Transfer-in offer from public sector pension

[strowger]

My OH has just started a part-time job for a public body which provides a defined benefit pension scheme through a Public Sector Pension Fund.

The pension scheme offers the opportunity to transfer-in funds from outside during the first year of membership.

She is late 40s and has a SIPP HYP valued at £XXXX

The transfer-in quote for this gives an estimated annual pension of £XXX payable from Normal Pension Age and indexed. It also provides for a surviving partner pension of £XXX.

The pension can be taken up to 13 years early with reduction in benefits

I have various SIPP/defined contribution pots totalling £xxxk.


I would appreciate any thoughts on the value of this offer that people might have to offer, please.

[Chrysalis]

I’d say this could be a good deal. You can estimate the relative value of purchasing the pension, by looking to see how much a similar sized annuity would cost you if purchased on the open market (include all the same features, index linking, spouses pension etc). You can look this up using the money advice service annuity calculator (cheaper than getting advice and will give you at least an initial steer).https://www.moneyadviceservice.org.uk/e ... ur-details
It can be very welcome to have at least some guaranteed pension income above the state pension.

[Sobraon]

I am not going to address the numbers because hopefully other posters will do a better job than I can.

We ( my wife and I ) receive DB (defined benefit) pensions. Its not often discussed but the reduction in stress and worry and certainty of payment you get from a such a pension is, for me at least, almost immeasurable. Our DB pensions cover all our essential spending and I can sleep at night without worrying about draw down rates or even worse drawing less than is sustainable because of an overcautious approach.

When I joined the DB pension I had the same decision to make that you describe. I had benefits from two other schemes at that time. I was seduced (I use the word with care) to transfer the previous funds into two commercial insurance company pension schemes rather than to transfer into the new employer DB scheme. This was the worst financial decision I have ever made. Because although the guaranteed annuity rates on the insurance company schemes were OK the funds grew at about the rate of a Post Office savings account because of the charges (and imposed restrictions when the companies realised they had over promised regarding guaranteed annuity rates).

I am really thankful that the transfer amounts were relatively minor. If at that time forums like this had existed I would have done what you have done and asked. I am as certain as I can be that I would have transferred to the DB scheme rather than the commercial insurance scheme. Good luck with your decision.

[kempiejon]

I too started a job with access to a local government pension scheme and had the chance to transfer in existing pensions, although the deal looked good value, guaranteed amounts and indexing but I declined as I'd like to take my pension before normal pension age and the reductions I felt I could better by self investing. I've checked the link and the reductions look less fierce than I remember; I though I was going to halve my pension by taking it 10 years early. 46% for 13 years is still quite a knock for the maximum early retirees, you'd have to do some sums.

[Chrysalis]

It’s interesting to get the two contrasting opinions here. It just goes to show that the real decision here is psychological rather than financial.
I myself err towards the peace of mind of guaranteed income. I’ve chosen to purchase additional DB pension as a result (similar transaction to what you describe, but a purchase rather than a transfer of pension assets).
I would not like to be facing retirement with the state pension my only guaranteed income. Of course, one can overdo it, and I think the ideal is a mix of types of pension asset - enough secured income to sleep well knowing your bills are covered for as long as you live, alongside some invested pension assets you can draw on to top up your desired spending, which can be pruned in years when your investments perhaps don’t perform as well as you would like.
I’d hate to be forced to withdraw from investments that had reduced in value, just to pay the bills.

You and your wife will have the best idea of what suits you as a household.

[swill453]

I am really thankful that the transfer amounts were relatively minor. If at that time forums like this had existed I would have done what you have done and asked. I am as certain as I can be that I would have transferred to the DB scheme rather than the commercial insurance scheme.

But of course these days nobody of sound mind would transfer to a DC scheme that had anything to do with an insurance company. Much lower cost pension schemes are available, both of the self-invested type and the more hands-off.

Scott.

[swill453]

I would not like to be facing retirement with the state pension my only guaranteed income.

But in reality the majority of us are in this situation these days.

Scott.

