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Transferring a Defined Benefit Pension PRACTICALITIES

anython
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Transferring a Defined Benefit Pension PRACTICALITIES

#330369

Postby anython » August 2nd, 2020, 5:21 pm

Hello All,

I registered here as I was told that you had an active and expert FIRE and pension investing board and it does look that way.

I couldn't, however, see anything that quite answered a couple of specific points I had.

Hopefully I am not duplicating, but if so I'd be grateful for a pointer.

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Basically my situation is that I would like to transfer out my DB pension into a SIPP.

My question is not about whether or not I should (although I can cover that if needs be) but rather the practicalities of doing so.

My two initial questions are around the fact that I am obliged to take financial advice

1. How much would that cost? (I have read in the past that it tends to be between 1.5-2.5% of the pot value. Bear in mind that the buyout quote I have is slightly above the LTA, that would be a ludicrous amount of money - not necessarily enough to stop me. On a more recent thread here, I did see reference to an IFA charging £2,000 up front and £2,000 on completion, widely different. Can anyone clarify a rough range I should be looking at?
2. I understand that IFAs are very reluctant these days to actually recommend a transfer and that many are not prepared to declare you an "insistent client" unless you are financially independent (I definitely would be if they would allow the transfer!)
Does anyone know of IFAs who will allow you to be an insistent client?

I should just add that I am "financially sophisticated" and have worked all of the angles on this and could present a convincing "business case" as to why this is the correct decision. I am not convinced though that IFAs would take this onboard over and above their formulaic advice (maybe I am to sceptical?). I don't really want advice, I just want a "certificate"!

Grateful for any help that you could provide.

jonesa1
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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330375

Postby jonesa1 » August 2nd, 2020, 5:36 pm

Fidelity provide a fixed fee service (£3,500 plus VAT). I'd have a chat with them and see if you can get them to give you a steer on whether there are any obvious impediments to a transfer recommendation before signing up for their service. Even then I suppose there's a risk you'll not get the result you want.

The state is very inconsistent in how it treats pensions. Someone with a DC pension can do what-ever they want (and many apparently take less than sensible actions, such as transferring it all into cash deposits), but an experienced investor with a DB pension who wants to take control of the asset, needs to jump through many hoops, line an IFA's palm with silver and even then there are no guarantees. On the other hand, the tax treatment of DB pensions is very generous compared to DC pensions (only 20x starting annual payment counts against LTA for a DB pension).

mc2fool
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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330377

Postby mc2fool » August 2nd, 2020, 5:50 pm

anython wrote:I registered here as I was told that you had an active and expert FIRE and pension investing board and it does look that way.

Welcome to the Lemon Fool. :D It'd be more appropriate to look and ask this on the Pensions - Practical Problems board.

Several folks there (inc. myself) have transferred a DB to a SIPP, here's some links. However, from all reports it's become a lot more difficult in the past year or two to find any IFA that will only charge if the transfer happens and/or approve insistent clients anyway. Good luck! :D

viewtopic.php?f=17&t=3062
viewtopic.php?f=17&t=10528
viewtopic.php?f=17&t=19881
viewtopic.php?f=17&t=20653

anython
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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330382

Postby anython » August 2nd, 2020, 6:02 pm

Thank you mc2 - I failed the first navigation test here then. I'll have a look on that board and see if that answers my questions and if not, re post there.

mc2fool
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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330419

Postby mc2fool » August 2nd, 2020, 7:50 pm

anython wrote:Thank you mc2 - I failed the first navigation test here then. I'll have a look on that board and see if that answers my questions and if not, re post there.

'S ok, and the mods have moved it there ... well, here anyway. ;)

anython
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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330420

Postby anython » August 2nd, 2020, 8:07 pm

jonesa1 wrote:Fidelity provide a fixed fee service (£3,500 plus VAT).


Thanks jonesa1, I will follow that up, but do you have a link for the specific service? When I tried to search for it, the page I arrived at suggested that I need an IFA.

On the other hand, the tax treatment of DB pensions is very generous compared to DC pensions (only 20x starting annual payment counts against LTA for a DB pension).


Indeed, but that also seems to limit the scale of the TFLS (at least on the various quotations I have received from my fund) which for me at least is a bigger consideration than the excess pension tax.

