Many public sector workers face a decision that involves choosing between different retirement income streams at different dates. It may be that they have a life pension conversion option. These will have different conversion factors, depending upon age, gender and whether a reversion to a surviving spouse is involved. A similar situation exists where the person has an entitlement to an overseas State Pension. Canada Pension Plan (for example) has a full pension at age 65 with reductions applying from age 60 and enhancements to age 70.
So the question is how do you evaluate these options? At the most simple level, one would work out the probability of both people (for reversionary pensions) being alive, “A” alive, “B” alive and neither alive. Then it’s a case of associating the pension payments with these probabilities and discounting to a present value. The larger present value should be the one chosen. But it’s not that simple. The first complication is the decision that could affect Australian Age Pension entitlements. Postponing income from periods where there is not an Age Pension entitlement to later periods will reduce entitlements. The reduction could be as high as 50 cents in each additional dollar.
The second complication is tax. The monies coming in from overseas are assessable income under ITAA1936. If nothing else, the deductible amount may be higher with a later commencement.
Retirement decisions will never be totally about money. The members overall goals and ambitions will play a major part in the decision.
The NetActuary Team