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DB pension transfer decision

Including Financial Independence and Retiring Early (FIRE)
chrissyr
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DB pension transfer decision

#169084

Postby chrissyr » September 26th, 2018, 9:47 am

Hi all

I have been sent a pension statement for my defined benefit which I can start taking at 55 (next month). I am trying to decide to take or to try and transfer to a SIPP.

Included was a CETV and detail about an annuity I would need to take to use up excess AVC savings.
The CETV is 31 times the pension offered and from initial talks with an IFA this seem a reasonable value offer.
The pension (which, after tax, is at a value I assume I can live off) is 3.2% 'draw' on the CETV value. The annuity just 1.68% for similar benefit (the pension is CPI linked upto 5% and a reduced spouse pension on death). In addition I would get 40% more tax free money if transferred to a SIPP. These bits do not sound such good value. Are these about average?

I have had an initial chat with an IFA and am arranging to to see some others.

Any views or ideas of what to look at much appreciated.

Thanks
C

Alaric
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Re: DB pension transfer decision

#169087

Postby Alaric » September 26th, 2018, 10:03 am

chrissyr wrote: In addition I would get 40% more tax free money if transferred to a SIPP. These bits do not sound such good value. Are these about average?


The terms on which defined benefit schemes will exchange income for cash have been allowed to drift into poor value by comparison with those quoted for CETVs or even annuity purchase. The maximum cash on a defined benefit scheme is calculated by reference to 20* the annual pension amount, rather than to 25% of an actual calculated value.

What you go for may well depend on how important an income guaranteed by someone else would be to you and how much you would pay for such assurance. Managing your future tax bills might come into it, which would be more flexible with a SIPP.

StepOne
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Re: DB pension transfer decision

#169097

Postby StepOne » September 26th, 2018, 10:48 am

SIPP can be left to children, unlike an annuity, which may be a consideration...

StepOne

OLTB
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Re: DB pension transfer decision

#169164

Postby OLTB » September 26th, 2018, 1:48 pm

chrissyr wrote:Hi all

I have been sent a pension statement for my defined benefit which I can start taking at 55 (next month). I am trying to decide to take or to try and transfer to a SIPP.

Included was a CETV and detail about an annuity I would need to take to use up excess AVC savings.
The CETV is 31 times the pension offered and from initial talks with an IFA this seem a reasonable value offer.
The pension (which, after tax, is at a value I assume I can live off) is 3.2% 'draw' on the CETV value. The annuity just 1.68% for similar benefit (the pension is CPI linked upto 5% and a reduced spouse pension on death). In addition I would get 40% more tax free money if transferred to a SIPP. These bits do not sound such good value. Are these about average?

I have had an initial chat with an IFA and am arranging to to see some others.

Any views or ideas of what to look at much appreciated.

Thanks
C


Hi chrissyr

If you are 55 next month, the ONS life expectancy calculator here https://www.ons.gov.uk/peoplepopulation ... 2015-03-27 suggests that your average life expectancy is 88 years old (33 years from now) and you have a 1 in 4 chance of reaching 97 and a 1 in 10 chance of reaching 102.

So, when considering your attitude to risk, do you want a 33 year guaranteed income that will go up each year in line with inflation with no risk (the current scheme - assuming you die bang in the middle of the life expectancy bell curve!), or do you want a scheme where you determine your income level, are able to pass on any unspent assets to relatives/charities as mentioned by StepOne above, but does not have any guarantees of fund value or income (it could run out!)? You can mitigate some of the risk by diversifying the investments of course, but there will still be risk involved. A good book to read is, "Beyond the 4% Rule: The science of retirement portfolios that last a lifetime" by Abraham Okusanya https://www.amazon.co.uk/Beyond-4-Rule- ... 1985721643 .

