Transfer DB Pension to SIPP?

[tieresias]

Hi,

I am a deferred member of a Defined Benefits (DB) occupational pension scheme which will pay out in full when I'm 60, but which I have been able to take at any time, at a reduced level, since I was 50. I will be 56 in a couple of weeks time. Once in payment, the income will be increased each year in line with RPI, with a 5% cap, and a 0% lower bound. During the period of deferment, the amount payable in the future goes up annually in line with RPI.

Today I received a quotation for the transfer value of the pension pot which also included an estimate for the eventual payment when I am 60. Assuming the pot to be the same value when I am 60 as it is today, the annual pension payment would start at 4.1% of the capital value. A very similar amount to the Safe Withdrawal Rate of 4% that people talk about from time to time.

The information pack also included data about reductions for taking the pension early and, if I were to take it now, I would get 80% of the amount I would get when I'm 60. In parallel, I also got a quotation for the income if I were to start taking it now and that tallies with the 80%. So, taking the income now would give an initial "yield" of 3.3% of the capital value.

Completely by coincidence, the income I am getting on my total non-pension savings and investments is 3.3% and if I strip out non-income elements, the yield rises to 4.1%. So, just by copying my current strategies, I should be able to match that initial yield.

So, I am considering transferring the DB pension pot to a SIPP. I am in no urgent need of additional income but am just considering it and would be interested in others' views.

The main reasons for transferring it would be:
- the capital will form part of my estate when I pop my clogs, rather than dying with me, and I would like to leave money to my heirs;
- the ability to increase or decrease the income I take from the SIPP in accordance with my needs, rather than the binary option available with the pension scheme;
- as I understand it, of any money taken out of the SIPP 25% is tax-free so if I take out money to supplement my other income but remain a basic rate taxpayer, then I will effectively pay only 15% income tax, rather than 20% on income taken from the DB pension;
- there is the option to take rather larger lump sums if required (and pay income tax on 75% of the amount).

The main reasons for leaving it where it is are:
- the responsibility for raising the payout annually in line with RPI, regardless of market conditions, would lie with the pension scheme trustees and not with me, who could very well be incapable of managing my own investments at some point in the future;
- it is a strong and stable diversifier away from my own style of investing;
- I suspect this kind of contract-based pension will be less susceptible to political interference than a pension based on one's own choice of investments.

What I do know is that for the next four years, i.e. until I'm 60, the ultimate payout is guaranteed to increase by more than 5% + RPI each year, which is not a result I would be confident of achieving if I were managing the money myself. Of course, I have absolutely no idea what the capital value will do over those four years.

Any views?

All the best,

Paul

[TUK020]

In a very similar position, recently been juggling with the same decision.

In the end, decided to stay with my DB scheme for the moment, for the following reasons:

Overall capital allocation
LTA treatment
One way decision

When I looked at my overall wealth (together with my better half), moving my DB scheme (which can be likened to a bond) into a SIPP (which I couldn't envisage investing in bonds) would leave me to heavily skewed to equities. I am aware of the logical disconnect in the previous statement.

DB schemes are treated more generously from an LTA valuation. This may or may not be relevant to you.

Wasn't sure about the decision. Leaving it there allows me to revisit the idea next year.

The other thing is that my other half is more risk averse than I am, and felt uncomfortable about me moving out of the DB

Tuk020

[dspp]

I am in a similar position. I see your pros for moving to a SIPP and concur. I have - for the time being - chosen to leave my DB where it is. My rationale is:

1. It is my 'bond' pot.
2. It is as immune as can be within reason to UK political risk.
3. .... and in my case is as immune as it can be to an ex-wife's possible future machinations.

I can see that I might review my decision about every 5 years for the next 15 years, hopefully with a different set of information at each stage. You are a bit closer to having to make a call on it.

Regards,
dspp

[Alaric]

- as I understand it, of any money taken out of the SIPP 25% is tax-free

You can take 25% of the notional value of a defined benefit scheme as tax free cash. Usually it all has to be taken in one go when you first draw benefits.

[fisher]

Another consideration might be the funding level of the DB scheme. I know mine has a rather large deficit and that concerns me with 12 years before I intend to take it. If I could easily move it to my SIPP then I would seriously consider it but I understand you cannot just transfer it without professional IFA advice and I believe that is hard to come by and expensive due to the risk to the IFA of being sued for giving questionable advice.

