18 May 2015, 7:39pm
personal finance:
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  • front-running a DB or State pension with a new Osborne style SIPP

    I’ve written about this before, but it is getting close to doing it for me, hence a worked example. This is particularly useful for people with a legacy DB pension although the technique also works to smooth your income between retiring and getting the State pension, which is another defined benefit pension 1.

    A DB pension is defined only at a particular retirement age, usually 60 or 65, or use this calculator in the case of the State Pension. With a company DB pension you can often retire earlier, but you will take an income hit called an actuarial reduction if you retire earlier than the scheme NRA. In my case the NRA for most of my DB pension is 60, I will eat the loss from ‘retiring five years early’ for the last three years accrued when it was shifted to 65.

    When these schemes were designed in the 1970s and early 1980s there was more goodwill between companies and their workforce which was seen as more of an asset than now, the pension was part of aiming at staff retention, which is largely gone in a faster-moving, possibly more efficient and definitely more dog-eat-dog employer/employee relationship now 2. The actuarial reduction is rarely defined, and gives companies wiggle room to reduce their costs. As a result it’s usually best to take a DB pension at NRA, because it’s nailed down what you get. Individual circumstances can sometimes mean you’re better off to take it earlier, but that’s usually more to do with paying off debts with any tax-free lump sum.

    What to do if you want to retire before NRA?

    What you ideally want is a short pension to front-run the main pension until its NRA. This pays out between the date of your early retirement and the DB pension NRA. If you want to retire before 55 you also need to save enough money in an ISA or unwrapped to  pay your way to the earliest date you can draw pension savings, currently 55 but scheduled to rise to 57 and further – a gotcha to watch.

    When I retired in 2012 a short pension wasn’t an option – if I had used a SIPP I wouldn’t have been able to draw it down, but all this has changed now. So the question is now how much can I save into a SIPP such that I can run the SIPP flat in the (for me) 5 years between getting hold of it and the pension NRA, without paying any tax. There’s not much mileage 3 in a basic rate taxpayer saving tax on the way into a SIPP only to pay tax on the way out, although any sort of higher rate taxpayer will gain a useful amount drawing down a SIPP even above the tax-free personal allowance up to the 40% tax threshold.

    Put another way, I want to know how much can I put into a SIPP, such that I can withdraw the 25% tax-free lump sum up front and then a personal allowance worth each year, for (in my case) five years, from 55 to 60. With a NRA of 65 that would be 10 years. It’s reasonable to hold a five-year amount in cash, a ten-year amount would need to have some investment component for inflation protection – either some exposure to equities or some fixed interest bond-like stuff.

    Show me the money…

    At first sight this is easy enough. Estimate the personal allowance at £11,000 (it is currently £10,600 and rising to £12500 by government manifesto diktat in 2020) and in five years I have £55,000 worth of personal allowance. I can add a third of that amount to the total, ie £55,000 × 4 ÷ 3 ≈ £73000. The first year I take a PCLS of £18,250   (£73,000 ÷ 4) plus £10,600 tax-free personal allowance, leaving £44150, which I then run out at £11,000 a year for the remaining four years.

    I can do a little bit better by using the non-earner’s annual pension contribution allowance of  £3600, costing me £2880 p.a, and tossing that into the pension for each for each of the 5 years. I only need ~ £49k of savings as opposed to £73k up front. I save less tax with the short SIPP, because the PCLS is smaller. However, I leave a lot more of my AVC fund intact, and get that tax-free later, so I have shown the difference as a lump sum PCLS coming out in 2020, computing the tax saving on that to add in. I need to take a 360 degree view of all pension savings rather than just compute it for the SIPP in isolation.