The FCA have been tightening up regulations in respect of Final Salary transfers (some British Steel workers are thought to have been fleeced by predatory advisers) and an IFAs initial stance should be that, for most people, retaining safeguarded benefits (Final Salary schemes) is likely to be in their best interests. In order for you to transfer the scheme, the adviser should demonstrate that such a transfer is in your best interests and why your existing scheme is not as suitable. The FCA are consulting on whether to ban/amend 'contingent charging' - this is where an adviser will get paid a fairly hefty fee if you move your fund. They think that a flat fee for the advice is more appropriate and ensures that everyone starts from a neutral position, rather than the adviser having to recommend you move your pension in order to get paid.

Hope that little bit of information helps.

Cheers, OLTB.

chrissyr
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Re: DB pension transfer decision

#169172

Postby chrissyr » September 26th, 2018, 2:10 pm

Thanks for the replies.

I have been looking at how taking money from our other savings and only taking any tax free allowance from the SIPP would increase the actual by about 8-9%. Or reduce the draw and so lower risk of running out. Appreciate this is not comparing apples with apples but does give us more flexibility as mentioned. As state pension kicks in (12 years at the moment) that again could impacts tax and where I draw from.

And yes we have 2 adult children and passing on money is an aspiration (if the government burglars don't work out how to get it first!).

C

OLTB
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Re: DB pension transfer decision

#169176

Postby OLTB » September 26th, 2018, 2:20 pm

chrissyr wrote:Thanks for the replies.

I have been looking at how taking money from our other savings and only taking any tax free allowance from the SIPP would increase the actual by about 8-9%. Or reduce the draw and so lower risk of running out. Appreciate this is not comparing apples with apples but does give us more flexibility as mentioned. As state pension kicks in (12 years at the moment) that again could impacts tax and where I draw from.

And yes we have 2 adult children and passing on money is an aspiration (if the government burglars don't work out how to get it first!).

C


If you are retiring at 55, and you mention the State Pension above, a State Pension forecast would be sensible as if you haven't paid in 35 years' worth of National Insurance contributions, you won't get the full amount.

Cheers, OLTB.

Hariseldon58
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Re: DB pension transfer decision

#169184

Postby Hariseldon58 » September 26th, 2018, 2:50 pm

On the one hand the offer of 31 times the benefit suggests that as simply cash it would last 31 years and any investment return on top is a bonus.

IF (it’s a big IF ) you have the competenace and mindset to the invest for your own benefit it could work out well. Provide 100% support for a spouse, the ability to cope far better with the possibility, albeit remote, that very high inflation returns to the U.K.and the chance of perhaps a better income.

For myself it has worked out great but I have decades of experience of investing and a nature that does not worry about the volatility that comes from investments being the sole source of income.

Peace of mind is very important to most people and relying on an external advisor for your income in retirement could be stressful. I would not undertake a transfer lightly and I rather suspect that those for whom it will be successful, will know themselves and not need too much outside influence, however well meaning.

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Re: DB pension transfer decision

#169210

Postby petronius » September 26th, 2018, 4:28 pm

Just for clarity, is the CETV 31 times the annual pension you would draw at 65 or the reduced one you would take at 55? Also do you have to take the residual AVC (after the 25% tax-free cash) as an annuity or are there other options?

chrissyr
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Re: DB pension transfer decision

#169217

Postby chrissyr » September 26th, 2018, 4:53 pm

Hi

OLTB -
re when I would die, both parents died aged late 50s and I have a medicated heart condition so assume for annuity purposes I would move to a lower mortality age (hope I'm wrong).
State pension wise I have checked and this would be £7k at 67 (if I did not work again). That is the figure I use in my calculations with an estimated rpi uplift.
Re IFA advice what you say does ring true from the initial conversation I had. There would be a charge but only if the transfer completed. This was 1% and would be taken from the transfer money. (I was a bit surprised as I thought they would want at least a small upfront payment). Does sort of nudge them to say yes if they take it on. They did mention they could managed the money for an additional fee (1.5%).

The 31 is on the 55 reduced pension. It is 26 of the 60 year pension (when it is fully due). There is an option to move the excess AVC but this reduces the amount of tax free money I could receive.

