The state pension reduction could significantly
reduce your income in retirement once you start
taking your pension. How do I know? Well, I've
just put in my notice on my job with a view to
retiring. My pension statements have come through
with significant reductions from the point I
get my state pension. Now, if you're due to receive
a defined benefit pension of retirement, then
I'd advise that you do check to see whether your
scheme will apply a state pension reduction.
So what is one? What's a state pension reduction?
Well, it's also known as a clawback and it's
applied to some private sector defined benefit
pensions, also known as final salary pensions
at state pension age. It's usually the case that
you'll take your defined benefit pensions before
your state pension age, a bit like I have. So
you'll start off receiving a certain amount from
the scheme. And if the scheme does operate a
state pension reduction like mine, then when
you reach state retirement pension age, the scheme
will reduce your pension by a proportion of the
state pension that you start to receive. For
example, I start to receive my defined pension
of the age of 55. Well, now, the income I receive
from the scheme is going to be £8 ,860 per year.
And at 65, there'll be a state pension reduction
of £1 ,840, which means going forward, I'll only
get £7 ,020 per year. I mean I've been entitled
to the state pension but my defined benefit pension
has been cut significantly. Now this type of
practice is perfectly legal and it's used by
many of the older pension schemes and it should
be stated in the scheme rules but many like me
will not have understood or simply forgotten
about it. I mean I left that pension scheme in
2011 so when I was told when I started paying
into it in 1999 I've forgotten mine now. There
are various campaigns out there trying to get
this type of practice abolished in defined benefit
pensions. And if you're impacted by state pension
reduction, then it'll be a case of having planned
your retirement on the basis of actually receiving
a certain amount of income and then realizing
that part way through, it's going to be cut.
So your plans may need to change. So what can
you do? If you're in the same situation as me
with my state pension reduction, if you've already
started receiving it, then there's not much you
can do about it really. Unfortunately, that's
the way it is. If it's already started, there's
nothing you do about it, other than maybe campaign
and force the schemes to change the rules. However,
if you haven't yet started taking defined benefit
pension, then there may be a couple of options
for you. I mean, option one is your scheme may
offer you a lower start in income and then not
reduce it when you hit state pension age. And
that'll give you at least some clarity over your
future. Or option two is a transfer of your defined
benefit pension into some kind of personal pension
or SIP, which you can then withdraw from. as
and when you like. I mean, if you choose option
two, it does put you back in control. You'll
need to request something called a cash equivalent
transfer value from the scheme. And the scheme
will offer you a lump sum transfer in exchange
for giving up your defined benefit pension. And
you must do this before you reach the normal
scheme retirement age. You then end up with a
pot of money sitting at a personal pension. and
you can then withdraw as much as you like subject
to tax. This is not really popular, this kind
of section option for a reason really. Divine
benefit pensions offer real good certainty and
private pensions, you actually can't move out
of them, the larger ones, without actually getting
formal. advice from a financial advisor. I think
that's a good thing actually, because you can
end up losing a lot when you move from a defined
benefit pension into a defined contribution pension,
particularly if the markets are unfavorable when
you do it. Your new personal pension will then
be invested and could go down as well as up.
The more money you take out, the more chance
your pension pot could actually run out before
you do. Now the first option which I talk to
is to ask for a lower starting position and then
have no drop when you reach retirement age. And
this is the option I've gone for. So I'm retiring
now at 55 and my annual pension will drop by
about 800 pound every year instead of 1 ,840
when I hit 65. Yeah, it did mean 65, not 67.
This is because the reduction runs from the normal
retirement age at the time you left a pension
scheme. which for me was 65. Now I don't get
my state retirement pension until I'm 67. So
I'd have had two really difficult years there
between 65 and 67. My situation is not going
to be identical to yours, but it is worth checking
if any of your defined benefits include this
statement, pension reduction or clawback. Now
you may have heard of something called the level
of pension. Now, I think this is different. It's
an option that some pension schemes offer that
allow you to receive a higher pension up until
the date you retire and then drop your pension
when you reach state pension age. I mean, so
an example might be you retire at 60 and you
get a change from your employer to either have
10 ,000 pounds a year every year until you die.
or have £15 ,000 a year for the first seven years
until you're 67 and then they'll drop what they
pay you to £4 ,000, add that onto your state
pension and you still get no £15 ,000 a year.
So that means it's level. Now I say this is difference
because it's an option that's offered and you
can accept it or not. Whereas the state pension
reduction is actually built into the scheme at
the start and it's not really an option, it's
just in there. So anyway, what I've agreed is
to take a lower pension at the beginning and
have no drop when I reach 65 Okay, cuz I you
know I really prefer to know where I am now,
to be honest, rather than suddenly, in 11, 10,
12 years time, suddenly have a real drop in income
like that when my state pension starts. My plans
didn't include that beginning, so I've gone for
the option to start our lower pension and have
no drop going through. Well, yeah, the idea of
this really is for you to check with your pension
scheme, just see if it applies to you, and don't
be like me. where it comes as shock when you
actually put your name to sleep with work already.
Cool. Thanks for listening everyone and I'll
see you on the next one. Cheers.