Early payment of Final Salary Pension-Pros and Cons

[smokey01]

I am 55 in 2 months. I have a Final Salary pension and I can apply to the trustees to take it early.

The early payment factor is 2.5% for 5 years, although a small part of it has a 2.5% deduction for 7 years.

So the figures they have given me is £20,507 at 55 or £23,581 at 60. Both amounts would get the same CPI increase, capped at 5%.

I plan to carry on working and I always pay into my SIPP any amount I would otherwise pay 40% tax on. Therefore I will increase payments to my
SIPP equivalent to the amount of pension I receive.

I have no dependents or spouse to consider, so I suppose this is a positive for taking early as by paying into my SIPP I can transfer to my siblings more IHT free, although this is not a major concern.

I don't have any concerns of breaching the LTA.

One reason for taking it early is that the normal retirement age for the pension is 65, but I can take it without reduction at 60 (well a part
from a small amount of it would have the 2.5% deduction for 2 years), but I do still need the trustees consent. Currently I am told no one has been refused, but it concerns me that this might change in the future and at 60 they say no, so I have lost 5 years of full pension.

Does anyone see any other pros and cons for taking the pension early?

[jonesa1]

You state that you would want to continue working if you take the pension, does that mean you're not employed by the employer behind the DB pension? I think it would be unusual for someone to be allowed to take a DB pension and continue working on the same basis as before (some employers have been known to bring back retirees as contractors). Assuming you are employed by the organisation funding the DB pension, have you checked whether you could continue working, or are you confident about picking up work else-where? Provided you've considered the risks (such as being without a job sooner than you planned), then there could be a lot to be said for taking the bird in the hand, to mitigate the risk that in future the trustees will be less flexible and the birds in the bush turn out to be harder to catch. It will also be several years before the higher pension at normal retirement age nets more income than the slightly lower pension now.

[BrummieDave]

I'm sure you can do the maths as well as anyone else on here (£20.5k now, or £23.5k in 5 years) and the tax implications if you're still working, and you're also best placed to consider whether anything may happen to the scheme to make the trustee do a U turn on early retirements without reductions at age 60 (btw if they've been doing this for some time, it's very difficult for them to change that approach without very strong reasons).

I would therefore make two additional points for you to consider, both regarding the 'Pension Commencement Lump Sum' (PCLS) as you haven't mentioned this:

Currently you can take 25% tax free - there is always the distant threat that this may change, although it would be such a vote loser obviously. I doubt therefore that it would be abolished without plenty of signposting, after all millions have based their future plans on getting 25% tax free. If it were changed at all, perhaps it would be capped, so reduced to 20% or something. Again most commentators think this unlikely, but if getting 25% of your pension tax free is important to you, you may wish to consider how likely either changes may be. Good luck with thinking that through in the current pre election political environment.

Amount of pension surrendered for your PCLS - the factor that schemes use is partly a function of gilt yields. The lower the yield, the more PCLS you get for every £ of pension surrendered. Yields are low currently, so this is an advantage. You won't have to surrender as much pension to get to the 25% limit as you would if yields were higher. Yields may of course be even lower when you are 60, or they may be higher. Again, something to think about.

Hope that helps.

Disclosure: I took my DB at 55 (and don't regret it).

[TUK020]

Not sure that I have understood what you are planning to do correctly, but there is one major thing that you do need to be aware of:

The moment you start taking taxable pension benefits from any pension, you are limited to tax relief on pension contributions up to £4k p.a.
Complicated subject so I suggest you check out the government rules rather carefully.

I think this may impact your plan of taking DB pension, continuing to work and fund SIPP (if I have understood correctly)

[smokey01]

You state that you would want to continue working if you take the pension, does that mean you're not employed by the employer behind the DB pension? I think it would be unusual for someone to be allowed to take a DB pension and continue working on the same basis as before (some employers have been known to bring back retirees as contractors). Assuming you are employed by the organisation funding the DB pension, have you checked whether you could continue working, or are you confident about picking up work else-where? Provided you've considered the risks (such as being without a job sooner than you planned), then there could be a lot to be said for taking the bird in the hand, to mitigate the risk that in future the trustees will be less flexible and the birds in the bush turn out to be harder to catch. It will also be several years before the higher pension at normal retirement age nets more income than the slightly lower pension now.