C

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Re: DB pension transfer decision

#169549

Postby OLTB » September 27th, 2018, 4:41 pm

chrissyr wrote:Hi

OLTB -
re when I would die, both parents died aged late 50s and I have a medicated heart condition so assume for annuity purposes I would move to a lower mortality age (hope I'm wrong).
State pension wise I have checked and this would be £7k at 67 (if I did not work again). That is the figure I use in my calculations with an estimated rpi uplift.
Re IFA advice what you say does ring true from the initial conversation I had. There would be a charge but only if the transfer completed. This was 1% and would be taken from the transfer money. (I was a bit surprised as I thought they would want at least a small upfront payment). Does sort of nudge them to say yes if they take it on. They did mention they could managed the money for an additional fee (1.5%).

The 31 is on the 55 reduced pension. It is 26 of the 60 year pension (when it is fully due). There is an option to move the excess AVC but this reduces the amount of tax free money I could receive.

C


An annuity might give you enhanced rates because of your heart condition and as annuity contracts now can have guarantees of up to 30 years, any unused lump sums could be passed down to beneficiaries (tax-free if you die before 75 and taxable if you die after age 75). If you want your spouse to benefit, the annuity company might 'look past' your health position a little and look at your spouse instead. If your spouse is in good health then that's what they'll be concerned about and base underwriting on how long they might have to pay out overall. Transferring out of a DB scheme to buy an annuity doesn't make sense in my view.

Try and find an adviser that you pay a fixed fee to for the advice of whether its best to keep the DB scheme or transfer. I'm sure the adviser would like to look after your funds for 1.5% a year - once you take into account the pension provider charges, fund charges and then adviser charges, there might not be much room left for any growth!

Cheers, OLTB.

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Re: DB pension transfer decision

#169620

Postby Longtermyieldman » September 27th, 2018, 8:13 pm

The transfer value is 31x the annual pension. 31 is also, coincidentally or not, very close to the expected number of remaining years life expectancy of the OP. So, roughly speaking, if he/she took the transfer, the invested capital would have to grow at a rate at least equalling inflation for the transfer to make sense, notwithstanding the pros and cons of the two options (flexibility and ability to pass on to heirs vs certainty of income).

While it's possible there could be periods of high inflation and of poor investment returns, in the long run the returns generated by a diversified equity income portfolio comfortably exceed inflation. Thus it seems to me that transferring makes sense for anyone who isn't particularly risk averse.

chrissyr
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Re: DB pension transfer decision

#169775

Postby chrissyr » September 28th, 2018, 11:01 am

The plan isn't to buy an annuity but the excess avcs need to used to buy one. As mentioned I have an option to move the excess and could then keep that invested but that reduces the tax free allowance so seem more complicated a setup.
As suggested just living off the cetv value topped up by state pension in 12 years it would provide a similar index linked pension for well over 30 years if I assume neutral inflation (ie 2% rpi and 2% return on money).
Finding the right ifa seems to be the issue at the moment - one that I contacted didn't want to handle a DB transfer another wanted a % fee and to manage the money afterwards.
Thanks for all the extra info it is helping in the decision process.

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Re: DB pension transfer decision

#170022

Postby andyalan10 » September 29th, 2018, 9:40 am

Something no-one seems to have asked yet which is also a factor:-

Assuming you have a partner, how old are they and what is their life expectancy. That has a considerable effect on how valuable a spouse's ongoing pension as provided by the final salary scheme is worth. Also do they have any private pension of their own to consider.

Andy

chrissyr
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Re: DB pension transfer decision

#170052

Postby chrissyr » September 29th, 2018, 12:14 pm

Yes I do have a wife who is same age. She is part of a local government scheme which should deliver an index linked pension at about 50% of her current earnings in about 3-4 years when she retires.

She is not interest in investing which is one of the pros of me taking the pension as if the pension fund was to pass to her not sure she would know how or want to continue running it. Although she could just take an annuity at that time.


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