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330559

Postby jonesa1 » August 3rd, 2020, 12:29 pm

anython wrote:
jonesa1 wrote:Fidelity provide a fixed fee service (£3,500 plus VAT).


Thanks jonesa1, I will follow that up, but do you have a link for the specific service? When I tried to search for it, the page I arrived at suggested that I need an IFA.

On the other hand, the tax treatment of DB pensions is very generous compared to DC pensions (only 20x starting annual payment counts against LTA for a DB pension).


Indeed, but that also seems to limit the scale of the TFLS (at least on the various quotations I have received from my fund) which for me at least is a bigger consideration than the excess pension tax.


Try https://www.fidelity.co.uk/fidelity-retirement-service/

ursaminortaur
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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330575

Postby ursaminortaur » August 3rd, 2020, 1:32 pm

anython wrote:
jonesa1 wrote:Fidelity provide a fixed fee service (£3,500 plus VAT).


Thanks jonesa1, I will follow that up, but do you have a link for the specific service? When I tried to search for it, the page I arrived at suggested that I need an IFA.

On the other hand, the tax treatment of DB pensions is very generous compared to DC pensions (only 20x starting annual payment counts against LTA for a DB pension).


Indeed, but that also seems to limit the scale of the TFLS (at least on the various quotations I have received from my fund) which for me at least is a bigger consideration than the excess pension tax.


The absolute maximum tax free lump sum is 25% of the LTA limit whether with a DB or DC pension. Many DB pensions in the past came with a tax free lump sum often something like 3 x pensionable pay. However even if there is no such automatic lump sum or it is less than the maximum then you can convert some of your annual pension into a tax free lump sum using a process called commutation ie you give up £1 of annual pension for £x pounds of tax free lump sum. However unless you really need the tax free lump sum for something or have reason to believe you will not survive long after retirement it is usually not recommended since the commutation values offered are generally pretty bad value for money.

One other wrinkle is that some DB schemes have AVCs associated with them from which the whole 25% tax free lump sum can be taken - assuming the AVC contains enough money. Unfortunately this only applies to some schemes not all DB schemes with AVCs.

mc2fool
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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330581

Postby mc2fool » August 3rd, 2020, 1:56 pm

Something to double check with anyone you get a quote from is what, if any, conditions or post-transfer constraints they may have. E.g. some folks have reported that an IFA would only give them a transfer quote if they agreed to the IFA managing the SIPP afterwards, at 0.5%pa of course, and/or if they transferred to the IFA's choice of SIPP.

I note the Fidelity pages talk about "whether you already have a Fidelity SIPP or are looking to move your pension to us" and "Others want to know if they would be better off transferring a pension to us". I haven't looked through the T&Cs to see if that's a condition or whether they'd be happy to OK you transferring to some other provider, so if you do talk to them do be sure to check that. ;)

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330584

Postby scrumpyjack » August 3rd, 2020, 2:06 pm

Don't know if it is possible to structure it so the IFA's fee comes out of your pension funds. That would make the net cost a lot less, especially if you have breached the lifetime limit

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330600

Postby mc2fool » August 3rd, 2020, 3:30 pm

scrumpyjack wrote:Don't know if it is possible to structure it so the IFA's fee comes out of your pension funds. That would make the net cost a lot less, especially if you have breached the lifetime limit

Yes, that is something else to enquire about, although I believe it has as much to do with the receiving SIPP as anything else. When I told my transfer IFA that I wanted my DB pension to go into an IWeb SIPP they replied that was fine but (a) I'd have to open it myself "as they do not recognise us" and (b) they "will not allow for advisor fees to be paid from the transferred funds" so I'd have to pay the IFA's fee directly, which was OK by me and what I'd planned on anyway.

Curiously though, when it came to IWeb's £60 pension transfer-in fee IWeb would only let that come out of the transferred-in funds....

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330602

Postby scrumpyjack » August 3rd, 2020, 3:38 pm

mc2fool wrote:
scrumpyjack wrote:Don't know if it is possible to structure it so the IFA's fee comes out of your pension funds. That would make the net cost a lot less, especially if you have breached the lifetime limit

Yes, that is something else to enquire about, although I believe it has as much to do with the receiving SIPP as anything else. When I told my transfer IFA that I wanted my DB pension to go into an IWeb SIPP they replied that was fine but (a) I'd have to open it myself "as they do not recognise us" and (b) they "will not allow for advisor fees to be paid from the transferred funds" so I'd have to pay the IFA's fee directly, which was OK by me and what I'd planned on anyway.