    Now it happens that I already have £10,800 in a HL SIPP as cash, because I acted as soon as I heard of Osborne’s pension reforms which was in March 2014, so I was able to use the 2013/4, 14/15 and now the 15/16 tax years non-earner’s £3600 pension savings allowance. That’s a bit of a way short of £73,000 but I saved 1/4 of my DB pension capital in AVCs, which I have the right to transfer to a SIPP, so I can get a hold of the residual amount from there, leaving the rest as AVCs. That AVC fund was originally targeted at getting 1/4 of my pension as a tax-free lump sum, by pre-saving that rather than commuting DB pension. With a short pension I can get hold of some of that earlier, still tax-free, and be able to defer my DB pension to NRA. Since I lose ~5% of DB pension per year drawn early, I am effectively investing this capital in more pension income. Although this exposes me a bit more to the risk of the DB pension failing, it reduces the risk of me screwing up the investment strategy. On balance the risk of the latter is probably worse than the pension failing, but this is a risk/reward tradeoff. Of course I don’t get ¼ of my DB pension capital as a tax-free lump sum because I’ve already transferred some of it out, but since I don’t have any mortgage to pay off with the PCLS that’s no big deal – getting some of it it tax-free earlier and the rest tax-free later is better than getting all of it tax-free later. The £12250 SIPP PCLS isn’t a bad match for next year’s ISA allowance, I only need top it up £3000-ish.

    The same principle of running a SIPP flat or drawing at a higher rate pre SP could be used to match the State pension for early retirement ten years before taking it, smoothing the income profile without taking a suckout.

    Some caveats

    Breaking your pension savings into silos (ISA to 55/57, short SIPP 55 to 65, DB pension)has problems of its own. Any situation where you have to divide your lifetime savings into different silos with different conditions is always worse than if you didn’t have the silos. Running an ISA or SIPP flat comes with  uncertainty if it’s exposed to the stock market. I can qualify this because my investment horizon is 5 years max and less than 2.5 years average 4, so cash is a perfectly decent asset class to use. For a ten-year SIPP the investment horizon is on average a shade under 5 years, cash isn’t necessarily right for that. With an ISA you can aim to over-save – if you don’t run it down to 0 you can still get a tax-free income from what’s left. If the aim is to run the SIPP to 0 before drawing the DB pension then adverse investment performance could mean you flatten it before your DB NRA. However, you’d still gain by not drawing it as early as you’d have to otherwise  – before Osborne’s changes I was going to draw my pension at 55 and invest the large AVC PCLS in ISAs over several years to compensate for the actuarial reduction. You don’t have the option to draw the State pension early, so you need to have some flexibility in your SIPP drawdown before 67 or whatever it is for you to not end up with an income hole.

    The theory of this comes with a massive DYOR warning – it’s possible I’ve screwed up somewhere in the calculations 5 The trouble with pension generalisations is that by definition people coming up to pension age have had a lifetime of complexity accrued in their financial story so no two people are even remotely similar. Saving your children from the requirement to earn their way by leaving an inheritance also complicates the issues.

    Osborne’s changes have created an opportunity to front-run a pension which was previously only possible for people with £20,000 p.a. of other guaranteed pension income. That’s useful to some people, but like anything to do with pensions the numbers are big for many people – the average DC pension savings at retirement is £25,000. And readers who don’t find the numbers big will probably wonder what’s the point of sweating to save a trivial amount like £14k over five years 😉

     

    annual contributions
    2016 2017 2018 2019 2020
    total savings grs 67000
    Initial 49000 33350 25950 18550 11150
    PCLS 12250 24000
    annual contrib 3600 3600 3600 3600 3600
    drawdown 10600 11000 11000 11000 11000
    tax saved 13400 4800
    check line
    total return 66850
    no annual contrib
    Initial grs 73000 44150 33150 22150 11150
    PCLS 18250 0
    annual contrib 0 0 0 0 0
    drawdown 10600 11000 11000 11000 11000
    tax saved 14600
    check line
    total return 72850

     

    Notes:

