Cashing Out Defined Benefit pension?

alivingstone · 20 April 2017 at 1:29PM

I'm a bit lost on this and need guidance!

I'm nearly 48 years old.
I have a Defined Benefits pension from a previous employer from baout 18 years ago.
It currently shows a Transfer Out value of circa £75k
I understand (I think!) that I can take all of this pension as a lump sum (subject to tax and after financial advice) when I am 55.
Am I right to assume that the Transfer Value is the pension pot value and if I was 55 now that £75k would be the value that I could cash out???

Trying to make plans for 7 years from now - I was hoping to cash in this as a lump sum to clear mortgage & move house etc. and was wondering if using the Transfer value is a good indicator of the actual pension pot that will be available to cash out or am I barking up the wrong tree???

I have another pension pot with my current employer that does not mature until I am 67

- it is currently £150k+ and riseing steadily due to the high amount I'm paying in monthly and the current spread of fund performances (yes I know past performance is no indicator of future etc...) but currently forcasts show I should have a comfortable income when it matures. Which is why I want to cash in the 1st pernsion at 55 to clear debts and enjoy life without being mortgaged to the hilt until I eventually retire / die! :A

So back to the original question - is the Transfer Out value of my Defined Pension an indication of the gross value available to cash out on retirement???

Thanks!

Anthony.

xylophone · 20 April 2017 at 1:42PM

If you wish to transfer your deferred DB pension into a DC arrangement you will need to take advice from a pensions transfer specialist.

https://www.finalsalarytransfer.com/Uploads/1435150910Tideway-Guide-to-Final-Salary-Pension-Transfers.pdf

https://www.fca.org.uk/consumers/pension-transfer

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

dunstonh · 20 April 2017 at 2:10PM

I understand (I think!) that I can take all of this pension as a lump sum (subject to tax and after financial advice) when I am 55.

Yes. Its usually a very bad thing to do and in most cases would be considered a mis-sale but apart from that, it is technically possible.

Am I right to assume that the Transfer Value is the pension pot value and if I was 55 now that £75k would be the value that I could cash out???

There is no pot value. It is a monetary value based on a range of assumptions for giving up the defined benefits within the scheme. After tax, you would get nowhere near £75k but the gross value before tax would be in that ballpark.

I was hoping to cash in this as a lump sum to clear mortgage & move house etc.

Clearing a mortgage using the taxable part of the pension is usually not a good idea. There could be the odd scenario where it is but why do you think it is a good idea for you?

I have another pension pot with my current employer that does not mature until I am 67

If this is a money purchase pension then its unlikely 67 is a maturity date. It is more likely the statement projection age.

Which is why I want to cash in the 1st pernsion at 55 to clear debts and enjoy life without being mortgaged to the hilt until I eventually retire / die!

Typical mortgages are around 2-3% interest rates. Investment returns are typically around double that. You want to pay 40% tax (possibly more) on a lump sum and stop earning around 5% a year to reduce a debt costing you 2-3% a year just so you can pay it off before retirement?

At this point, based on the limited information available, it sounds like a crazy idea that would be a mis-sale if done under advice. So, why do you do think it is a good idea?

LHW99 · 20 April 2017 at 2:17PM

I think the transfer value may represent the cost of buying a similar pension on the 'open market' and can change over time.

alivingstone · 20 April 2017 at 2:46PM

I wanted to be able to use the lump sum from the 1st pension to clear outstanding debts (£20k+ of high interest credit cards currently!) & mortgage and move to our "forever house". At the moment we are financially stretched to the limit with no wiggle room and I wanted to be able to ease this so we can enjoy holidays etc without having zero disposable income for an extra 10 years until the current mortgage is cleared just before retirement. Without the lump sum any move would be problematic and severly limit our options and still leave us with minimal disposable income.

My understanding is I can drawdown 25% tax free and the remainder at 40% tax - potentially a lump sum of around £50k based on my assumption of £75k - but the regulation surrounding Defined Benefit are confusing me and my assumption / understanding may not be correct..

