Pensions - options - which is better?

The Dreamer

Distinguished Member
I've seen a few threads in GC that mention pensions and retirement options. So I just thought I'd throw this in here, purely as food for thought, and in NO WAY does anything here constitute advice. Always, ALWAYS, consult a professional Financial Adviser before committing to a course of action!

Anyway, this is just something my own FA pointed out to me at the start of a long consultation, before making the move to take my defined benefit CETV and investing the pot (a whole different discussion than what I'm about to 'talk' about).

I'm going to use made up numbers here - but they illustrate the point well enough. In my own case the end result was that I would be better off until age 80+ - but I'm getting ahead of myself......

Here goes.....

Pensions - take it now or later?


Let's say we have a current salary of £50k per year, and we're aged 55, so we can take our pension now if we were so inclined. However, the pension will be worth more if we stay working until age 60 - which we're planning on doing anyway.

What should we do?

The pension now, at age 55 is worth £24k per year, but if we wait until age 60, it'll be worth £32k

We want to 'retire' at 60, we have a couple of options (actually there are lots of options, but we're just looking at these simple ones now).

We can simply carry on working until age 60, and take our 'enhanced' pension, or we can carry on working, but put our pension into payment now!


So. Option A. Just keep working until age 60, and then draw our bigger pension.

In the 5 years to age 60, we will have earned £250k, and from then on we get £32k per year from our pension. Not too shabby!


Option B. We could put our pension into payment now, and carry on working alongside it, until we reach age 60.

In the 5 years to age 60, we will again earn £250k - but, we will also bring in £120k from our pension, so a total of £370k, followed by £24k per year from our pension.



The difference in pension payments is £8K per year - quite a bit. But at age 60, using option B, we will have benefitted from extra income of £120K already.

In fact it would take until age 75 using option A to overtake option B overall!


Food for thought!


Now, I obviously haven't allowed for tax paid on any of this income, or increases in pay or pension, and Option B would put someone firmly in the high rate tax bracket, so you wouldn't benefit in quite such a clear cut way as I have indicated - but still, many people might not be aware of the possible advantage of drawing their pension earlier rather than later. It does of course rely entirely on personal circumstance, so nothing here should be construed as advice - it's just a thread to get people thinking/talking about their options. And I would ALWAYS recommend seeking professional advice before making a move like this!


In my own case, as I say, it would take until I was 80+ to overtake option B - and of course the state pension would have kicked in at 67 to boot. Just how much money does one need when they're in their 80's?

Again, my own FA used this as a quick and dirty example to show that there are multiple options out there, some of which one might not have considered - I certainly hadn't considered drawing my pension 'early', and it opened my eyes to various other options that have since been discussed.

If anyone is approaching retirement, or better yet, approaching age 55, I would highly recommend getting some professional advice on the way forward. Avoid anyone with a 'get rich quick' scheme, promising stellar returns, but even advice as to how, or when, best to draw your pension would be worthwhile IMHO.
 

imightbewrong

Distinguished Member
I've often wondered about 'retiring' vs 'taking pension' - these are often coupled to be essentially the same day - but they do not need to be. I.e. if you were to stop working at some age but were comfortable with decent savings, maybe some savings/investment income - is there a need to actually take a pension at that point? As you say, the longer you leave it the higher the income (since it will hopefully appreciate and also, you won't draw on it for so many years).

I am still a few years off needing to give it serious thought though.
 

gg13533

Well-known Member
Also you can never tell what the future brings health wise, so in my opinion go for option B but also stop work and enjoy life!
 

Rasczak

Distinguished Member
The Dreamer makes some good points and I certainly know quite a few people who believe it is far better to take money sooner rather than later. Until you apply the taxation factors and other considerations though, the figures aren't that helpful IMHO. By way of example, that extra-£124k of income you mention automatically reduces to £83k. And you would become a higher rate taxpayer with the consequences that incurs (e.g. reduction in savings allowance to just £500 - a consideration given the fact you will have all this extra money to put somewhere). Also, if you are no longer making pension contributions, you would be taxed on that income as well! If you find yourself bumped up into the Additional Rate the taxation pain is even more acute.

The 'other considerations' are many and varied. For example, what would you lose in Employer contributions for the five year period? How will the pension growth change after it has started paying out? Will you have any requirements for loans etc when in retirement (in which case a larger income will obviously be better).

I suppose the key question though is what are you going to do with the extra income if you had it now? And would an alternative option to be a second job, promotion in your current job or job switch? I suppose my point here is that, if you are of working age and healthy, it is easy to boost your income - that won't be the case when you are 75.
 
