Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Defined Benefit Transfer Questions

Including Financial Independence and Retiring Early (FIRE)
PensionResearcher
Posts: 2
Joined: March 14th, 2019, 10:25 am
Been thanked: 1 time

Defined Benefit Transfer Questions

#207623

Postby PensionResearcher » March 14th, 2019, 10:30 am

Hello All – let me start with a little personal declaration to the community and the moderators – this is a secondary account. Whilst I haven’t been a frequent poster here for some time during the course of this thread I am likely to post personal information that I wouldn’t want to declare publicly – hence the anonymity. I hope I am not breaking any posting rules in doing this.

I know there are people here that have gone through the subject of DB pension scheme transfers and I’m hoping to pick the collective brain, and hopefully leave behind a trail that may be useful to others.

So let me explain my circumstances and my starter question :

I am 52 and a deferred member of a Defined Benefit pension scheme with a normal payment age of 65.

A little under two years ago (I was a deferred member by that stage too) I requested a firm quotation for a transfer out value of my pension.

This came out at 20.5x the annual pension, which was a little disappointing given that I had heard of ratios in the range 25-30x from other schemes. Nevertheless, I worked out that this represented a rate of return of c. 1.4% above inflation to make the fund last until age 95, 2.3% for age 110 and obviously c. 5% for the fund to survive in perpetuity.

These figures did not strike me as especially challenge.

Roll forward to now and my trustees now offer the facility to get an online indicative quote. This came out at 28x (the annual pension has increased by 2.4% whereas the buyout value has apparently increased by 43%).

So, my first question before I go any further would be – is this change credible?

The notes on the quotation indicate that future quotes might vary particularly based on age, inflation, earnings and ‘current market conditions’. I cannot immediately understand what would have changed to sufficient extent to create this major change in quotation – unless it is a change in policy by the trustees.

Obviously one step I would need to take would be to request a new firm quotation to validate the number, but as that sets a clock ticking on the time limit to act on that quote (I obviously can subsequently request another on) so I’m keen to understand a little more before doing that.

Especially if there really is something that has moved in my favour in this quotation vs the previous. I am aware, for example, that the Government is making noises to the effect that schemes should perhaps discourage transfers out and if that might manifest in future reductions in multiples, there would be a motivation to act now.

I’d be grateful for any thoughts on the above – I will probably at some point (even before being ready for action – more questions to follow on that I expect) request a new firm valuation and as and when I do that, I will feedback the results.

Regards & TIA,

PensionResearcher

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1401 times

Re: Defined Benefit Transfer Questions

#207644

Postby Alaric » March 14th, 2019, 11:38 am

PensionResearcher wrote:So, my first question before I go any further would be – is this change credible?


Transfer values are worked out by summing the discounted cash flows of the potential outflows allowing for longevity. If the discounted values have increased, it's likely that it's because the Trustees are using a lower discount rate. If it's a real rate of return because the benefits are indexed and they invest in Indexed Gilts, very possibly even a negative one.

There's also been an element in recent years of attempting to de-risk by pension funds and their sponsoring employers. One way of doing this is to make a generous offer to those with deferred pensions to take the risk away. That can now be more attractive for the recipient given the pension freedom rules.

PensionResearcher
Posts: 2
Joined: March 14th, 2019, 10:25 am
Been thanked: 1 time

Re: Defined Benefit Transfer Questions

#208099

Postby PensionResearcher » March 16th, 2019, 5:41 pm

Thanks Alaric,

You’ve reinforced my view that the difference between the quotations has to be [1] a change in assumptions, [2] a change in policy or [3] an error in one or other of the quotations (the option I was trying to eliminate.)

That’s perhaps though given me a theory.

I was unconvinced that it could be a change in assumptions, given that I am not aware of any other pension scheme that thinks its liabilities have increased by c. 40% over the last two years.

However, there is a potential nuance here that I had overlooked.
My pension is with Section C of the BT Pension Scheme. The possible significance of this is that in 2017 BT asked the courts to sanction a change in the inflation measure for Section C from RPI to CPI (which they had already done for sections A & B) this was ultimately rejected (and also on appeal).

So perhaps – when the quotation I received in early 2017 was calculated this assumed a successful change in the inflation measure, whereas the current quotation assumes that the inflator will indefinitely be RPI.

The change in the buy out value I have been quoted is a pretty profound 40%+, but when I look at that in terms of the investment returns I would need to support the scheme benefits, it comes out as a difference of ‘only’ c. 1% pa. Reporting on the court case cites the expected difference between CPI and RPI to be ‘upwards of a full percentage point’.

Does this change credibly explain the inferred change of assumptions? I think so, but I would be grateful for views.