    1. a company DB pension is defined after each year you work for the company – they can change the terms for future accrual but not retrospectively for defined benefits already accrued. Whereas the State pension is defined by government and can be redefined – as has been the case recently
    2. until you get to the parasitic executive level, which seems to featherbed a ‘because we’re worth it’ layer of scum to loot shareholders more and more, because of course you have ‘pay the going rate’ to recruit top talent despite the fact that CEO pay used to be about 40 times that of the grunts (US study, Table 6), compared to over 200 times now and there’s been no notable increase in company profitability since then
    3. but there is some – even if you pay 20% tax on all of your SIPP income the 25% pension commencement lump sum saves you a quarter of the BR tax you’d otherwise have paid
    4. more than half the money is out by 2018, the midpoint, because the PCLS front-loads it
    5. original spreadsheet at google docs

    @ermine I find it surprising that your firm would not give you an actuarial discount calculation up front. When I retired at 58, I had the option of a 6% PA discount from 62 or a 3% PA discount from my “90 factor” retirement age of 64.5 – whichever one was better for me.
    Otherwise your tax planning is quite sublime. I probably did things wrong by using unwrapped funds to supplement my pension until I was able to take my contributory Canada Pension at age 60. I still have not converted my RRSP although I do de-register small amounts each year to go into my TFSA (your ISA.)
    When I do convert my RRSP I can base the mandated withdrawal amounts on my wife’s age, and recent changes have smoothed out the amount you must withdraw after 71 so maybe things will still work out OK. We have no options here to take out a lump sum tax free. Nor did we have the TFSA option when I retired (that came later.)

    I find it surprising that your firm would not give you an actuarial discount calculation up front

    They will. But they reserve the right to re-evaluate this triennially! And people are living longer. It’s about 5 to 6% p.a., though as I will be a 20% taxpayer the net loss is about 5% p.a. – the discount increases the more years one draws early.

    We can’t formally convert SIPP to ISA – the way I plan to do that is simply draw from the SIPP tax-free and shove into the ISA as cash. It would be nice if one could shift, say 100 units of stock from a SIPP to an ISA which is what your de-registration sounds like!

    Sadly you cannot do any sort of transfer in kind from an RRSP to a TFSA. You have to sell the shares , take out the cash, pay income tax at your going rate and then put the remaining cash to work in the TFSA. You can transfer shares from an unregistered account to a TFSA but you have to pay capital gains on them as if they were sold. So transfer in kind is a last option if you don’t have any cash lying around. 🙂
    All deregistration means is that you can withdraw a certain amount of money from your RRSP without converting the whole thing to an RRIF (where you must withdraw a certain fixed percentage every year.) Keeping things as RRSP until you are 71 gives you a smidgen more flexibility.

    Hi Ermine,

    I’ve just hit the eject button at work. I’m a Physics teacher and I have just become fed up with the silliness. I have given them a year’s notice as we have 2 colleagues going on maternity leave and they would be really stuffed with 3 new colleagues in a department of seven. It does mean that no one will TINA me! (translation – there is no alternative) as I can just walk out of the door.

    I am basically going down your path.

    ISA cash/share income from 52 to 55
    Short SIPP 55-60, never taking out more than the tax free allowance
    A DB pension at 60.
    State pension as well at 67.

    The spreadsheets work I think, so I have jumped off the cliff finishing Sept. 2016.

    Matt

    PS Have you thought about making voluntary NI class 3 contributions to enhance your state pension? £14.10 a week to gain an additional £4.24 a week in state pension for each year you contribute seems like a good deal.
    Much better than an annuity. Better than index linked as well.

    Congratulations! And there’s nothing so dangerous to the jumped up squirts issuing pettifogging edicts than a greybeard on his way out who can say NO 🙂

    I have 34 qualifying years of NI credits so I’m reasonably chilled about getting the extra year. Some sort of low-level self-employment would make me eligible for paying voluntary Class 2 contribs which are even better value at £2.65 pw

    19 May 2015, 8:17am
    by Rowan Tree

    reply

    This is what we plan to do, to take us through the next few years until our other pensions kick in at 65/66.
    I had planned to use the UFPLS (uncrystallised fund pension lump sums) route for this. True, you don’t get a big TFLS initially, only 25% of each withdrawal, and the rest is taxed initially, which you have to claim back.
    But keeping the amount to the TFA + 25% p.a. over 4 or 5 years could empty my SIPP without any tax being liable. Unlike drawdown, some SIPP providers are not charging for this, only the eventual SIPP closure.
    What do you think are the advantages/disadvantages of the two routes?

