# Non indexed DB pension now with penalty or at age 65 no penalty



## Retiredguy (Jul 24, 2013)

My married friend lost his private sector job at age 57 and he is entitled to a non indexed DB pension - At age 65 he would get 100% but for every year he takes it early it is reduced by 4%. Therefore if he starts it at age 57 he would only get 68%. (100% - 32% penalty) His wife will not have any pension of her own and is not employed. I expect they have significant other assets. I don't know if any portion of his pension would fall to his wife in the event of his death.

Income now is not an issue as he has found other work.

I'm throwing this out for others to offer their thought/opinions. 

His crossover point is age 82 (Age 82- Age 65x100%=1700) (Age 82-Age 57x 68%= 1700). In my opinion he should take it now, enjoying some tax preferable pension sharing with his wife and accumulate/invest (by borrowing and buying some strong dividend (est 3.5 %) paying stocks which would be fully paid off at age 65). (3% Interest on the purchase loan would be fully tax deductible and of course the 3.5% dividends would be taxed preferentially.) The dividends would more than cover the cost of the loan.

At 65 his 68% pension would continue bolstered by the "19.04" (68x8=544 x3.5%). Should he die before age 82 he would definitely die ahead $$$ and his estate would have the benefit of the stocks and continuing dividend income. If he lives past 82 he will very likely be ahead as, 1 the value of the stocks will probably have gone up significantly and 2 the dividends likewise would likely have gone up also.) 

Assuming at age 65 he has "544" fully paid shares (8 years of 68% pmts) that are paying 3.5 % divs and both the stock and the divs increase annually by 3.5% At age 82 his 68% pension plus the tax preferred divs of "34.16" give a total greater than 100%. AND he would have "976" fully paid shares.

Does anyone have any comments ............


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## Eclectic12 (Oct 20, 2010)

Retiredguy said:


> My married friend lost his private sector job at age 57 and he is entitled to a non indexed DB pension - At age 65 he would get 100% but for every year he takes it early it is reduced by 4%. Therefore if he starts it at age 57 he would only get 68%. (100% - 32% penalty) His wife will not have any pension of her own and is not employed. I expect they have significant other assets. I don't know if any portion of his pension would fall to his wife in the event of his death.
> 
> Income now is not an issue as he has found other work.
> 
> ...


If they have enough income now and can borrow to accumulate dividend paying shares - I'm wondering if the "benefit" of a reduced by 4% a year pension now is worth it. It sounds like she will have no income in retirement and he sounds like he's not going to have a pension (or much of one plus likely not a DB pension) from the new company so they should have a low income in retirement.

If they have taxable assets - it would seem that it might be better to focus on getting those assets into TFSAs and a spousal RRSP versus giving up the penalty for an early pension.

It also sounds like the borrow to invest can be done either way, so that seems to be a wash.


So the main reason I can think of to take it early, is if he has concerns that the DB pension is at risk or if there's some risk attached to him dying before the pension starts.

Not knowing his tax rate, it's hard to assess what the tax benefits / issues will be, except in general terms.


My bias is that if they don't need the money, 4% per year is a significant permanent reduction so I'd want to be sure there is a significant benefit to make up for it. 

Cheers


*P.S.*
As other threads have pointed out, guarantees are expensive to put in place so I'd look at the alternatives long & hard before giving it up.


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## MoneyGal (Apr 24, 2009)

One thing you might want to contemplate is the likelihood of one of the members of the couple remaining alive beyond the crossover point. You might be surprised at how high the probabilities are - for a couple aged 65, the probability that at least one member of the couple is alive at age 90 is 45%, and at least one member alive at age 95 is 19%.


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## OptsyEagle (Nov 29, 2009)

In theory both options are the same. The pension actuaries have already done the life expectancy work for you. 

Also, you should not call the reduction a penalty. It is simply the way the actuaries have come up with to pay the extra cost of taking the pension 8 years earlier then anyone was expecting. He may get less money if he takes it now but he has to miss out on a lot of pension paydays to get the higher amount later. There really is no cross-over point, at least when you take into consideration the time value of money, as the actuaries do. Both options have the same actuarial value.

If you can find a tax benefit that the actuaries don't use or some other benefit then go with that. For instance, I believe pensions are not varied by gender, so I would imagine they will assume he will live a little longer then he is actually expected to, since they will most likely average men and women together. With that in mind the math might skew a little towards taking it now but I doubt the difference would be overly material.


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## fraser (May 15, 2010)

If he does want the commuted value, NOW is the time to take it. Interest rates are low, commuted values are high. He should check to ensure that he will not loose any benefits, if there are any, by taking the commuted value.


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## hystat (Jun 18, 2010)

I suppose to take the pension now would be to officially "retire" under the plan. In my DB pension, that is a very important consideration and something your friend may want to check into. The reason for that in my case:
If I get hit by a bus before retiring, my spouse gets a one time payment or death benefit (I forget the exact amount but I'm thinking about 4 years pension payments). 
Once I retire, if I then die, the full pension pays to her until she dies. 
People in her family tree live 25 to 30 years longer than people in mine, and she is younger than I, so she is likely to outlive me by a good number of years -possibly 40 years.


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