Transferring DB pension - why wouldn't I ?

milford59 · 19 April 2015 at 7:43PM

I am almost 56 years old and I am a deferred member of a DB scheme with a normal retirement age of 60. This pension will pay 2/3 to my wife if I die, and additionally, it will pay her a lump sum if I die in the first 5 years after I start to take benefits - the lump sum would be the rest of the 5 year period. If she then dies, that's the end of the payments.

I asked the Pension Provider for a transfer value, and was pleasantly surprised to find they are offering me a lump sum of a fraction under 30 times the pension - I guess this is a function of the current historically low gilt yields, which may or may not continue.

It seems to me to be an absolute no-brainer to take this transfer value lump sum and invest it in a SIPP in low risk funds, as I am sure that even a modest return over the next few years will put me in a better position. I would then decide, at 60, whether to start to drawdown, take a TFLS or a combination.

Added to that is the fact that the SIPP can then form part of my estate if I fall under a bus in a few months time.

What, if anything, Am I missing ?

Thank you very much.

xylophone · 19 April 2015 at 7:55PM

What other pension provision do you and your wife have?

Have you and your wife (if 55 or over), obtained new state pension statements?

https://www.gov.uk/state-pension-statement

https://www.moneyadviceservice.org.uk/en/articles/transferring-out-of-a-defined-benefit-pension-scheme

hugheskevi · 19 April 2015 at 8:14PM

Personally I find it helpful to break down the value of DB schemes into two components. The first component is the expected value, ie what you get out if you are the average person and average conditions prevail. The second is the insurance component, ie the value of having a guaranteed lifetime income stream that is not subject to investment, inflation or longevity risk. The expected value of the pension isn't too hard to calculate (but is very sensitive to assumptions), and the insurance value differs from person to person based on individual characteristics.

Assuming:

You invest the money cautiously, and receive a CPI+1% return net of fees
Ignore lump sum commutation, for simplicity (but note this probably favours the DB scheme more in the comparison)
The DB pension increases in line with CPI
CPI is 2% in all years
You withdraw from the personal pension an amount equal to the DB pension at the start of each year from age 60
Your transfer value is exactly 30 times the annual pension

Then your personal pension pot would be exhausted when you reach age 96.

Based on typical pension scheme assumptions your life expectancy is about 88-89. However, your life expectancy combined with your wife's life expectancy (ie expected age by which both of you will be dead) will be higher than that.

You may not be willing to take the risk of completely depleting the pot in the event that you live to age 96. In that case you would either need to save more or draw less. You may not be able to get a low-risk return of CPI+1% net of fees (if you only get CPI, the pot runs dry at age 89) at a level of risk you find desirable, in which case you would either need to save more, draw less or accept more investment risk than you desire.

A lot depends on how much you think your low-risk rate of return net of fees will be, along with your tolerance of inflation risk and longevity risk.

kidmugsy · 19 April 2015 at 8:37PM

(i) Your health? Is your family long-lived? Ditto for your wife.
(ii) Do you have a compelling use for your TFLS before you are 60? A transfer would helpfully divorce the timing of taking the TFLS from the timing of drawing down taxable income.
(iii) If your SIPP collapsed in value by (say) 30% at some point soon, could you hold your nerve and stay invested? If you'd panic and sell, then you have the wrong personality for managing your own pensions.
(iv) Do you have a large lump of cash somewhere so that if your SIPP investments collapsed you could refrain from drawdown for a few years, and live off the cash instead?
(v) How financially sound is your pension scheme, and its sponsoring employer?

milford59 · 19 April 2015 at 9:29PM

Thank you very much for the comprehensive replies. I appreciate that it's difficult to give opinions without all of the facts, so perhaps I should say that I don't expect to need any TFLS before I am 60, as I have other savings and am still working - my family is not quite as long-lived as my wife's. The transfer value of my DB pension is 997k and I have some other DC pension pots totalling around 820k. The DB scheme is very sound - I have no concerns there.

The deferred pension is £33,500 so if I didn't transfer it out, I know that using the 20x multiple, I am just under the Lifetime Allowance, but if I take the 997k, I will be over the LA, but with the flexibility, and opportunity of a SIPP.