    There’s something to be said for each way, it’s easier to explain in the post as a PCLS and there’s some element of bird in the hand to my thinking.

    The UFPLS route and the up-front PCLS route give roughly the same win if you don’t add to the pension, taking it up-front lets you get as much as possible into an ISA tax shelter which reduces change of regulation risk, taking it UFPLS means you can benefit more from adding significant amounts to the SIPP as you go. I guess you’d need to be working to make that really work for you. HL don’t seem to charge differently for either route so I didn’t catch fees/charges difference.

    One difference is that if you invest in the same asset in ISA and SIPP and you expect the value to appreciate then you’re better off with the initial PCLS lump sum shifted to the ISA early, so the appreciation in value is tax-sheltered. That would matter more with longer SIPPs

    20 May 2015, 9:22am
    by Neverland

    reply

    There is a company I have been doing some work for which employs about 5,000 people across Europe

    They closed their UK defined pension scheme to new members more than a decade ago…there are less than 200 people still working for the company and accruing benefits the defined pension benefit scheme

    I was looking at their 2014 accounts…the pension charge for the defined pensions of those 200 or so people was as much as the rest of the 4,800 employees combined

    Fact is in 15 years time, generation X won’t be having these threads about retiring in their mid- late fifties…

    > generation X won’t be having these threads about retiring in their mid- late fifties…

    It will be a different constituency. I am grateful that I grew up in the more paternalistic company environment, because although the young ermine didn’t generally spend money he didn’t have, he didn’t think strategically. It will be RITs, Early Retirement Guys and Monevators of this world who will be having these threads. I passively saved 25% of my pay without knowing it, although it probably wasn’t enough due to the unforeseen rise in lifespan. Millennials’ pay rises faster and earlier in their careers, but they will have to save actively.

    And Gen X and following will live longer, they didn’t have measles as children and didn’t have the respiratory diseases from the condensation running down the draughty and mouldy walls of coal-fired heated houses in the 1960s. A different set of wins and losses, but overall progress IMO

    @ Neverland Not entirely unexpected as the DB folks are likely long term service employees and the book value of any DB pension really takes off as you get close to retirement. The DC people would be relatively new employees in comparison.
    DB pension plans have some cost advantages that are not always mentioned by their detractors. Overall management costs of a big DB plan are quite low as a percentage of assets. Also DB plans spread actuarial risk over all the members. Each one doesn’t have to plan to live to 100, although some will.
    A DB plan is a tremendous asset but believe me not every one who has one appreciates it until they retire.

    20 May 2015, 5:00pm
    by Neverland

    reply

    @Ray

    Err…no actually

    The calculation is that the few UK defined benefit employees are getting a company pension contribution equal to c. 30% of their salary

    The normal maximum contribution for defined contribution by the company is about 7% of salary in the UK rank and file (there are probably some enhanced executive schemes as well for the 1%)

    I think in Europe the pension mainly gets paid for in “social charge” type taxes

    @Neverland – in my case my and my employer’s contribution combined was around 12% of salary. Something like 30% would be well in excess of what could be put away in retirement savings tax free, and would certainly get the attention of the Revenue Canada auditors.

    Hi Ermine,
    Please excuse my ignorance I am in a very similar situation but am trying to understand where you get the £73k figure. I mean why are you adding a third to your 55k five year personal allowance?

    @John You are permitted to take 25% of your pension capital as a tax-free lump sum called a pension commencement lump sum (PCLS).

    Thus three parts of your pension capital is to be drawn as the personal allowance over 5 years, and one part as the PCLS. Therefore the calculation is a third of your 55k five year personal allowance may be added on top, ie about 18k.