I think this is quite important. For the time being the case seems settled and BT cannot change the inflation measure, but as the judgement seems to be centred around the fact that BT could not demonstrate that “RPI had become inappropriate” it strikes me as something that could be further challenged in the future.

This being the case, it seems to me that it favours the option of “cashing out” now whilst the assumption is in my favour. Again though, it would be great to get any thoughts on that matter.


So I have decided that I will request an updated firm transfer out quotation just to eliminate any doubt about errors. Whether I will action this within the expiry date is still open to question as there are a few other things I consider, but I am now tending towards the view that I will do this sooner rather than later.

Hariseldon58
Lemon Slice
Posts: 835
Joined: November 4th, 2016, 9:42 pm
Has thanked: 124 times
Been thanked: 513 times

Re: Defined Benefit Transfer Questions

#208781

Postby Hariseldon58 » March 20th, 2019, 8:52 am

Prior to your second post I would have said it was unlikely that the assumptions would have changed so sharply but the RPI vs CPI could be an explanation.

I did a transfer from a good DB about 4 years ago and the multiple was 33 up from 20 a year or two previously.

At that time the transfer was just under £100k and since I had been in FIRE since 2007 (49 at the time ), it was under 10% of my assets, I had many years of managing my income from investments, through difficult periods I felt it was a good choice.

I don’t know what proportion of your assets this represents or level of investing experience but even at a multiple of 28 I would not assume a switch is a no brainer.

With 12 years of DIY investment income management, 30 plus years of investing and being numerate (Mathematics at Oxford ) it’s not a walk in the park.

My brother who is early 70’s has been retired age 52 on a good DB pension has had an adventurous retirement climbing , skiing etc all over the place with zero money worries....

Having a decent DB as a income floor would be very attractive for many people...

I have done just fine as well, better financially but I have a nature that has a low level of fear and thus my results to an extent are lucky....

Any assumptions that You only need a real return of X, need to be viewed in the full context of the investment returns of the 1970’s or the 1930’s, I’d be cautious in your assumptions, recency bias is dangerous!

I found that I had thought through the Investment strategy but not really enough on the drawdown, generally making it up as I go along, given our needs are around 2% it probably doesn’t matter in the short term but I am thinking hard about when I get bored of investing and I would rather not leave a huge pile of money at the end, better to spend more/ give more away earlier than later and with an objective of not dying poor then clearly the drawdown approach needs more thought...

Good luck

richfool
Lemon Quarter
Posts: 3492
Joined: November 19th, 2016, 2:02 pm
Has thanked: 1195 times
Been thanked: 1280 times

Re: Defined Benefit Transfer Questions

#208827

Postby richfool » March 20th, 2019, 12:01 pm

Could the improved pension quote also be benefiting from an increase in the value of the fund (the pot) since the earlier date?

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1401 times

Re: Defined Benefit Transfer Questions

#208858

Postby Alaric » March 20th, 2019, 1:20 pm

richfool wrote:Could the improved pension quote also be benefiting from an increase in the value of the fund (the pot) since the earlier date?


It will benefit from unwinding of the discount rate as the dates the benefits become due get closer. But they are probably using a very low discount rate, maybe even a negative one in real terms, so the effect of the passing of time isn't so large. On defined benefit schemes there's no clearly defined "pot", rather the fund has to sum up all the individual values and hope it's got enough assets in aggregate , or if it hasn't, that the sponsoring employer will make up the difference.

I go with the theory that it's CPI back to RPI that's the change.

Dod101
The full Lemon
Posts: 16629
Joined: October 10th, 2017, 11:33 am
Has thanked: 4343 times
Been thanked: 7534 times

Re: Defined Benefit Transfer Questions

#208861

Postby Dod101 » March 20th, 2019, 1:45 pm

From what the OP is saying, not only has his cash out benefit increased significantly but so also has the benefits in the DB scheme he is giving up, if that is the Trustees are having to use RPI when they had expected to be using CPI.

As one who has never had a DB pension, I think the benefits of one, especially an inflation proofed one, are under valued. I am not saying people should not take the cash but they should carefully weigh up the benefits they are giving up. Essentially this is what Hariseldon58 is saying but I think it needs to be emphasised. OTOH, in effect that is what I got on retirement at age 52, the cash value of a pension, and whilst I have had a lot of ups and downs over the years, I have done fine with my investments. I have withdrawn most of the income since I retired, lost money in the tech bubble, avoided any major loss in the banking crisis, and today have much more capital than I started out with and live a comfortable life.

No need to have a maths degree but being reasonably numerate certainly helps.