Curiously though, when it came to IWeb's £60 pension transfer-in fee IWeb would only let that come out of the transferred-in funds....


You could always move it to a provider that will allow the fee to come out of the fund, and then move elsewhere if you want to. HL don't charge exit fees I believe, and are likely to be clued up on allowing IFA advice fees to come out of the fund if at all possible,

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330610

Postby mc2fool » August 3rd, 2020, 3:52 pm

scrumpyjack wrote:You could always move it to a provider that will allow the fee to come out of the fund, and then move elsewhere if you want to. HL don't charge exit fees I believe, and are likely to be clued up on allowing IFA advice fees to come out of the fund if at all possible,

Yes, I suppose, although it's not clear to me why paying out of the transferred funds is better. My view was that I didn't see the point of paying costs out of tax-sheltered funds when I could do so out of (unsheltered) ready cash.

And does doing it out of pension funds not count as a withdrawal? Taxable, crystallising, etc.....?

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330616

Postby scrumpyjack » August 3rd, 2020, 4:10 pm

mc2fool wrote:
scrumpyjack wrote:You could always move it to a provider that will allow the fee to come out of the fund, and then move elsewhere if you want to. HL don't charge exit fees I believe, and are likely to be clued up on allowing IFA advice fees to come out of the fund if at all possible,

Yes, I suppose, although it's not clear to me why paying out of the transferred funds is better. My view was that I didn't see the point of paying costs out of tax-sheltered funds when I could do so out of (unsheltered) ready cash.

And does doing it out of pension funds not count as a withdrawal? Taxable, crystallising, etc.....?


If the fees are paid directly by the SIP operator, or by your current pension provider, to the IFA then that is simply an expense in your SIP and not treated as a drawdown by you, so it is not a BCE anymore than the costs of buying and selling investments within your fund.

If,say, the fees were £10,000, paying it from the pension fund as compared to you paying personally, would save whatever your marginal tax rate is on that £10,000. If you are a 40% taxpayer you would need to drawdown £16,667 to have £10,000 net. It could save you more if it reduces the 55% charge on your fund being over the LTA. There might be an adjustment the other way re the 25% TFLS but anyway you are certainly better off as you are effectively getting £10k out of your pension tax free.

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330625

Postby mc2fool » August 3rd, 2020, 4:41 pm

scrumpyjack wrote:If,say, the fees were £10,000, paying it from the pension fund as compared to you paying personally, would save whatever your marginal tax rate is on that £10,000.

Only if you got the £10K from a taxable source. If you got it out of savings there is no tax to save.

It could save you more if it reduces the 55% charge on your fund being over the LTA.

Dunno about LTA, I've never investigated it as I'm far enough from it that unless they drastically change the rules or I discover within myself some so far unobserved investing genius, it's unlikely that it'll ever be a problem. :lol:

Methinks this is one of those things that is quite individual case specific. In my case it wouldn't have saved me anything and I'd rather reduce unsheltered cash than sheltered funds.

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330668

Postby anython » August 3rd, 2020, 8:07 pm

mc2fool wrote:Yes, I suppose, although it's not clear to me why paying out of the transferred funds is better. My view was that I didn't see the point of paying costs out of tax-sheltered funds when I could do so out of (unsheltered) ready cash.



I think you are getting your sheltered and unsheltered funds mixed up.

Your ready cash, savings account, ISA whatever is the "sheltered" cash; you pay no tax if you choose to withdraw it to use.

On the other hand cash within you pension fund is not if you choose to withdraw it (other than as a TFLS) it is treated as taxable income.

So if it is practicable, depleting the value of you pension fund rather than your ready cash is more tax efficient - it might be a saving of 20% for some, but as scrumpyjack points out it could be 55% if you are over the LTA.

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330678

Postby mc2fool » August 3rd, 2020, 8:47 pm

anython wrote:
mc2fool wrote:Yes, I suppose, although it's not clear to me why paying out of the transferred funds is better. My view was that I didn't see the point of paying costs out of tax-sheltered funds when I could do so out of (unsheltered) ready cash.

I think you are getting your sheltered and unsheltered funds mixed up.