I understand nothing can be done without taking financial advice but it's still 7 years away so I'm just trying to make sure I am thinking along the correct lines and planning for the future...

Yip - my current pension is a projection date of 67, lowering it to 65 (or less!) brings the projection down and I believe the state pension component isn't payable until 67 so in all likelyhood 67 is my target date for retirement at the moment.

lovinituk · 20 April 2017 at 2:51PM

dunstonh wrote: »

Yes. Its usually a very bad thing to do and in most cases would be considered a mis-sale but apart from that, it is technically possible.

Is it still generally a bad thing if your transfer value is a really high multiple of 35-40x?

I'm seeing more posts where people are basically saying go for it when the multiples are in this range (specialist advice pending of course).

dunstonh · 20 April 2017 at 3:10PM

Is it still generally a bad thing if your transfer value is a really high multiple of 35-40x?

If you are going to then cash it in and pay 40-50% tax then yes. That is what the OP is planning. Not leaving it in the pension.

I'm seeing more posts where people are basically saying go for it when the multiples are in this range (specialist advice pending of course).

But those posts are not from people planning to pay around half the pension value in tax.

My understanding is I can drawdown 25% tax free and the remainder at 40% tax - potentially a lump sum of around £50k based on my assumption of £75k - but the regulation surrounding Defined Benefit are confusing me and my assumption / understanding may not be correct..

It may be more than 40% depending on how much you earn. You could see removal of your personal allowance. You would also see your annual allowance reduce to £4000 which could impact on your other pension.

At the moment we are financially stretched to the limit with no wiggle room and I wanted to be able to ease this so we can enjoy holidays etc without having zero disposable income for an extra 10 years until the current mortgage is cleared just before retirement.

What you propose is a very expensive way of achieving that. Not just in tax paid but also in amount you receive. That pension, if transferred now but left in a pension until your mid to late 60s could be worth around £200k by then. Giving that up to get around £40k at 55 seems poor value for money.

If things are tight now and you are stretched to the limit with no wiggle room then contemplating a house move that will likely cost tens of thousands of pounds initially and later costs doesnt sound like a sensible thing to do.

lovinituk · 20 April 2017 at 3:29PM

dunstonh wrote: »

If you are going to then cash it in and pay 40-50% tax then yes. That is what the OP is planning. Not leaving it in the pension.

But those posts are not from people planning to pay around half the pension value in tax.

OK, got it. I think I jumped on the wrong thread to ask that particular question. Thank you.

woolly_wombat · 20 April 2017 at 3:54PM

alivingstone wrote: »

I wanted to be able to use the lump sum from the 1st pension to clear outstanding debts (£20k+ of high interest credit cards currently!) & mortgage and move to our "forever house". At the moment we are financially stretched to the limit with no wiggle room and I wanted to be able to ease this so we can enjoy holidays etc without having zero disposable income for an extra 10 years until the current mortgage is cleared just before retirement. Without the lump sum any move would be problematic and severly limit our options and still leave us with minimal disposable income.

You are going to have to be realistic.

Sacrificing a valuable defined-benefit pension to pay down debts does not sound sensible in the long-term.

I suggest you get help now to formulate a plan to start living within your means and paying off the credit cards.

As for the holidays, tents are a lot cheaper now than they were when camping was the only type of holidays we could afford, and we still had fun.

I don't know where this notion of a 'forever house' has come from but please be kind to yourself and stick to what you can afford!

Lecture over.

Malthusian · 20 April 2017 at 4:23PM

I wanted to be able to use the lump sum from the 1st pension to clear outstanding debts (£20k+ of high interest credit cards currently!) & mortgage and move to our "forever house".

You have 7 years before you can use the lump sum to clear your debts. Are you planning to have £20,000 on high interest credit cards for the next 7 years? Because that's mad. You could pay twice the amount owed in interest and not reduce the balance by a penny.

greatkingrat · 20 April 2017 at 4:34PM

You say you are paying a large amount into your current pension every month, so you may be better off leaving the DB pension where it is, reducing your contributions to the DC scheme and using the money saved to clear the credit cards.

Cashing Out Defined Benefit pension?

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