[Alaric]

I understand you cannot just transfer it without professional IFA advice and I believe that is hard to come by and expensive due to the risk to the IFA of being sued for giving questionable advice.

Correct me if anyone knows better, but I don't think the proscribed "advice" required by the FCA has yet caught up with the new freedoms. If someone's intention is to transfer and draw income from a SIPP either immediately or in the near future, assuming that they invest for a bit and then buy an annuity is irrelevant, other than to assess whether a transfer value is "fair". Elsewhere the legislation etc. on transfer values attempts to ensure that they are "fair" anyway.

A bigger problem that isn't being properly addressed is that the range of allowed investments in a SIPP is wide enough to permit some really dodgy stuff. With SIPPs now much more mainstream than when first introduced a "restricted" SIPP with the same or similar limitations on investments as ISAs would make a fair amount of sense.

One of the adverts that pops up on this forum is for a firm that will assist you if you think your SIPP was mis-sold.

[Wizard]

If I could easily move it to my SIPP then I would seriously consider it but I understand you cannot just transfer it without professional IFA advice and I believe that is hard to come by and expensive due to the risk to the IFA of being sued for giving questionable advice.

I transferred a very old and small (first job which I was in for 5 years) DB pension to my SIPP and Hargreaves Lansdowne did indeed require me to prove I had taken advice. However, the advice did not have to say it was best for me to transfer out of the DB, rather it just had to advise me of the risks of doing so. So you could be advised to keep it in the DB and then sign the form to say you know you are acting against the advice, so I do not see a significant risk to an IFA here, presumably they would mostly go down the 'safe' route of advising you to keep the DB.

Around the same time I had a cold call asking if I wanted a free pensions review. The fast talking snake oil salesman told me the best thing for me to do was to cash the DB in and invest it all in Cypriot wind farms and Brazillian tree plantations*. I went through their process, they paid for the necessary advise telling me to keep the DB and then simply did not invest it with them. I have to say it felt good to get something for nothing out of the man in the shiny suit.

I am not advising anyone to cash in a DB as everyone's circumstances are different, just explaining that there are ways to address the need for advise without paying a fortune.

Terry.

* About a year later I had a call asking if I wanted to join a legal action against the company investing money in the Cypriot wind farm and Brazillian tree schemes as they investments had been missold and had schemes had collapsed. I feel sorry for the people taken in by the sales pitch.

[ursaminortaur]

If I could easily move it to my SIPP then I would seriously consider it but I understand you cannot just transfer it without professional IFA advice and I believe that is hard to come by and expensive due to the risk to the IFA of being sued for giving questionable advice.

I transferred a very old and small (first job which I was in for 5 years) DB pension to my SIPP and Hargreaves Lansdowne did indeed require me to prove I had taken advice. However, the advice did not have to say it was best for me to transfer out of the DB, rather it just had to advise me of the risks of doing so. So you could be advised to keep it in the DB and then sign the form to say you know you are acting against the advice, so I do not see a significant risk to an IFA here, presumably they would mostly go down the 'safe' route of advising you to keep the DB.

Unfortunately a lot of Sipp providers are now refusing to allow such transfers from insistent clients as they are called (ie clients who have been advised not to transfer but want to anyway)

https://www.financialplanningtoday.co.u ... o-transfer

70% refuse insistent DB clients if advice not to transfer

A bigger problem that isn't being properly addressed is that the range of allowed investments in a SIPP is wide enough to permit some really dodgy stuff. With SIPPs now much more mainstream than when first introduced a "restricted" SIPP with the same or similar limitations on investments as ISAs would make a fair amount of sense.

Most of the Sipps people buy on here will just allow you to hold the same type of investments as in an ISA. Although you can get Sipps which allow you to hold commercial property and other non-mainstream investments they are a rarer and much more expensive product.

[Alaric]

Although you can get Sipps which allow you to hold commercial property and other non-mainstream investments they are a rarer and much more expensive product.

Those are the ones that entice transfers to investments in Cypriot wind farms and Brazilian tree plantations, which is what the FCA ought to be concerned about. Perhaps SIPPs that are just dealing accounts or ISAs with extra tax rules should get a generic rename.