Your ready cash, savings account, ISA whatever is the "sheltered" cash; you pay no tax if you choose to withdraw it to use.

LOL, no, I'm definitely not getting them mixed up, you are! ISAs & SIPPs are tax shelters because you pay no tax on income or capital gains within them. Savings accounts, dealing accounts, etc, are not tax shelters, because you do.

anython wrote:So if it is practicable, depleting the value of you pension fund rather than your ready cash is more tax efficient - it might be a saving of 20% for some, but as scrumpyjack points out it could be 55% if you are over the LTA.

No (putting the LTA case aside), as I've already said, it's only a tax saving if it comes from a taxable source, e.g. by withdrawing it from your SIPP. If you have, say, £5K in your building society savings account and, say, £100K in your SIPP, and you owe your IFA, say, £3K, there is no tax difference between paying the IFA fee from either; in both cases you pay no tax (as long as you pay it from within the SIPP, not withdraw it).

Further, you (and scrumpyjack) are also only considering specific cases in the immediate and not the long term. Your portfolio inside your SIPP will (hopefully) grow over time untaxed, whereas the same portfolio outside of a tax shelter (ISAs/SIPPs) will be (potentially) taxed on income and realised gains every year, and the cumulative difference will (should) be much greater than the incremental tax you may or may not pay when/if you withdraw it from the SIPP. That really is the whole point of the tax shelter structure. ;)

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330679

Postby PhaseThree » August 3rd, 2020, 8:47 pm

I went through a transfer of a small-ish DB to my YouInvest SIPP at the end of 2018. I used a company called "First Equitable" and found the whole process fairly straightforward. The transfer was fixed fee, with a total cost of somewhere in the range of £2000 + VAT .

https://www.first-equitable.co.uk/final ... er-advice/

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330696

Postby anython » August 3rd, 2020, 10:13 pm

mc2fool wrote:LOL, no, I'm definitely not getting them mixed up, you are! ISAs & SIPPs are tax shelters because you pay no tax on income or capital gains within them. Savings accounts, dealing accounts, etc, are not tax shelters, because you do.


We might be getting somewhat 'nuanced' here, but whilst I understand what you are saying I think we are arguing a slightly different point.

True, you are not (immediately) taxed on any gains with in your SIPP - but it you actually want to withdraw and spend those gains, they are subject to income tax.

So the point here is essentially that if you can pay the bill from funds within your SIPP, without that being deemed as withdrawing them (and been taxed) then it is certainly a benefit and this is true whether the effective marginal tax rate is 20% or 55%.

Money within your SIPP, whether it is gains or original capital (which potentially was sheltered as it went in). Is fully exposed to income tax.

It is not massively material for most, but if you are ever at risk of not utilising for full personal allowance in a given year (or if you usually pay 40% not reaching that limit), then it pays to withdraw the remainder from the SIPP - and if you expect to make capital gains on it get it into the ISA.

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Re: Transferring a Defined Benefit Pension PRACTICALITIES

#330701

Postby mc2fool » August 3rd, 2020, 11:05 pm

anython wrote:True, you are not (immediately) taxed on any gains with in your SIPP - but it you actually want to withdraw and spend those gains, they are subject to income tax.

So the point here is essentially that if you can pay the bill from funds within your SIPP, without that being deemed as withdrawing them (and been taxed) then it is certainly a benefit and this is true whether the effective marginal tax rate is 20% or 55%.

Money within your SIPP, whether it is gains or original capital (which potentially was sheltered as it went in). Is fully exposed to income tax.

If you withdraw it then you are potentially subject to income tax, but you are presenting this as an absolute and it isn't, each person needs to figure their own situation, including considering the bigger picture "further" point.

And you've not explained where you think the "benefit" would be in the example I gave. In fact I wasn't quite correct in saying, if you have, say, £5K in your building society savings account and, say, £100K in your SIPP, and you owe your IFA, say, £3K, there is no tax difference between paying the IFA fee from either.

There is in fact a tax difference in that by paying the fee from my building society account I lowered the amount of interest gained by the account and hence the tax on the interest, which I wouldn't have done if I'd paid the fee from the SIPP. Yes, with the pitiful interest rates of recent years we're talking small amounts, but by paying out of unsheltered funds (not the SIPP) I've lowered my tax bill, then and going forward.


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