Is there any reason NOT to take my pension at age 55?

[pensionconfusion1]

Hi everyone. I have a private pension with a Bank, who I worked for, for 27 years.
I can access this next year, when I am 55. Or obviously, I can leave it alone and access it later, and get a higher amount.

The figures are :

Age 55 - £61k lump sum plus £770pm

Age 60 - £83k lump sum plus £1037pm

The thing is, if I took it at age 55, and put the lump sum in to a savings account, and also got the £770pm paid in to the same account, and left it untouched, it looks as though no matter what age I live to (have used 75 as a marker), the figures look roughly the same. This is assuming a 3% interest rate on the account.

Am I missing something?

The £1037 is probably index linked, so is based on today's prices and will be higher in 5/6 years time. Although I assume the £770 will also rise each year?

You will pay some tax on the interest above £1000, although you might also be able to use your personal allowance if you don't earn anything other than the £770 pm pension income. But you'll be able to move some of the money into ISAs (or premium bonds, which also pay above 3%) and the returns will be non taxable.

I suppose the other factor would be your circumstances - do you plan to carry on working or not, do you have a partner who works and do you have any 'need' to spend the lump sum on? Obviously £770 pm isn't enough to live on, on it's own, but if you have a partner who works, or will work yourself, you could certainly make it so you have sufficient income.

It's probably worth talking to Moneyhelper - it says you don't qualify for a Pensionwise appointment as it looks like a DB scheme but they say they can help you.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

The temptation to spend it if you take it now and have access to it??

Do you mean take it and carry on working?

Have you thought about the possibility of living a lot longer than 75?

So if you do 770512 you get about 46k.

(1037-770)*12 = difference in pension value per year = 3,204.

Difference in lump sums: harder to calculate as you could probably invest and have 63k become 84k in that time so let's ignore that

46k / 3,204 = 15 years so essentially if you live to less than 75 taking it early is better value. If you live to over 75 taking it later is better value.

Don’t forget they will tax the monthly pension payments at normal tax rate .

so might be okay if lower rate tax payer, but not so good at 40%

Well if you are 54 now and in average health then your life expectancy is actually to about 86. Will this affect your calculations at all?

I hadn’t thought about it but check how many stamps you have for your old age pension. I know my father got caught out on this and doesn’t get a full old age pension as he retired early.

I'd plan for living until at least 90

No, you’re not missing something. Pensions like yours are designed to be fair, you aren’t penalised for taking it early, it’s calculated to come out the same value overall over an average lifetime as if you took it later. Leaving it in the bank is effectively the same as not taking it early.

But why would you do that? As PP said, if you did you would pay tax on the income. If you leave it in the pension it’s tax free until you take it.

If you actually retire, will you have enough NI contributions for full pension when you do?

If you carry on working have you factored in paying tax on your pension?

Safer to calculate on the basis of living longer than 75!

Is the lump sum part of the deal, or an option that you can take out if you want to?

Thanks all. To clarify, I will continue working. I am self employed with a good wage. The lump sum and monthly payments would not be touched. I guess the rationale behind taking it asap, is then that money is in my hands - what if the pension crashes? Can that happen? I lost a lot on shares in the past which has made me risk averse. Yes, I will get the full state pension.

1. you will probably pay more in tax as the monthly pension will be taxed - are you a higher rate tax payer?

2. the monthly payment will (probably, depending on scheme rules) rise with inflation for ever. If you start drawing now, will you be able to match or beat inflation?

3. you don't have any investment risk with a DB pension scheme. The trustees do but you have a promise to pay the pension & that is unaffected by the markets

4. an average woman of your age will live beyond 80

It isn't a terrible plan but leaving it intact is likely to be 'safer'.

It's also not a 55 or 60 situation, you could access it at any point in that time period. They should produce an annual funding calculation which will give you information about the health of the scheme. Pension scheme are much more highly regulated than they were in the past.

I'd definitely try to minimise taking it and paying tax on it if you don't actually need the income.

It's a good point about the tax, I hadn't factored that in. I only pay tax at 20%, but it's still a good point.

Does anyone know what happens if you die before you've emptied your pension pot? My Dad is in receipt of my Mum's work pension. If he dies, and there's something left in the pot, does that get passed to me and my sister until it's empty?

It will depend on scheme rules as to what happens. Most would have the option for a spouses pension but it would be fairly unusual for anything to be passed to non dependent children. Some may have a minimum payment term such as 5 years that could be paid as a lump sum to the estate if they hadn't paid out 5 years worth. It's not a personal pot of money as such, all they can quote is value equivalent to benefits that they would expect to be liable for in terms of an actuarial calculation.

The only way to have a lump sum as such would be to transfer out of the workplace scheme into a private arrangement such as a sipp or drawdown facility, however that is the wrong decision for most people and would require specialist advice.

DB pensions (where there is no 'pot' of money but a promise to pay a monthly amount) depends on many factors in scheme rules but often a proportion of it passes to a surviving spouse. Mine (bank) will pay 50% to my DH if I die first. If he had already died, no more payments would be made.
Unused DC pension pots are passed on.

Check if your total income would take you into the higher rate tax bracket too. Taking into account earned + pension + savings interest + any other income you might have.

I think you can take a percentage at age 55 tax free, might be better to do that and shove it in a high interest account (if there is such a thing anymore!).

Really? You reckon you would be able to grow £61k to £83k in 5 years, tax free? (That's what the scheme offers per the OP).

Your more recent comments make it sound like you need more help to get your head around pensions, you seem to have some big gaps in your knowledge. I strongly advise you speak to pension wise as PP suggested and read up about pensions on money saving expert too.

There are different types of pensions, if you are being told a monthly income figure you have a defined benefit (DB) scheme. It doesn’t work like shares, it only goes up with inflation, it can’t go down. There are laws in place to protect pensions and DB pensions are nowhere near as risky as stocks and shares. Even if the pension scheme collapsed, there is a protection scheme in place to make you still get most of the money. If you don’t plan on spending it at 55, I really don’t think you should draw it out early.

The age 60 figures are based on current projections though. If it's a DC pension and you plan to buy an annuity, annuity rates are improving all the time at the moment. So if you waited until 60, by that point the pot could buy a better annuity of, for example, £1,300 pm