I have not made any pension contributions of any sort since I left the company where I have the DB scheme about 3 years ago. I applied for protection last April to keep a £1.5m Lifetime Allowance, so I know I am in for some increased taxation at some point (even if I don't do the transfer) as I expect (hope) that the 820k pot will continue to grow over the next few years - it is currently invested in more cautious funds, with low-ish equity component. I have been involved in markets for all of my career, so I would not panic if my funds were down 30%, but I would be looking to invest in areas that were not as volatile as that, appreciating that "past performance is no guide to future performance"

It seems to me that with gilt yields (and annuity rates) at historic lows, there is an opportunity to get the money out of the DB scheme with a 30x multiple, into my estate, invest it cautiously in a SIPP for the next 4 years (or more) and then (if I wanted to) I could buy an annuity at better rates at some point in the future - I can't see much, if any downside !! I very much appreciate your opinions.

bmm78 · 19 April 2015 at 10:21PM

Important to consider PPF cap levels alongside the funding of the scheme. What would the PPF provide (at various ages) if the scheme was to go bust, and how likely (or unlikely) is that to happen? There are risks to weigh up on both sides of the coin.

Legally, you need to have received advice before you transfer any defined benefits over 30k, so you will also need to consider at what point you involve the adviser, what you are looking for from them (transactional or ongoing service), cost of advice etc etc.

mania112 · 19 April 2015 at 11:58PM

Simply, you have a big enough pot to not make a wrong decision here. Although you're trying to justify this mathematically, I don't think you need to.

There are major pros/cons for going down both routes.

DB = Guaranteed payments, increasing annually in line with inflation. Poor death benefits (beyond the 2/3s for your spouse).

SIPP/Drawdown = Investment risk. Fund could end up lower and therefore becomes an inability to sustainably (if that's a word) draw as much as you would have had in your DB scheme. However, your income choices are completely flexible and there's a nest egg for your beneficiaries to inherit.

Whichever option sounds the most appealing is the right choice for you. The only hurdle is finding an IFA able and willing to help you with the transfer (and expect to pay a reasonable fee).

BobQ · 20 April 2015 at 12:06AM

Not sure, but I thought that if you change a pension from DB to DC that impacts on your continued LTA protection. Someone will be along who knows.

kidmugsy · 20 April 2015 at 1:08AM

milford59 wrote: »

I don't expect to need any TFLS before I am 60, as I have other savings and am still working - my family is not quite as long-lived as my wife's.

The transfer value of my DB pension is 997k and I have some other DC pension pots totalling around 820k.

The deferred pension is £33,500 so if I didn't transfer it out, I know that using the 20x multiple, I am just under the Lifetime Allowance, but if I take the 997k, I will be over the LA, but with the flexibility, and opportunity of a SIPP.

I have not made any pension contributions of any sort since I left the company where I have the DB scheme about 3 years ago. I applied for protection last April to keep a £1.5m Lifetime Allowance

"Applied for": do you mean that you got it?

You need an IFA, so all I'll do is speculate in sublime ignorance.

(i) You would be casting away the fact that DB pensions are treated with absurd over-generosity by the LTA system (and presumably always will be because civil servants).

(ii) I'd consider drawing the DB pension now, so that the actuarial reduction of being three years early would move me further from the LTA (12%, 15% actuarial reduction?) and so give me some headroom for growth in my DC scheme. You could always avoid the extra income tax bill by using VCTs, EISs, SEISs.

(iii) You already have a huge DC pot: why do you want another, that anyway would breach the LTA? Wouldn't having one DB pension plus one huge DC "pot" bring useful diversity to your provision?

(iv) I might even consider starting drawdown on the DC scheme too, so that the TFLS comes out, thereby reducing future growth.

milford59 wrote: »

It seems to me that with gilt yields (and annuity rates) at historic lows, there is an opportunity to get the money out of the DB scheme with a 30x multiple, into my estate

(v) It won't go into your estate anyway. Not unless you draw it out and thereby add it to your estate.

(vi) You've still not really told us your motivation.

milford59 · 20 April 2015 at 9:09AM

BobQ wrote: »

Not sure, but I thought that if you change a pension from DB to DC that impacts on your continued LTA protection. Someone will be along who knows.

I believe that it's OK so long as it goes into an HMRC approved scheme.

I DID get the £1.5 mio LTA protection last April.

As for "motivation" - I don't know really - I guess that intuitively I feel that the Transfer Value is "mis priced" and I want to try to take advantage of that.

I very much appreciate all of the input - thank you.

232607 · 20 April 2015 at 9:41AM

No wanting to comment too much on the good/bad aspect of whether it's the right thing to do but I do agree that low gilt yields are driving very high CETV,s at the moment. I've just transferred at a ration of 26:1 & was happy doing so after having done loads of calcs. At 30:1 I'd say that ratio is certainly in the fair to good range.
The issue is that low gilt yields won't be around for ever hence the opportunity to transfer out won't be either.

Regards.

Transferring DB pension - why wouldn't I ?

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