[Wizard]

Unfortunately a lot of Sipp providers are now refusing to allow such transfers from insistent clients as they are called (ie clients who have been advised not to transfer but want to anyway)

https://www.financialplanningtoday.co.u ... o-transfer

70% refuse insistent DB clients if advice not to transfer

Yes, my transfer was a few years back now. I guess the issue is that it is impossible to know if somebody really has understood the advice and still decided to go ahead with a transfer on an informed basis.

A bigger problem that isn't being properly addressed is that the range of allowed investments in a SIPP is wide enough to permit some really dodgy stuff. With SIPPs now much more mainstream than when first introduced a "restricted" SIPP with the same or similar limitations on investments as ISAs would make a fair amount of sense.

Most of the Sipps people buy on here will just allow you to hold the same type of investments as in an ISA. Although you can get Sipps which allow you to hold commercial property and other non-mainstream investments they are a rarer and much more expensive product.

You can take a lot of risk with ISA eligible investments. My SIPP was a small proportion of my retirement savings and I ended up investing the whole thing in distressed Co-OP preference shares. Turned out fine, but not for the faint hearted or anyone who will rely on their pension pot providing a necessary income stream for their post retirement needs.

Terry.

[ursaminortaur]

Although you can get Sipps which allow you to hold commercial property and other non-mainstream investments they are a rarer and much more expensive product.

Those are the ones that entice transfers to investments in Cypriot wind farms and Brazilian tree plantations, which is what the FCA ought to be concerned about. Perhaps SIPPs that are just dealing accounts or ISAs with extra tax rules should get a generic rename.

Not being interested in them myself I haven't really investigated exactly what types of investments a "full SIPP" can invest in.
However most of the scams I've heard of involve using QROPS to transfer the pension out of the country into an overseas scheme before then investing it in dodgy investments rather than using SIPPs which are still regulated by the FCA.

[ursaminortaur]

You can take a lot of risk with ISA eligible investments. My SIPP was a small proportion of my retirement savings and I ended up investing the whole thing in distressed Co-OP preference shares. Turned out fine, but not for the faint hearted or anyone who will rely on their pension pot providing a necessary income stream for their post retirement needs.

Terry.

Yes I took a small position in those as well and did OK - though not as well as I did in Bradford and Bingley bonds. The banking board on TMF was a great place for analyzing such investments and though it sometimes got a little hairy Mark Tabor's campaigns generally saved our bacon when the companies involved tried to screw us. But I only invested what I could afford to lose rather than betting the house which meant my gains weren't as large as they could have been but at least I could sleep.

[tieresias]

Thanks everyone for your comments.

I have decided to leave things as they are for now. Maybe I'll review again in 3-4 years time.

[mickeypops]

Me and Mrs MP will have access to our DB pensions next summer when we retire. They are sufficient enough to pay the bills and put food on the table. Our SIPPs and ISAs are invested in income focussed ITs and UTs and will provide the luxuries.

We will sleep soundly knowing that the markets can do what they like and our DB pensions will mean that we will never starve. For that reason I would not consider transferring them into a cash sum, no matter what the multiplier.

Good luck whatever you decide.

MP

[Langbarb]

Hi All,

I am in a very similar position to the original poster (it feels to me we might be in the same scheme as the numbers are identical). I have 2 questions:
1] my transfer value came at roughly 24 times the annual pension payment, which is way lower than that some of my friends were quoted (30+ times). They are in other DB pension schemes, but it seems incredible to me that there can be such a dramatic difference. All valuations were made roughly at the same time. I know my scheme has changed the retirement age from 60 to 65 after I left the scheme, but my pension wills till be paid in full once I turn 60. Could it be the transfer value is calculated based on the retirement age of the scheme (now 65) and not on the retirement age of the individual member?

2] I have really struggled to find an IFA willing to offer advise (which I do not want, it's only to satisfy FCA requirements) at a reasonable price. I put a reasonable price at around £1k. If anybody had someone they could suggest, could you please PM me?

I would be tempted to transfer the scheme, but these days (or at least a couple of months back before Gilt yields spiked) 24x transfer value is rather poor.