    Add 18k to 55k to get 73k – if you now back-work the PCLS it’s £73k/4 or about £18,000. I’ve rounded most of the figures to lose the recurring decimals.

    Hi, very interesting and very similar to what my wife and I are striving to achieve. We are currently 48 & 47 and are happy with our DB situation post 67, SIPP situation 55-67 but do not yet have sufficient cash funds to get to 55. We have a One Account mortgage currently with a positive balance and that is due to be cleared at age 65. We are considering finishing at Xmas this year and when our cash expires in 4-years running up mortgage debt for the remaining 2.5 years until we access our SIPP’s. Then use the PCLS to clear the mortgage. I am struggling a little with this plan as it goes against our values of not borrowing, but does seem to allow us to escape the rat race. What are your thoughts on this as a plan?

    Hard to argue with the approach. You are taking a viewpoint on interest rates from 2019 to 2022, but the total amount of interest paid is probably okay even if they return to the long-run UK average of about 6%, what price freedom, eh?. I screwed up by paying off my mortgage early, which means I have an income suckout now and will have to work out how to seriously increase my spending from next year and ramp up five years after that, then ramp up even more seven years later when/if I get the the SP 😉

    Using your mortgage helps you smooth that much better. Be wary that the mortgage company may stitch you up if they find you have given up work – if interest rates are still low I’d be tempted to take out at least as much as you’d need to pay bills (plus any minimum mortgage repayments) for that 2.5 years and stash it in some Santander 123 or so high-interest accounts. Yes you pay more interest but you have some security – as long as the money is in a bank unconnected with your offset mortgage provider so the setting-off rules can’t be applied.

    The one account mortgage is cool with no income and we have in the past taken periods off work to travel so no issues there. My worry is the SIPP value tanking and there not being enough to fund both the mortgage repayment and income requirements. Working one more year would pretty much solve the problem, but we have some exciting travel plans and work is bleeding us dry!

    > My worry is the SIPP value tanking

    Would you not address this in the usual way of lifestyling the equity:bond split or even shifting to cash closer to the end date? Paying down a mortgage is a similar case to when people had to buy an annuity where you want to suck out a fair amount of the risk in the five – ten years before crystallising the SIPP. You also have some flexibility – you could decumulate over a few years into the mortgage if you retired exactly at an equity near-death moment. That’s easier said than done – you need balls of steel which is why it’s good to get the derisking done ahead of time.

    If you need a mahoosive equity burst to get there at all that points ot a different issue which might perhaps need the extra year!

    […] this I am going to invest in delaying my pension to secure a more fixed income, front-running it with a 5 year SIPP. The 5 year term means I can use cash for that rather than equities, which then takes me to the […]

    hi,can you help, i have a small db pension which i get at 60 or 65, it has a gmp part, so cant tell if i can get it at 60 yet, i rent from council, low rent rtb, but its a flat, help, service costs when retired if i buy
    I have a small workplace pension and a small stocks isa all 100% equities.I know the stock market very well.
    I wish to retire early to,I.m 47, married, no kids,wife works, both lowish paid. but i’m afraid that i will hit some probs.
    if i drawdown my isa and workplace pension , what will happen when i,m 67 to get sp and housing benefit/council tax benefit,the flat rate pension still leaves full housing benefit and council tax benefit available, I have worked it out.
    do you see any deprivation rules as my db pension may still allow a housing /council tax top up and what happens in 8 yrs time if a future gov changes the pension rules and puts us back to annuities, this is major worry.en getting sp and housing benefit. as surely its the same rules for someone that never saved but worked till 67, using their wages fully every week are still entitled to council/housing benefit when aged 67 if they have no savings or up to £10000 max savings.Thus avoid small annuity, take capital up to £10000

    I have read articles from dwp about drawing down sipp when retired and on benefitts, but nothing about drawing it down between 55 and 67 and th
    if i do rtb, then the service costs repairs leaves me no better off than renting till 67,then getting housing/council tax benefit and free repairs/updates till i die as an old person.

