Swap final salary pension for SIPP?

My former employer is trying to reduce the liabilities of their final salary pension scheme and is currently offering incentives for people to transfer out. I'm trying to work out whether or not it is in my interests to transfer out to a personal pension plan of some sort, preferably a SIPP.

The pension is quite small (transfer value of approx £11750) but an additional cash payment of £1530 is on offer if I decide to transfer out by the end of January. According to the figures supplied with the offer, I would need an annual investment return of 8.7% to match the benefits offered by the current scheme, falling to 8.1% if I choose to invest the additional cash in to the pension as well.

I have about 27 years left before retirement, and am quite happy investing in equities rather than gilts or bonds for greater returns, but am I likely to be able to beat a return of 8.1% per annum over the longer term?

If I do choose to transfer out, ideally I would like to setup a SIPP of some sort but am not sure if it is worth it for such a small pension. As an alternative to the SIPP, my former employer has negotiated a deal with Legal & General for a personal pension plan with low charges (0.35% annual charge) which offers a limited amount of investment choice (various L&G tracker funds and a few external funds).

Any views on whether it would be a good idea to transfer out would be much appreciated.
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Comments

  • jamesd
    jamesd Posts: 26,103
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    The long term market return for the UK markets is something in the 12% range before fees of say 2% so provided you're mostly invested in equities and pay regular (at least annual) attention to the quality and performance of your investments you should be able to beat those targets.

    Are they also firing you so that your final salary does not increase? Or if not, how are they allowing for increases in your final salary in their calculations? Particularly as salaries tend to increase at a rate higher than inflation, so there is an expectation of a long-term gain.

    Why do you want a SIPP specifically? If it's solely to get a large range of unit trust and OEIC investment choices there are cheaper non-SIPP personal pensions that will do that job, complete with online investment management. Seems unlikely that you want to buy an office building or other commercial property with the low value of your SIPP so that reason for preferring a SIPP can't apply.
  • goosander
    goosander Posts: 97 Forumite
    I'm not being fired, the pension was from a former employer I left 7 years ago, so the pension is frozen (I forget the pensions term for this).

    I would like a SIPP so that I can choose to invest in individual shares as well as funds, and also have access to a wider range of funds than most personal pensions allow. I do not need or want to invest in commercial property or any of the other investment classes a full SIPP allows.
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    IMHO it's not a very attractive offer.Your f/s pension is guaranteed to increase by 5% or inflation to retirement without you doing a thing. This way you take all the risk with no guaranteed return and quite a high target.

    I would stay put.
    Trying to keep it simple...;)
  • goosander
    goosander Posts: 97 Forumite
    True, but I seem to recall reading somewhere (probably on here) that the government is considering lowering the maximum rate of increase of deferred FS pensions to 2.5% which is less than inflation (real world not government figures).

    Other considerations are that the pension scheme might go bust, OK so there is the PPF but 90% of a pension that might have been erroded by 25 years of below inflation increases (if the above happens) doesn't sound good, and who knows if the PPF will still be around in 20 years.
  • kennyboy66_2
    kennyboy66_2 Posts: 2,598 Forumite
    jamesd wrote: »
    The long term market return for the UK markets is something in the 12% range before fees of say 2% so provided you're mostly invested in equities and pay regular (at least annual) attention to the quality and performance of your investments you should be able to beat those targets.

    easily beat 12% in future ??????

    I would doubt it.
    US housing: it's not a bubble

    Moneyweek, December 2005
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    goosander wrote: »
    True, but I seem to recall reading somewhere (probably on here) that the government is considering lowering the maximum rate of increase of deferred FS pensions to 2.5% which is less than inflation (real world not government figures).

    That won't apply restrospectively
    ... who knows if the PPF will still be around in 20 years.

    Pension funds in run-off have a much longer shelf life than 20 years.
    Trying to keep it simple...;)
  • Milarky
    Milarky Posts: 6,354
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    If the employer is making offers to reduce FS pension liabilities now then the chances are that transfer value would be even higher in (say) 5 years time. In other words, isn't a transfer from DB to DC always available anyway - and don't the 'real cost' of these rise each time longevity assumptions are changed (as they are periodically) so the 'cash-in' value of your DB frozen pension is always likely to be going up???
    .....under construction.... COVID is a [discontinued] scam
  • goosander wrote: »
    . According to the figures supplied with the offer, I would need an annual investment return of 8.7% to match the benefits offered by the current scheme, falling to 8.1% if I choose to invest the additional cash in to the pension as well.

    That sounds uncannily like my old employer, with a decision date of 31st January ;)

    I have a slightly different way of viewing this, as opposed to comparing directly with James' stock market returns of 12%.

    1) You have 27 years to retire, so presumably this isn't your only pension.
    2) Generally, when investing in a pension portfolio, like any investment portfolio you would invest in a mixture of equities and fixed interest products.

    Therefore, you could just view this 8.1% as the fixed interest part of your portfolio (compare with the yield on bonds). Then you can do asset allocation as required to suit your risk profile.
  • No its not my only pension, and having thought about it more I agree with your view that it should be regarded as a fixed interest part of my portfolio so I think I'll leave it as it is. FYI, the scheme in question is Racal/Thales.

    One final thing though, the above pension has a small (£1000ish) protected rights element which it seems you can't transfer to a SIPP, so if I did ever want to transfer out to a SIPP, what would happen to the protected rights fund? Would this mean that any transfer out would have to be to a PPP rather a SIPP.
  • EdInvestor
    EdInvestor Posts: 15,749 Forumite
    goosander wrote: »
    One final thing though, the above pension has a small (£1000ish) protected rights element which it seems you can't transfer to a SIPP, so if I did ever want to transfer out to a SIPP, what would happen to the protected rights fund? Would this mean that any transfer out would have to be to a PPP rather a SIPP.

    The two components can be split with the non-PR money into a SIPP and the other to a PP.But from October this year it is expected that PR money will be allowed into SIPPs,so the problem should be solved. :)
    Trying to keep it simple...;)
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