Sorry I should have mentioned it is a deferred pension, I no longer work for the company. I now work for a company with a DC pension.

[smokey01]

I'm sure you can do the maths as well as anyone else on here (£20.5k now, or £23.5k in 5 years) and the tax implications if you're still working, and you're also best placed to consider whether anything may happen to the scheme to make the trustee do a U turn on early retirements without reductions at age 60 (btw if they've been doing this for some time, it's very difficult for them to change that approach without very strong reasons).

I would therefore make two additional points for you to consider, both regarding the 'Pension Commencement Lump Sum' (PCLS) as you haven't mentioned this:

Currently you can take 25% tax free - there is always the distant threat that this may change, although it would be such a vote loser obviously. I doubt therefore that it would be abolished without plenty of signposting, after all millions have based their future plans on getting 25% tax free. If it were changed at all, perhaps it would be capped, so reduced to 20% or something. Again most commentators think this unlikely, but if getting 25% of your pension tax free is important to you, you may wish to consider how likely either changes may be. Good luck with thinking that through in the current pre election political environment.

Amount of pension surrendered for your PCLS - the factor that schemes use is partly a function of gilt yields. The lower the yield, the more PCLS you get for every £ of pension surrendered. Yields are low currently, so this is an advantage. You won't have to surrender as much pension to get to the 25% limit as you would if yields were higher. Yields may of course be even lower when you are 60, or they may be higher. Again, something to think about.

Hope that helps.

Disclosure: I took my DB at 55 (and don't regret it).

I don't want to take a tax free lump sum as I would rather the guaranteed income, also I think it would affect how much I could pay into my SIPP due to pension recycling rules.

[smokey01]

Not sure that I have understood what you are planning to do correctly, but there is one major thing that you do need to be aware of:

The moment you start taking taxable pension benefits from any pension, you are limited to tax relief on pension contributions up to £4k p.a.
Complicated subject so I suggest you check out the government rules rather carefully.

I think this may impact your plan of taking DB pension, continuing to work and fund SIPP (if I have understood correctly)

No I am OK as this doesn't apply to DB pensions so I still have the full 40K allowance.

[BrummieDave]

Not sure that I have understood what you are planning to do correctly, but there is one major thing that you do need to be aware of:

The moment you start taking taxable pension benefits from any pension, you are limited to tax relief on pension contributions up to £4k p.a.
Complicated subject so I suggest you check out the government rules rather carefully.

I think this may impact your plan of taking DB pension, continuing to work and fund SIPP (if I have understood correctly)

Not true I'm afraid TUK.

Accessing a DB pension has no bearing whatsoever on the Money Purchase Annual Allowance (MPAA). Only accessing a DC pension can trigger the MPAA being reduced to £4k pa.

I'm sure you're not alone in this misconception btw.

[BrummieDave]

I don't want to take a tax free lump sum as I would rather the guaranteed income, also I think it would affect how much I could pay into my SIPP due to pension recycling rules.

Only if after taking a tax free PCLS you "significantly" increase the amount you pay into your SIPP, and meet other criteria.

TBH you have to try pretty hard to meet the criteria for falling foul of Pension Lump Sum recycling rules!

[TUK020]

thanks guys, that was a detail that had eluded me!
Apologies to the OP for the misdirection

[Chrysalis]

That actually seems like fairly low reduction for paying you an extra £100000. You’d need to live to more than 90 before it would balance financially.

In the NHS scheme taking pension at 55 instead of 60 loses 21% of the pension.

[BrummieDave]

That actually seems like fairly low reduction for paying you an extra £100000. You’d need to live to more than 90 before it would balance financially.

Indeed, hence my comment above about doing the maths.

Any pension taken whilst still working will of course be taxed at the marginal rate, so the additional £100k, if Smokey works to 60, will be less than that figure when taxed. Taking the full tax free PCLS would reduce the residual pension and hence tax liability, and the PCLS could be invested in relatively safe investments yielding sufficient to replace the lost pension income, as many do on here with equity income ITs or a HYP, seeking to grow income in line with inflation whilst leaving the capital untouched. Smokey would have to be comfortable this could be done, within or outside a tax shelter such as an ISA, with sufficient confidence to take this approach.

One input to this decision would be the factor being offered for taking a PCLS and surrendering some pension, but with gilt yields being low currently, a figure around mid 20s could well be what the scheme is offering. Again, the maths will be relatively simple once this is known.