Dod

Fletchsmile
Posts: 4
Joined: March 28th, 2019, 3:52 pm
Been thanked: 2 times

Re: Defined Benefit Transfer Questions

#211106

Postby Fletchsmile » March 28th, 2019, 4:08 pm

Yes the changes are possible.

I recently did a DB transfer into my SIPP.

One of the many key reasons for doing so was the revaluation on my transfer value. It was around 3x what they quoted me 6/7 years back. A key factor in this is obviously interest rate assumptions / annuity rates, but there are quite a few other variables too that change for schemes. These are often foward looking variables.

Obviously also mine was a bigger gap in time between revaluations.

The quote itself on your annual pension is also usually only an estimate. There will be a rider at the bottom to that effect. So not only will the multiple move around based on interest rates/ life /annuity assumptions etc, but also the estimated annual pension you are basing the multiple on is likely only an estimate in the first place.

I realised the latter when my IFA (you need to use one LOL ) came up with a different estimate of what the annual pension should be than the one my schem provider sends each year. The IFA had used actual rates for inflation etc strictly in accordance with the 2.5% / inflation or whatever. Some parts were also guaranteed. I ran my own reasonableness checks, and long story short the IFA was more realistic on the annual pension amount - theirs was actually higher making the multiple lower, and hence the transfer slightly less attractive. They also said the companies sometimes do this to be conservative in the annual statements.

So it could well also be down to the estimated annual pension in the first place as well as the transfer values calculation variables

Fletchsmile
Posts: 4
Joined: March 28th, 2019, 3:52 pm
Been thanked: 2 times

Re: Defined Benefit Transfer Questions

#211114

Postby Fletchsmile » March 28th, 2019, 4:29 pm

FWIW here's part of the reply I got when I queried thei annual pension numbers. The part about the webiste is where I downloaded my annual statement from, i.e the annual pension shown is for illustrational only and they can't actually predict it.

This is what I meant when I said not only does the transfer value have variables but also the annual pension you are dividing it by when you are calclating your multiples
----------------------------------
Dear xxxx

We refer to your e-mail dated 8/1/18. Please see below our responses to the queries you raised;

Your deferred pension of £xxx pa, is the accrued pension calculated to the date you left the Scheme, i.e. 30/11/19xx, at which time you ceased to accrue pension benefits. This pension will revalue until Normal Retirement Date.

Any pension quotations obtained from the website are non-guaranteed and are for illustration purposes only. The illustration makes various assumptions but we cannot provide accurate projections of benefits as we cannot predict future revaluation.

Your deferred revalued pension in the Scheme at 14 January 2019 is £xxx a year payable from normal retirement age. We have worked it out based on the Trust Deed and Rules and the laws in force at the date of this letter. This pension does not allow for any future revaluation or early payment reduction.

The transfer quotation process uses the deferred pension at date of leaving and revalues it to the date of the transfer calculation. Various factors are applied to obtain a transfer value. These factors vary on a monthly basis as they reflect market conditions.

You have the option of:

· leaving your benefits in the Scheme; or
· transferring the value of your benefits to another registered plan, such as your new employer’s scheme or a personal pension scheme

Early retirement can be applied for once you have reached age 55.

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1401 times

Re: Defined Benefit Transfer Questions

#211137

Postby Alaric » March 28th, 2019, 6:14 pm

Fletchsmile wrote:The transfer quotation process uses the deferred pension at date of leaving and revalues it to the date of the transfer calculation. Various factors are applied to obtain a transfer value. These factors vary on a monthly basis as they reflect market conditions.


One of the factors being the revaluation assumed between the date of quote and date of retirement.

Haylingchris
Posts: 14
Joined: November 15th, 2016, 5:45 pm
Has thanked: 12 times
Been thanked: 9 times

Re: Defined Benefit Transfer Questions

#213896

Postby Haylingchris » April 9th, 2019, 2:17 pm

I hope I haven't responded too late to be of value, but I thought I'd share my experience as I faced this this question a couple of years ago.

I was due to take a voluntary redundancy package at age 57 with nearly 40 years in a DB company scheme.

The transfer out value was approx 28-30x the annual payment. That seemed like a lot of money and there were certainly advantages to having that value in a SIPP.

I was at approx 90% of the LTA. Whilst the taxman values the fund at 20x, if transferred out the valuation was some 30% above the LTA, so a portion of the pension payments would be subject to higher rates of tax of up to 55%.

I had to make the decision in about 6-8 weeks once I'd made a decision to apply for the redundancy.