    I don’t have any expertise wit the DWP rules, and it’s hard to imagine what they might be in 20 year’s time! At least it’s not this government you’d be dealing with. It might be worth speaking the the CAB about whether accelerated drawdown in front of the DB pension would be seen as deprivation of capital, but there won’t be any test cases yet.

    It would surprising for a government to risk the wrath of the over 50s by going back to the annuity system with yields still so low. They could, of course, still raise the age at which you can draw – 55 is surprisingly low (it’s 59 1/2 in the US for instance) and there are already ambitions to shift this to 57.

    You’re inherently taking on risk by relying on the SP and housing benefit, in whatever form they may take in 20 years. The current direction is definitely towards cutting back.

    Yes i worked out if i rent, it will be say £70000 till i reach 67 and if my sp , db pension included i may still get housing benefit till the die i die, if i buy using rtb i get it for say £30000 plus interest over 20 yrs, say £4300 total.
    but service charges will be say 500 to 1000 a year, plus big ones like new roof, estate maintainence, pavements, boiler, new gutters, door entry, fire checks,gas checks,new kitchen, bathroom over next 35 yrs as an owner will take it over the £70000 as an renter, then on to housing benefit.
    but my worry is also if i want to relocate, as a renter via council it is very hard to do a mutual exchange to another region, where as an owner i can buy and sell. but an advantage is if i rent in a cheaper area, i can swap to better area for similar rent, eg swap from say torbay, £80 a week rent, to ealing, £90 a week council rent.
    council rents are similar all over uk, house prices arent. hence swapping can be better but harder to find a swapper.

    my dwp comment was if you spend a dc sipp pension too fast, it maybe deprivation of capital before you reach 67, but the dwp made no mention of drawing down an isa, as an isa is just a savings plan, where as a sipp is a lifetime income fund. hence the rules are misleading in their recent publication.
    my employer now call their auto enrolment dc pension an lifetime savings plan, ( no annuity) , wonder why the dwp stil call it a pension!
    the dwp moan you got 20% tax deferred, but hey you may end up paying that back when retired and if the moan that much, then they can cut housing/council tax benefit by 20% as that was the deferment you get up fron, but they have no clout in demanding you get no housing/council tax help cos you spent your dc pension over 12 yrs instead of 25 yrs.

    […] and possibly show you why. I didn’t get to learn much about that because it appears that front-running the DB pension is not a peculiarly dumb-ass thing to do. I am obviously glad to hear that, though it surprised me […]

    […] am slowly inching my way to being able to run my DC pension flat in front of my DB pension, effectively burning up the DC fund over five years, drawing my DB […]

    Now paying full attention at the back of the class. I’ve revisited this page as the Firm announced this week, in a “you’re dumped” out of the blue email, that the ability to uplift your DB pension (45th’s/40th’s/35ths etc) will cease from 1st July 2016. Only the non contributory 60th’s will remain. So for lower paid grunts like me going in at 35ths (65:35) to exit at 55, this is a major setback, to the tune of about 20% of expected income. It was inevitable this was coming, let’s face it. In the style of “Deal or No Deal” they’ve offered an option to exit the DB pension altogether and take a 35% uplift on your base salary instead (tapering down to 15% over the next 8 years). It highlights the worth of a DB pension, when it’s quick to calculate that after tax and NI that it’s a no brainer (for most anyway) to stay in at 60th’s. Predictably this is excellent news for all the top brass who have the LTA/annual allowance to worry about, and those that are close to retirement with big pensions already.

    Some front running (or topping up of) my DB pension with a SIPP is now in order, and I’ll use the 15% that was going into the DB for that. I’m fully expecting some extra tinkering to the actuarial reduction as well so it’s hard to predict when I could take my DB while simultaneously wanting it my grasp asap rather than anyone else’s. I realise this a first world problem and I’m incredibly grateful they haven’t closed the DB altogether. Yet.

