Should I start taking one of my six pensions at age 62?

I am a 60 year old working man reviewing my pension options.

I would like to, or I will have to, continue working until at least age 65 if not 67 when my state pension kicks in and I need to continue building my defined contribution schemes until I retire, benefiting from the tax relief on the £40,000 contributions for the year.

I have a number of pensions schemes with three defined benefit schemes and three defined contribution schemes.

One of the defined benefit schemes has a retirement age of 62 when the pension begins whilst the other two defined benefit schemes start at age 65.

It is the defined benefit scheme which starts to pay out at age 62 that concerns me – if it begins at age 62, can I still make contributions to my defined contribution scheme and be eligible for the tax relief on the full £40,000 contributions per year?

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Steve Webb replies: With many of us starting a new pension every time we change job, it will be increasingly common to be in your situation, with half a dozen or more different pensions.

In principle, having a mix of traditional ‘defined benefit’ (DB) or salary-related pensions and more modern ‘defined contribution’ (DC) or pot-of-money pensions, gives you great scope to customise your road to retirement and beyond.

I would strongly recommend that you consider taking some personalised financial advice about how to make the most of your multiple pension pots, but in this column I will flag at least some of the issues you need to think about.

Your defined benefit pensions

Focusing first on your DB pension with a normal retirement age of 62, the answer to your specific question is ‘no’ – taking a DB pension has no direct impact on your ability to go on saving into other pensions whilst enjoying full tax relief on your contributions.

In particular, it does not trigger the dramatically reduced £4,000 per year limit (the so-called ‘money purchase annual allowance’). This is only triggered if you chose to flexibly access a ‘pot of money’ type of pension.

But it would be well worth finding out from this DB pension scheme whether you have the option to take your pension later than age 62, and to do so at a higher rate.

Just as you can often take pensions early at a reduced rate, you may be able to defer this pension and get a higher rate.

One reason to consider deferring taking any of your DB pensions while you are still working is that I’m guessing you may be a higher rate taxpayer.

If so, the whole of your DB pension would be taxed at 40 per cent if you draw it on top of your wage. If, instead, you wait until you have retired before taking your DB pensions, you may find you end up paying a lot less tax.

More generally, and thinking about all three of your DB pensions, you may find that each has the potential to be flexed in some quite interesting ways.

I’ve recently written a guide to some of the potential options in defined benefit schemes which runs through some of the options.

These could include:

– Taking a higher starting pension in exchange for giving up some of your future inflation protection (a ‘pension increase exchange’);

– Starting your pension early and at a substantially enhanced rate, but with a step down when your state pension cuts in (a ‘bridging pension option’);

– Transferring out some of your pension rights (a ‘partial transfer’) into a more flexible DC arrangement, though only after taking financial advice;

– Varying the proportion of your pension you take in the form of a tax-free lump sum rather than regular pension;

– Early or late retirement, where you simply choose to draw the pension at a date other than the ‘normal’ retirement age for the scheme, typically with a reduction or increase in the rate of pension as appropriate.

Contacting all of your DB schemes to find out what flexibilities they offer will help you to make a much more informed choice.

You should also ask if any of them provide free or subsidised access to financial advice which could be much cheaper for you than sourcing your own adviser and paying full market rates.

Your defined contribution pensions

Thinking about your DC pensions, these are inherently more flexible following the introduction of ‘pension freedoms’ in 2015.

But one thing you might think about is using one of them to help support you in any income gap between stopping work and state pension age (at 67).

This may be less relevant to someone such as yourself who has multiple DB pensions, but for someone who mainly has DC pensions, there are some interesting options.

One idea would be to turn a DC pension into a regular income but only for a set period – a so-called ‘fixed term annuity’.

In effect you would be ‘squashing’ your DC pot into a very short period of time.

For someone who wanted to retire several years before state pension age, and who was confident they would have enough to support them in retirement once their state pension started, a fixed term annuity bought with a DC pot could provide a secure income to bridge the gap up to pension age.

A financial adviser could also help you review whether your current mix of pensions makes sense.

For example, if you have three different DC pots you are almost certainly paying different charges on each and each probably has a slightly different investment mix.

One option to consider might be moving all of your DC pensions into your current active workplace pension scheme, provided that this looks better value than where the money is currently sitting.

What else might you consider

The moral of all of this is to look ‘under the bonnet’ of every pension you have.

You might find some pleasant surprises, such as product features or options you were not aware of. But you may also find some nasty surprises such as old pensions with high charges or poor investment performance.

Rationalising your pensions could be a good way to make the most of the saving you are able to do, and to maximise your flexibility when it comes to the timing of your retirement.