You asked for pros and cons Smokey, so hope this is the kind of thoughts you were requesting.

[smokey01]

You asked for pros and cons Smokey, so hope this is the kind of thoughts you were requesting.

Thanks to everyone for your replies.

Yes this is the sort of thing I am interested in as I want to make sure I haven't missed anything of relevance.

One reason for not taking a cash lump sum from my final salary pension is that I already have large ISA and SIPP accounts already invested
on the stock market, so while I am comfortable with investing I also like the idea of a guaranteed income should the stock market crash.

Also while I am still working I will effectively be paying an equivalent amount into my SIPP to offset 40% tax, so the pension income will essentially be tax free.

[Nen2319]

Smokey, do you have salary sacrifice at your current employer? If so you could save the NI charge on your payments into your SIPP as well! You’ll be paying both tax and NI on the DB pension payments into the monthly pay so makes sense.

I looked at this as well as taking the entire transfer value but I would lose 21% between 55 and 60 so staying put.

[BrummieDave]

You’ll be paying both tax and NI on the DB pension payments into the monthly pay so makes sense.

Minor correction Nen, you don't pay NI on pension income; you only pay NI contributions on earned income.

[Nen2319]

You’ll be paying both tax and NI on the DB pension payments into the monthly pay so makes sense.

Minor correction Nen, you don't pay NI on pension income; you only pay NI contributions on earned income.

See what I mean? Thx Dave. I was told wrong and now I’m corrected.

So it’s even better with salary sacrifice as you save the NI when paying into your SIPP from your salary?

[OLTB]

You’ll be paying both tax and NI on the DB pension payments into the monthly pay so makes sense.

Minor correction Nen, you don't pay NI on pension income; you only pay NI contributions on earned income.

See what I mean? Thx Dave. I was told wrong and now I’m corrected.

So it’s even better with salary sacrifice as you save the NI when paying into your SIPP from your salary?

In addition, some employers also top up pension contributions by paying a portion of their saved employer NI contributions into the employees salary sacrifice scheme. That’s what mine do!

I hope that makes sense, it’s a bit of a long sentence!

Cheers, OLTB.

[smokey01]

Hi,

Yes I do pay into my employers scheme via salary sacrifice. Unfortunately this only saves me 2% National Insurance per pay period due to how NI is calculated i.e on pay over £4167 per pay period you only get charged 2% NI so that is all the NI the pension payment saves.

However on another forum I learnt of a tip where it is best to pay a small number of large pension payments via salary sacrifice if possible so it brings you into the 12% NI saving. So I have discussed with my employer and they are happy for me pay 85% of my salary into my pension for 2 months and then go back down to the minimum 5%.

This means in those 2 months I will save the £422 NI I normal have to pay (well I calculated I will pay 39p NI!). Also this amount is almost enough to bring be from being a higher rate to a basic rate tax payer. For the remainder I will make a small contribution to my SIPP.

[Wasron]

Hi,

Yes I do pay into my employers scheme via salary sacrifice. Unfortunately this only saves me 2% National Insurance per pay period due to how NI is calculated i.e on pay over £4167 per pay period you only get charged 2% NI so that is all the NI the pension payment saves.

However on another forum I learnt of a tip where it is best to pay a small number of large pension payments via salary sacrifice if possible so it brings you into the 12% NI saving. So I have discussed with my employer and they are happy for me pay 85% of my salary into my pension for 2 months and then go back down to the minimum 5%.

This means in those 2 months I will save the £422 NI I normal have to pay (well I calculated I will pay 39p NI!). Also this amount is almost enough to bring be from being a higher rate to a basic rate tax payer. For the remainder I will make a small contribution to my SIPP.

You have a very understanding employer...

If only they were all like that

Wasron

[fca2019]

smokey01 - I would check again with your pension provider the early payment factor you quoted.

I have a small DB scheme pension, from an old job, and for taking early retirement you get a lower payout.

Example with my real figures.

Retire at 65 get £3,881 pa x est 25 years = 97k

Early 63 get £3532 (4.5% reduction x 2) x 27 years = 95k

Late 67 get £4230 (4.5% uplift x 2) x 23 years = 97k

So this acts as a disincentive to early retire from a DB scheme.