I chose to stick with the company scheme for the following reasons

1. I took advice and to gain exactly the same benefits I could only obtain them with an annuity. I would need approximately the 30x value in order to buy an annuity with those benefits in the open market. The IFA suggested I might consider spending some of sum on an annuity (for a near risk free income) and the remainder on higher risk assets which could generate a higher return and remain in my estate for inheritance. I thought this was quite a useful way of looking at things.

2. I thought back to when I had first joined the pension scheme. I joined in order to generate an income in retirement (not to add to my wealth and pass on to my children).

3. While I enjoy investing and have done so as a profitable hobby for the last 20+ years, there may come a time when I cannot do that, or when the responsibility of managing the substantial (for me) sum might be too great.

In the end I chose to leave the fund in the company scheme, I withdrew the maximum tax free amount and have invested that. As a result, I (that's really we, my wife and I) have assets (house, cash, shares etc) approximately equal to the value to my pension fund (at 28-30x). I felt that was a reasonable balance.

Good luck with your decision.

HC

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1401 times

Re: Defined Benefit Transfer Questions

#213922

Postby Alaric » April 9th, 2019, 3:45 pm

Haylingchris wrote:I was at approx 90% of the LTA. Whilst the taxman values the fund at 20x, if transferred out the valuation was some 30% above the LTA, so a portion of the pension payments would be subject to higher rates of tax of up to 55%.


For larger sums, taking advantage of the 20x multiplier (taxmen or senior civil servants having bent the rules in their favour) might be the decisive point.

The other perverse thing about the 20x rule is that it can encourage early retirement, taking "advantage" of early retirement reductions so as to keep within the lifetime limit.

Haylingchris
Posts: 14
Joined: November 15th, 2016, 5:45 pm
Has thanked: 12 times
Been thanked: 9 times

Re: Defined Benefit Transfer Questions

#213942

Postby Haylingchris » April 9th, 2019, 5:07 pm

Alaric wrote:
Haylingchris wrote:
The other perverse thing about the 20x rule is that it can encourage early retirement, taking "advantage" of early retirement reductions so as to keep within the lifetime limit.


That's absolutely correct. I was predicted to exceed the LTA, had I remained in work until my normal retirement date. By retiring early I was able to get in under LTA and was able to use much of my redundancy payment as a top-up to my pension, with substantial tax savings. It's another part of the tax system that provides advantage to the wealthier. The whole tax system does need a overhaul.

ursaminortaur
Lemon Half
Posts: 6945
Joined: November 4th, 2016, 3:26 pm
Has thanked: 449 times
Been thanked: 1718 times

Re: Defined Benefit Transfer Questions

#214074

Postby ursaminortaur » April 10th, 2019, 9:50 am

Alaric wrote:
Haylingchris wrote:I was at approx 90% of the LTA. Whilst the taxman values the fund at 20x, if transferred out the valuation was some 30% above the LTA, so a portion of the pension payments would be subject to higher rates of tax of up to 55%.


For larger sums, taking advantage of the 20x multiplier (taxmen or senior civil servants having bent the rules in their favour) might be the decisive point.

The other perverse thing about the 20x rule is that it can encourage early retirement, taking "advantage" of early retirement reductions so as to keep within the lifetime limit.


Wouldn't a larger mutiplier say a 30x rule provide even more encouragement to take early retirement ? The problem in that particular case is surely the idiotically low level of the LTA.

itcouldbeworse
Posts: 8
Joined: April 5th, 2019, 1:53 pm
Been thanked: 8 times

Re: Defined Benefit Transfer Questions

#216647

Postby itcouldbeworse » April 22nd, 2019, 5:56 pm

I've just completed a transfer of two final salary schemes to a SIPP, so for what its worth heres my experience.

Scheme 1, NRA =65 transfer value had increased from 16x revalued pension (re-valued to date of transfer not NRA) when I last received a quotation, about 3 years ago to 22x now. When I had got the original quotation 3 years ago I had been disappointed given the high multiples that people had been talking about even then.

Scheme 2, NRA = 60. Transfer value was 36x revalued pension (again revalued to date of transfer rather than NRA).

For scheme 1 it was a marginal decison in my books. What swung it was the fact that under the scehme rules deferred members could not get benefits before 65. I did check with the administrators that this was the case. I just wasn't prepared to wait that long - I'm early 50's and have a plan to retire at age 55. I was also conscious that my father died mid 60's.

Scheme 2. Well, it just looked an incredibly "generous" multiple. At 0% real rate of return, which obviouly I'd hope to beat, and even taking the 25% tax free cash, 27 years worth of payments if I retired at 55 would take me to age 82.


Return to “Retirement Investing (inc FIRE)”

Who is online

Users browsing this forum: No registered users and 11 guests