Taking Benefits Early

[tractorboy2]

I saw in some older threads that by taking your benefits early , you start to lose at around age 68 to 70.

If two posties of the same age had the same benefit forecast of £6,000 per year , and one of them took it early at age 55 giving up 25% so getting £4,500 per year , then by the time s/he reached 60 years of age they would have received £22,500. Divide £22,500 by £1500 (the annual difference between £6000 and £4500) equals 15 , so they wouldn't start losing till 75.

NB I have left aside tax and inflationary increases.

So how do people come to 68 to 70 ?

[RobertT]

The break even age for just the pension is likely to be around 75.

But most people take a lump sum too, which will also be reduced for early payment.
These things will always vary a bit due to individual circumstances and amounts involved, but I estimate that would bring the break even age down to closer to early 70's.

I doubt it would get as low as 68 for most, although there was someone on here a while ago who took their pension at 50 before the age was increased, and therefore their break even age would have been quite low.

RMSPS figures suggest the average postie actually lives to slightly higher than the national average age, so in practice the earlier you take it, the more you're potentially giving away overall.

But obviously averages are just that, they don't apply to everyone.

[tractorboy2]

Using my example above , I did another calculation if both take a lump sum the person who took their pension early at 55 would start losing during their 69th year. The person aged 60 would start benefitting at age 68 and 4months.

[RobertT]

I've been telling people on this forum for years that taking their pension early is, generally speaking, a mistake. But there's still lots that do it, particularly while still working. They all seem happy to do so, which is obviously their choice.

I've given up trying to persuade them not to and now just consider their decision as making my own pension more secure.

[NorthernBoy]

Using my example above , I did another calculation if both take a lump sum the person who took their pension early at 55 would start losing during their 69th year. The person aged 60 would start benefitting at age 68 and 4months.

I used to try and work out how long it would take me to break even if I took my pension early. I then decided this was the wrong approach as for me it’s all about when I want to retire and how much income I will need.

I will probably take mine at 59/60 as I intend to use money from a personal pension to retire earlier, hopefully 56/57. By taking it as late as possible I am allowing my tax free avcs to grow for as long as possible which is a valuable benefit.

Another factor to consider is do you have a partner and will they need your pension once you die.

Does taking it early say at 55 reduce the overall pension so much that it effects their standard of living (after your death) My partner will have very little pension provision of their own so will need as much from mine as possible, hence why I am taking it as late as possible.

There is no right or wrong decision as everyone’s circumstances are different.

[heapsy]

So many people on here seem to be obsessed with getting as much out of their pension as they can before they kick the bucket. If you are that bothered about it, then why put money into a pension in the first place? The first question should be, am I going to have enough money to live off if I reduce my income for the rest of my life by taking my pension early? Remember, a reduced pension attracts a reduced increase for life. How many times have people heard someone say "council tax has rocketed", "gas has gone up" etc etc. Too many people underestimate just how long they will live. You might not get out much when you are older but you will still have the bills! If you want to retire early, you have to work a plan out as I have, that does NOT include taking any pension early, AND avoids paying tax from age 60 to 65. Simple enough, but people just can't be arsed doing their research.

[Hawkey99]

Great points heapsy.

The only thing I would mention is t expect to pay some tax when your older as this means you are getting more income...

But as you say its Planning, Planning, Planning and to start it as early as you can...

[RobertT]

With a state pension of currently about £9,300 per year, assuming you qualify for the full amount, tax will be unavoidable for many from SPA onwards when including RM(and any other) pensions. But if you can avoid paying it beforehand then try to if you can.

A lot of people see pensions as something to think about when you're old, but starting early is always better, as this article explains: https://www.thisismoney.co.uk/money/pen ... month.html

[tractorboy2]

What if it is too late ? How do you avoid paying tax between 60 and 65 , without taking some element of your pension early ?

[NorthernBoy]

What if it is too late ? How do you avoid paying tax between 60 and 65 , without taking some element of your pension early ?

If your income from all sources is over £12570 you will pay tax. My advice is to focus on what income you need for your lifestyle, if that means you have to pay a little bit of tax then so be it.

[RobertT]

As ever with pensions, everyone will be different. But let's say your pension(no lump sum) will pay out £15,000 per year, in which case you'll pay tax on £2,430 not including any other income you have in any relevant financial year year..

If you were to take a lump sum which reduces your income down to £12,570 or lower, that lump sum will be tax free and you'll avoid paying tax.

That is just a fairly basic example, but I agree with NorthernBoy that you shouldn't get too bogged down in the tax side of things and should concentrate on having enough money to provide the lifestyle you want.

[tractorboy2]

How is the tax split between Pension and Earnings ? For example if you had to pay tax on 6k of your income , how is your annual allowance divided ?

[RobertT]

If you retire part way through a financial year you'll have paid a certain amount of tax based on your earnings up to that point. Your income will probably then reduce, therefore your tax code might alter too. In practice a lot will depend on timings, the earlier in the tax year you go, the less tax you'll probably pay!

It's also possible to have different tax codes associated with different incomes, but as has already been said, overall you can earn £12,570 until you start paying any tax.