convinced whether that figure being 3, 10 or 20% would have much bearing on the OP's decision. 

😊

It would do that, but montyjohn seemed to think it could be added to the 'works pension' and a portion of the total be taken tax free. (I think that's what he meant).

True inflation can often be higher than the so called inflationary % increases in pension schemes .

As I said people are often too optimistic in their forecasts they fit the numbers to their desires.  It’s a bit like a financial plan for a business the numbers never match up, something always changes. And you are trying to predict numbers in 10 years plus time.

This is helpful as a starting point

https://www.bbc.co.uk/news/business-68222807

Ah, I think that is where we are looking at it from a slightly different perspective.

All that would apply if the OP was debating whether to retire early and then live of a reduced pension for the rest of there life. I took it to be about how they benefit most from their existing pension. They were planning to work for another 10 years, keeping pace with the increase in the cost of living and how much income they have in retirement will be affected more by how much they earn and what they do with those earning in the next 10 years, than whether they take their existing DB pension early or not. 

Something I can't quite my head around - and I'm not sure I've seen it mentioned - is what 'keeping pace with inflation' actually means.

To take a simple example - a car might cost £10,000 today, and in ten years time the equivalent car might cost £20,000; so if your pension in that time had doubled you would be 'keeping pace with inflation.' But that's not quite true ... in 10 years time working people with that sort of spending power would be aspiring to a more valuable car with extra bells and whistles, worth £25,000; this is a function of capitalism, a 'rising standard of living.' You however, even on your inflation linked pension, could not afford that; so your standard of living would be falling behind those still working. 

Isn't that only true if wages are rising faster than pensions? 

That's my understanding. Declining spending power seems to be a function of capitalism in the UK, and has been for quite some time.

Going back to before that time, I do remember retired teachers articulating that point. Basically they weren't happy even though their pension was, at the time, increasing more favourably than it is now, RPI v CPI,  but at the time teachers wages were increasing even faster, due to above inflation pay rises and the introduction of the upper pay scale. The fact that over the last 15 or so years my pension has gone up significantly more than teachers wages, fills me with concern more than anything else, and that's before you factor in that a couple of current teachers would have no chance of buying our house and paying the mortgage off early.

How would I feel if, because of significantly above inflation wage increases, a single teacher, a year or two after leaving university, could now afford to buy my house easily. Slightly envious, probably, would I feel less well off, possibly, although logically that's a bit daft?

I often wonder why many comfortablely off pensioners seem intent on hoarding their wealth, perhaps the desire to feel better off than their grandchildren, and the perceived reliance, is part of it?

Hoard wealth because you have to to protect the future.  

Investment protects the future, I'm not sure hoarding is any more healthy than any other addiction. 

If you are unfamiliar with investing or uncomfortable with it then keeping hordes of cash is not unreasonable.  Especially with social care costs as you get older.  Fear of the future is reasonable.I do not see why you view it as an issue or an addiction. It is after all just savings. 

Apologies, I didn't want to give the impression I was just being rude and ignoring your post, but we've just found out that a friend passed away suddenly and unexpectedly last night. 

Sorry to hear that.