    I’m tunnelling my escape with a rock hammer and have just hit some granite, so will tunnel round in a different direction 🙂

    Front run the sucker. The main thing to be wary of with a DB pension is drawing it early. Qualify whatever you have as of now, and wrangle your DC contributions around that. Split out the difference between the before DB pension and after. The after needs to happen for all time (well, you + spouse if any) but the before can be burned up ahead of the DB NRA.

    it’s hard to predict when I could take my DB while simultaneously wanting it my grasp asap rather than anyone else’s.

    I understand the sentiment, but for me came to the conclusion that I had less faith in my talent as an investor than the Firm’s dudes. So I’ll draw at NRA, which means not yet and not for a few years. Of course if the entire financial system goes titsup, well, I’m hosed anyway, i’m too old and not fit enough to fight the zombies. Just saying, beware the grasp… It’s seductive, but control does not equal competence. IMO etc etc. Drawing a DB pension at NRA is a copper-bottomed guarantee. Of course, there is the question, where is the money in a coin?.

    I’m surprised it took the Firm so long to shift this, and I am with you all the way when it comes to people in the PF scene bitching about the LTA restricting their precious ability to piss away riches beyond most people’s dreams. I will never, ever, in my whole lifetime, ever be worth that much. But I will have something more precious. I will know what enough looks like and if it’s good enough for Vonnegut, it’s good enough for me 🙂 They can’t take it with them, and their kids don’t have the talent to fight the troubles to come in 40, 50 years time. A gated community won’t help them get old, knowing who you are, what your stand for and whom do you serve will do far better.

    Of course, none of this is financial advice etc etc You know the pack drill.

    Quantifying what I have today, taken at 65, plus a small DC and the state pension kicking in 2 years later, then all is well. “Enough” is reached. My panic to draw it early stems from a fear of all of the above being wiped out, but you’re right, if The Firm couldn’t pay out, it’s pitchforks at dawn and watching a few episodes of Ray Mears isn’t going to help either. I’ll attempt to park it to as near to NRA as possible, and as it stands today, with some black belt SIPP action, I’m still on track be out by 55 and “front run the sucker”. There are so many variables on the horizon, the good and the bad, some in my control, some out of my/our control. One fundamental remains, which is I am not (h/t to redundancy of course) working in the Firm past 55. Non negotiable. There are things more precious.

    Of course it could be a lot worse, and I should spare more thought for those topping out on the LTA, and be a little more respectful when they come to me to talk about how troublesome it is. Yes. Really.

    Sage advice, thank you. DYOR. Always.

    One thing to note is when we speak of NRA it’s not as simple as it seems due to The Firm’s shenanigans. Do not take their nominal NRA of 65 as gospel, because you have some choice in the matter, subject to actuarial reduction, and there are two components to your pension. The NRA was shifted to 65 from 60 in March 2009 ISTR. As such you have x years accrued pension based on a NRA of 60 up to 2009 and y years accrued since then. But they say you must take it all in one go (ie not draw the first bit at 60 and the second bit from 65).

    That was a crafty way to steal money from you for the first part, because if you don’t want the second part to be actuarially reduced by 25% you have to give them a free ride on the first part by not drawing it for a few years. This is free money for The Firm because it reduces the total amount paid out by five years (assuming you get to 65). In my case (20 years NRA 60, 3 years NRA 65) it’s a no-brainer, I draw at 60 and let a quarter of the second part go hang, because it is a lower rate of accrual, a smaller part of the whole and so losing 25% of roughly a tenth is no great deal.

    For someone with a larger stake in the second part, this needs some serious Excel what-iffery to compute the optimal NRA, because you may need to give away some of the NRA 60 part to avoid taking the gut-punch too much on the NRA 65 part. I would, however, be surprised if your optimal NRA comes out at 65, but it depends how much you have in the NRA 60 components, and on your actual date of leaving. All this has an impact on how much SIPP you need to front run your main pension.