[strowger]

Thanks for all the replies so far.

I'm at a bit of a loss in terms of modelling it really.

If we were buying an annuity with her £66k NOW then I could look at the pension offered and compare it with an annuity.

I can make a spreadsheet and plug assumptions into it about how much a SIPP might return over 10 or 20 years, but I then have to make *another* assumption about annuity rates at that time in order to compare...which feels like a lot of assuming, especially given that a tiny change in the projected return makes a dramatic change in the output.

My gut feeling is that her pot is basically a quarter of our total, and that it feels sensible to take the opportunity to diversify a quarter of our total into something entirely uncorrelated with investments and entirely unaffected by stock market gyrations, the election of lunatics, or my own mistakes in investment management.

And actually, taking into account sobraon's post, although I'd hope not to be living on so little in retirement, actually 2 state pensions, a £450pcm index-linked pension, and the fact that we own a substantial home outright, probably is enough to relax a bit about the future even if my SIPP management is disastrous.

[swill453]

I'm not sure I'd factor annuity rates anywhere in the modelling, I'd compare the DB quote against what I'd actually be likely to do with the pot.

For example, with £66K in a SIPP over 19 years you might hope/expect to get a return of, say 3% over inflation. This would give you a pot of about £115K in today's money.

Ignoring the fact you'd be able to get 25% as a tax free lump sum, you might decide that drawing down 4% per annum would be a reasonable approach, thus an income of £4600/year.

A few other factors also come into play. With the DC SIPP, for example, you also have and retain a capital amount that can be left (usually tax free) to someone on your death.

To me there's no screamingly obvious answer (as I think you've already worked out).

Scott.

[Chrysalis]

I would not like to be facing retirement with the state pension my only guaranteed income.

But in reality the majority of us are in this situation these days.

Scott.

I’m not sure of the stats, but among people retiring now a reasonably substantial proportion have some DB provision.
And some people do still buy annuities , precisely because they want to know where they are in terms of income.
But yes, it’s a dying breed, and that’s why this opportunity should be given careful thought.

[Chrysalis]

I suggested looking at annuity rates just to give a feel for the value for money offered by the purchase price of the DB pension. And it is a comparison of like with like. The problem with making projections of investment growth and safe withdrawal rates is that no one has a crystal ball, and it’s really comparing apples with oranges.

[Chrysalis]

Thanks for all the replies so far.


My gut feeling is that her pot is basically a quarter of our total, and that it feels sensible to take the opportunity to diversify a quarter of our total into something entirely uncorrelated with investments and entirely unaffected by stock market gyrations, the election of lunatics, or my own mistakes in investment management.

And actually, taking into account sobraon's post, although I'd hope not to be living on so little in retirement, actually 2 state pensions, a £450pcm index-linked pension, and the fact that we own a substantial home outright, probably is enough to relax a bit about the future even if my SIPP management is disastrous.

I think the diversification argument is a strong one. And I don’t see the main risks of a SIPP being mismanagement, more that none of us can see what future investment returns are going to be like - the risks are mainly outside our control.

[swill453]

The problem with making projections of investment growth and safe withdrawal rates is that no one has a crystal ball

Again, that's what many of us have to do when planning retirement

But I take your point.

Scott.

[strowger]

I think we’re going to do this.

She’s filled in all the forms and tomorrow she’s going to log into the SIPP and sell everything.

Thanks, all. The diversification is compelling. Not compelling enough to tip more money into the SIPP before transfer, I think, but enough to shift this quarter of our funds into a DB scheme.

[Wuffle]

Not exactly the thrust of the enquiry but the amount involved does neatly close the gap between the state pension and the basic tax threshold (at current). Nice to have that closed up with an element of certainty and you can chose what wrappers to squirrel stuff away in over the next few years.

[supremetwo]

She is 48 and has a SIPP HYP valued at £66000.

Do take into account that SIPPS can be passed on free of Inheritance tax.

Depends on the rest of your wealth and, of course, the rules can change but that amount (and its future growth) is currently sheltered from IHT at 40%.