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The Dreamer

Distinguished Member
Indeed, there are lots of issues with my simplistic example - it is purely that - just to get people talking about this, and other, options/considerations.

I wasn't even aware that we had a savers allowance for example! As I have no savings, it's never been a concern, despite paying the higher rate of tax!

It is merely to highlight that simply working until 'retirement' and then drawing a pension, is only one of many options available - and something that might be worthy of consideration.
 

mjn

Distinguished Member
Retiring at 60? Lucky bastard.
 

Rasczak

Distinguished Member
It is merely to highlight that simply working until 'retirement' and then drawing a pension, is only one of many options available - and something that might be worthy of consideration.
Fully got that Dreamer - I was just adding my thoughts. Presumably you have quite a few ex-Forces people in your line of work that are receiving their military pension in addition to their salary?
 

The Dreamer

Distinguished Member
Fully got that Dreamer - I was just adding my thoughts. Presumably you have quite a few ex-Forces people in your line of work that are receiving their military pension in addition to their salary?

There are - I'm not one of them though!

Though, with all the changes our pension provisions have been through, I now have 3 separate parts making up the whole. So again, lots of options.

And no, @mjn, I'm not retiring at 60 - it'll be a few years after that - but I am putting one pot into payment (though not actually drawing an income) shortly, to pay off our mortgage using the tax free PCLS.
 

MSW

Distinguished Member
Interesting thread and a great point about pension and early taking of the pension.

I have been thinking about taking my pension at 55 for sometime and made the decision about 2 months ago that if I am still employed at 55 I will definitely retire. I am 49 at the moment and, up until 2 months ago, due to some severchanges with my work I had begun to dread each day

For me it was quite liberating, and now that I have reconciled that I only have 5 years to work I have changed from someone who just turned up and would do what was required into someone (probably a PITA) who resembles a go getter / climb the ladder type but with the freedom to act / speak more liberally.

My pension at 55, after I have taken a lump sum, will not provide a life of luxury but, it will cover all living costs and a bit over. Lump sum aside my pension would not cover very expensive things like a new car, expensive sofa. However, my plan for those things if the lump sum runs out or I wish to preserve the lump sum is to get a temporary job. I do realise there is the tax element but, the thought of working for say 6 months to earn say £8000 NET all of which would be fun money something that sits well with me.

At the end of the day I took into account 2 things “Time” and “Money”

IMO if money is the main driver then financially it is better to spend 5 more years working till 60 at which point I could retire and not need to worry about a temporary job.

Time, I decided that Time was the main driver for me and I am happy to forgo the additional financial benefits of working to 60 in favour of having up to 5 years free time.

I also think the state pension at 68 is a wonderful little top up that is often forgotten by people when weighing up when to retire

Finally, I am mindful that I had the good fortune to join a company at 18 who offered non contributory final salary pension. Despite changes over the years the pension is very good and I consider myself incredibly lucky to have received this benefit and glad, that circa 25 - 20 years ago when many colleagues were leaving for much higher salaries that I stayed put.
 
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captainarchive

Distinguished Member
Post Covid-19 my thoughts have turned more morbid. Now when it comes to retiring I think about the saying 'a bird in the hand is worth two in the bush'. Sure if you work longer you'll accrue a larger pension, however it means you'll have less time to enjoy your retirement, if at all.
 

The Dreamer

Distinguished Member
Post Covid-19 my thoughts have turned more morbid. Now when it comes to retiring I think about the saying 'a bird in the hand is worth two in the bush'. Sure if you work longer you'll accrue a larger pension, however it means you'll have less time to enjoy your retirement, if at all.

There is that too I guess.

Speaking of morbidity, if you have your 'pot', as opposed to a DB scheme (or if you have transferred out of a DB scheme) - and die before the age of 75, your pot can be passed on to your family free of any tax, as long as they don't touch it for 2 years! (Check with an IFA on this, but pretty sure it's reasonably accurate - there may some hoops to jump through though).

If you have any health issues that might mean you don't get to enjoy a long retirement, it might be well to see what can be done to pass on your 'wealth' as efficiently as possible.

It was yet another reason for me to take my CETV and run! We all like to think we're going to survive to 90+, but the reality is that many of us won't make it that far - it'd be nice to set up my survivors financially.

Having said that, they know that if I peg it before I reach 75, they'll become very wealthy overnight - I may have just painted a large target on my back! If I suddenly 'go quiet' within the next 20 years, you'll know what's occurred! :eek: :D
 
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