Should you start a final salary pension on your birthday or in April?

I was a deferred pensioner in a final salary scheme. As I approached the age at which I could draw this pension, the company wrote to me asking me if I’d like to put the pension into payment as soon as I was eligible to do so, on my birthday.

Knowing there was no further accumulation of years of service possible, I said yes.

The documentation I had been given by the scheme stated that the pension would be increased annually by Retail Prices Index inflation during deferment and during payment.

Timing pensions: What should you weigh up before starting payments? (Stock image)

I knew that increases were applied each April and were calculated based upon the RPI for the previous year September to September.

So, the April after it went into payment, I was shocked to discover that instead of 3.9 per cent being applied, the increase was a mere 0.9 per cent.

Despite the phrase ‘increased annually in line with inflation during the whole period of deferment’ it turns out that only whole years are counted for the purposes of calculating increases.

In other words, in this particular scheme – and in most, I imagine – it is almost always a mistake to trigger the pension on one’s birthday, when offered.

Where can you turn for help with your pension? 

The Government offers a free guidance service, PensionWise, for over-50s, but this is for people with ‘defined contribution’ pensions.

This is where you and your employer build up a pot of money and invest it for old age, rather than ‘defined benefit’ pensions where you get guaranteed payments from retirement until you die.

You can make a phone or face-to-face appointment here. 

The more general Pensions Advisory Service is also free and Government-backed. Go here to search for answers to your questions, or call 0800 011 3797.

Many people baulk at the cost of financial advice, but it can be invaluable in avoiding unforeseen traps. 

If you don’t want a full financial review, you can ask advisers to quote a one-off flat or hourly fee for help with a specific issue like the one discussed here.

Read This is Money’s guide to getting one-off financial advice here. This is Money’s Editor, Simon Lambert, explains why getting financial advice on a pension is not just paying for something you could do yourself here.

‘The reality is that even those of us who consider ourselves financially informed may struggle to think of all the things that should be considered,’ he writes. 

One should instead await until the April increment has been applied and then trigger it immediately after that. 

In my case, with a January birthday, I lost 9 months’ RPI amounting to 3 per cent right at the start of a pension. 

The situation would be even worse if one’s birthday was in late March.

I took a £50,000 lump sum, and the extra 3 per cent increase that I lost by not waiting until April offset the three months of payments I received beforehand.

Please make others aware of this anomaly, that they might not make the same costly mistake I made.

Tanya Jefferies, of This is Money, replies: Your case highlights how complicated the rules on final salary – or ‘defined benefit’, in industry jargon – pensions can be to navigate.

It can be very difficult for non-experts to fathom them – often it’s a matter of ‘you don’t know what you don’t know’, so people don’t discover the pitfalls until it’s too late.

You took this matter to the Pensions Ombudsman, which found the line you quote above from the old company document that misled you ‘could have been clearer’, but that your pension scheme rules took precedence and nothing had been done wrongly.

We ran this by two pension experts, who agreed with the Ombudsman’s decision.

They also say the question of whether to start a final salary pension on your birthday or the following April will depend on the scheme rules and personal factors, and so will differ for each individual.

They offer some pointers for people weighing up such a decision about what to ask a pension scheme before triggering payments.

Jon Greer, head of retirement policy at Quilter, says he can see where you are coming from but that your pension scheme took a fairly typical approach in applying inflation for whole years only.

He also notes that as part of a redundancy package from your old employer, you were allowed to take this final salary pension at age 50 at the full amount – without the usual reduction in payments involved in taking it so early.

Jon Greer: I would expect providers to answer questions with factual information. Tell them if you don't understand the answers

Jon Greer: I would expect providers to answer questions with factual information. Tell them if you don’t understand the answers

Greer explains that there are usually time restrictions on such redundancy deals. 

So, if you had taken the pension later you might have lost this perk and had to wait until your scheme’s ‘normal retirement age’ many years from now to receive the full benefits you get now.

If this was the case, it’s possible you avoided an entirely different and even worse trap, and have still ended up much better off as a result of taking your pension on your birthday.

It’s another example of how obscure rules can really complicate such decisions.

Greer says people should treat starting to take an income from a pension as if they are starting a new job, where you will understandably want to be quite certain in advance what you will be paid.

He suggests asking for an illustration from your provider, and making sure you understand the following:

– How much pension income you will get and when

– How your income will be be increased in future and when

– How increases are going to be calculated and applied to your payments.

‘I would expect providers to answer these questions with factual information,’ says Greer. ‘Tell them if you don’t understand the answers. Don’t make any assumptions. Take your time, so you get what you think you will get, and can sort out anomalies.’ 

Chris Noon, partner at pensions consultant Hymans Robertson, says most schemes would adopt a similar approach to the one yours did when it comes to revaluing deferred benefits – in other words, to use complete not part years when calculating inflation.

Chris Noon: 'The best option for any individual is likely to be based on the scheme rules and the individual¿s personal circumstances'

Chris Noon: ‘The best option for any individual is likely to be based on the scheme rules and the individual’s personal circumstances’

‘Depending on the rules, some schemes might operate a more generous approach and others a less generous approach, for example, not paying increases on pensions in payment for part years.’

Noon says rather than focus on a specific date, such as age 50, people should investigate whether there are benefits to retiring a bit earlier or later based on the rules of their scheme.

For example, look into whether there will be reductions or increases in pension for earlier or later payment, or even tax advantages to waiting until the next tax year.

And Noon adds that you have to take into account the payments you will receive by taking your pension for a part year rather than waiting until the next April.

‘The best option for any individual is likely to be based on the scheme rules and the individual’s personal circumstances,’ he says.



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