    The economic conditions under which the Firm’s ability to pay gets wiped out and the Government’s PPF repudiates its offer to underwrite 90% are perfectly possible. But even if you had five times the LTA behind you, what exactly are you going to do as a post-55 y.o. in that kind of world? How would you store value and realise it when you need to buy bread? You’re stuffed, it’s going to be no country for old men.There isn’t anything you can do about that. Donald Trump might be rich enough to survive that, but you and I aren’t, and even then he is still going to be an asshole over the hill with no hair, which seems to be his main problem.

    Take action about the things you can do something about. The things you can’t, well, let them be what they may be. Drawing the pension early for a greater feeling of control needs a serious appraisal of the risks and hazards of that course of action, as opposed to the risks and benefits of the status quo. It’s perfectly possible that you are a better investor than I which would shift things towards more SIPP/ISA and less DB pension. But you have to ask yourself that question honestly, because it’s your future at stake…

    According to The Firms pensions website as of today (pre future fiddling), there is no “one size fits all” and the NRA and the Actuarial Reduction vary from join date and years under your belt. I’m a 2007 joiner.

    NRA: Says The Firm: “The contractual retirement age moved to 65 on 1 October 2006”. All my past contributions are set at 65:xx. I don’t have two components to deal with, which makes the maths there straight forward at least.

    Actuarial Reduction: This is the slippery one, and I have to give plenty of thought and painful hours on Excel as to how and when I finally exit, or I could really take the shaft. Under the “Age Discrimination” section it details how my AR differs to yours.

    Redundancy: 3% AR for every year pension is taken early before 65. Would be a steal if the timing is right and enhanced redundancy terms remain.

    Retirement: From 55 (with company consent) 3% AR for every year before 65. While many might consider this nuts, this was my original weapon of choice as the 35ths meant the pension was big enough with the 30% hit for me to go with no front running required. Option now defunct as 60th’s couldn’t take that hit. In the interests of £’s I should stay on a few more years, in the interests of my sanity I’d rather not.

    Resignation: 5-6% AR for every year taken before 65. If I’m to take action on the things I can do something about, then this is the one. If (when) they pull the DB altogether I can use the salary uplift (puts us on DC terms) plus the 15% now redundant from my 35ths, to accelerate the FR/SIPP. Your workings on the post are mega useful as I’d be aiming to take 25% tax free and withdrawing only up to the personal allowance annually and topping up with other allowable tax free components.

    8 years to go once 35ths are removed, I’m no investing expert, so cash/low risk SIPP appeals at this stage of the game. Interested to see what George has to say on pensions tax relief in March, if I get my way then a flat line to anything above 20% please.

    Failing all of the above, then I’d like to go in the initial “die off phase”rather than spend any time alive with Donald Trump.

    Aha, The Firm is different in my case than yours, though the first adjective is the same. Mine produced primarily a service. Hence some of the assumptions I made on the differing components don’t apply. The principles of front-running are the same as they only depend on the tax threshold, and the amount of time you front-run. That 15% option you have to make 1/35ths accrual was remarkable, and indeed the 3% p.a. actuarial reduction is less bad that the typical 5%. I guess it depends on how often the voluntary redundancy option comes around.

    I never found a smart way of doing the Excel computations – in the end I replicated blocks of rows for if I went at 50 through to 60 and assumed various actuarial reduction rates. It was a hell of a mess. And kept on telling me I couldn’t retire as early as I wanted. Until all of a sudden it was okay – the cross-point is quite distinct.

    All good, as this gave me the push to reacquaint myself with the Firms terms, which is never a bad thing. 1/35ths for 15% was obscenely generous and I shouldn’t b1tch about it too much as I’ll sound like a long suffering LTA’er. Blocks of individual rows by age might well unravel the thought-mess I’m in. THANK YOU 🙂

    Update, if of interest. Over the last 6 months, a resistance group (people like me badgering the hell out of The Firm) and people power, has led to a partial U-turn. Rather than lose all our enhanced DB options, 54ths has been reinstated as one alternative option. 5% contribution rather than the previous 2%. I have to say I’m surprised, but in the face of ongoing benefit erosion, feeling victorious.

    That really is quite remarkable – congratulations and well done – I’d never have thought it possible!

     

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