[Kantwebefriends]

If she transfers in she will then be free to move to a better paid job elsewhere having successfully bought herself a secure DB pension. In retrospect that might look a brilliant manoeuvre.

[hiriskpaul]

I'm not sure I'd factor annuity rates anywhere in the modelling, I'd compare the DB quote against what I'd actually be likely to do with the pot.

For example, with £66K in a SIPP over 19 years you might hope/expect to get a return of, say 3% over inflation. This would give you a pot of about £115K in today's money.

Ignoring the fact you'd be able to get 25% as a tax free lump sum, you might decide that drawing down 4% per annum would be a reasonable approach, thus an income of £4600/year.

A few other factors also come into play. With the DC SIPP, for example, you also have and retain a capital amount that can be left (usually tax free) to someone on your death.

To me there's no screamingly obvious answer (as I think you've already worked out).

Scott.

To continue Scott's calculation, which is a good way of thinking about this, in order to draw £5600 at 4%, the pot would need to grow to £140k (in today's money). That is a growth rate of inflation + 4.0%. To put that into perspective, the total real rate of return of the UK stock market since 1945 (according to the Barclays equity/gilts study) has been about 6.8%. However, over overlapping 19 year periods, there is considerable variation around that real growth rate, with 18% of periods having growth rate of less than 4% and 10% of periods with growth rates under 3%. On the flip side there have been periods of considerable overshoot, the best being 13.0% real between 1980 and 1999.

If the SIPP did grow at the historical average 6.8% real, the pot would grow to about £230k and £5600 per year from that would be a drawdown rate of only 2.4%.

There is a huge range of outcomes in continuing down the SIPP route, but it looks to me that the certainty coming from the DB route is coming at an expensive price. Not outrageously expensive, but expensive nonetheless.

[strowger]

To continue Scott's calculation, which is a good way of thinking about this, in order to draw £5600 at 4%, the pot would need to grow to £140k (in today's money). That is a growth rate of inflation + 4.0%. To put that into perspective, the total real rate of return of the UK stock market since 1945 (according to the Barclays equity/gilts study) has been about 6.8%. However, over overlapping 19 year periods, there is considerable variation around that real growth rate, with 18% of periods having growth rate of less than 4% and 10% of periods with growth rates under 3%. On the flip side there have been periods of considerable overshoot, the best being 13.0% real between 1980 and 1999.

If the SIPP did grow at the historical average 6.8% real, the pot would grow to about £230k and £5600 per year from that would be a drawdown rate of only 2.4%.

There is a huge range of outcomes in continuing down the SIPP route, but it looks to me that the certainty coming from the DB route is coming at an expensive price. Not outrageously expensive, but expensive nonetheless.

An excellent post and an interesting perspective. Thank you.

I am a pessimist on investment returns for various reasons - demographic, monetary, regulatory - and think we are likely to see lower growth rates in the future than we've seen in the past. In particular, I think that returns have been flattered by the trend in inflation and interest rates having been downward for all of my lifetime sofar - which seems unlikely to continue indefinitely, and I think that the quality of our governments is in long-term decline.

I also doubt the extent to which the proceeds of economic growth will accrue to investors in public markets, rather than to private equity and VC, in the future.

And if I'm wrong - and I continue to invest, on the very HYP basis that I don't know the future so I just try to buy stuff that offers a good return without being greedy about it - then we'll have plenty of investment returns from the 3/4 of the combined pot that we haven't surrendered.

Ultimately, it was a "sleep at night" thing for both of us - as in, "do I sleep better for having made this change?" - and the answer is yes.

[Avantegarde]

I am heavily biased in favour of public sector DB schemes, having been an elected trustee of one. The "peace of mind" argument is very persuasive in my view. But there is an alternative way of examining the issue. If your partner were already a member of the scheme, would she be inclined to take her accumulated pot out, as a pension transfer value, and put it into a SIPP or similar arrangement? If the answer is a resounding "NO" then putting her money into the DB scheme is almost certainly a good idea, or at least one likely to meet her requirements.