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  • FIRST POST
    • username12345678
    • By username12345678 18th Oct 16, 3:20 PM
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    username12345678
    Transfering my DB pension to a SIPP
    • #1
    • 18th Oct 16, 3:20 PM
    Transfering my DB pension to a SIPP 18th Oct 16 at 3:20 PM
    Hi,

    I've searched through the pension forum and already picked up some really useful information about transferring out of a DB and in to a SIPP.

    I'm considering it myself and i'm going to arrange a meeting with an IFA to discuss my circumstances but if you guys/girls with a good handle on it could cast a quick eye over my situation and give me an initial assessment i'd really appreciate it.

    Age:44
    CETV: £1.36m
    Preferred retirement age: 55
    Estimate annual drawdown: £40-50k pa

    I've started looking at the links for withdrawal rates etc on the 'Drawdown' thread but if you could give me a steer on some of the things that i've thought about...

    1. Is my drawdown requirement reasonable against the pot size given average life expectancy?
    2. I would want to keep risk to an absolute minimum to achieve the above - but what would that risk look like?
    3. I've got headroom on my LTA - should I keep paying in to the SIPP after transfer?
    4. What questions is the IFA going to want answers to?

    Thanks in advance!
Page 1
    • Woby_Tide
    • By Woby_Tide 18th Oct 16, 3:40 PM
    • 5,197 Posts
    • 1,963 Thanks
    Woby_Tide
    • #2
    • 18th Oct 16, 3:40 PM
    • #2
    • 18th Oct 16, 3:40 PM
    Don't you need to provide what the DB would be per annum? If it's £50k then it looks a bad idea. If it's £5k then it's probably a better idea
    • username12345678
    • By username12345678 18th Oct 16, 3:47 PM
    • 8 Posts
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    username12345678
    • #3
    • 18th Oct 16, 3:47 PM
    • #3
    • 18th Oct 16, 3:47 PM
    My forecast for retirement at age 60:

    Lump sum: £250,000
    Annual: £55,000

    I would be looking at leaving 5 years before so i'm not sure what the figures would look like at that point.
    • Daniel54
    • By Daniel54 18th Oct 16, 3:50 PM
    • 559 Posts
    • 649 Thanks
    Daniel54
    • #4
    • 18th Oct 16, 3:50 PM
    • #4
    • 18th Oct 16, 3:50 PM
    If you have fixed protection then you can't continue to pay into a pension.If you don't have fixed protection ( and I asume you don't) then by taking the CETV you will be £360k over from day 1 and you will need to apply the 55% tax to that surplus when calculating whether to proceed or not.
    • username12345678
    • By username12345678 18th Oct 16, 3:52 PM
    • 8 Posts
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    username12345678
    • #5
    • 18th Oct 16, 3:52 PM
    • #5
    • 18th Oct 16, 3:52 PM
    I haven't got fixed protection (or the other option?).

    I'm around £745,000 on my LTA.
    • Daniel54
    • By Daniel54 18th Oct 16, 4:10 PM
    • 559 Posts
    • 649 Thanks
    Daniel54
    • #6
    • 18th Oct 16, 4:10 PM
    • #6
    • 18th Oct 16, 4:10 PM
    I haven't got fixed protection (or the other option?).

    I'm around £745,000 on my LTA.
    Originally posted by username12345678
    You are benefitting from the fact that the LTA calculation undervalues a DB scheme.If or when you tranfer out of the DB scheme then the LTA calculation is based on the actual amount in your pot,which as per my previous post would be considerably over the current lifetime allowance
    • username12345678
    • By username12345678 18th Oct 16, 4:17 PM
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    username12345678
    • #7
    • 18th Oct 16, 4:17 PM
    • #7
    • 18th Oct 16, 4:17 PM
    You are benefitting from the fact that the LTA calculation undervalues a DB scheme.If or when you tranfer out of the DB scheme then the LTA calculation is based on the actual amount in your pot,which as per my previous post would be considerably over the current lifetime allowance
    Originally posted by Daniel54
    That's come as a bit of a surprise.

    I'd assumed it was the LTA not the CETV that was subject to the cap and taxation for surplus.

    Totally changes the numbers I think!
    • dunstonh
    • By dunstonh 18th Oct 16, 5:04 PM
    • 85,148 Posts
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    dunstonh
    • #8
    • 18th Oct 16, 5:04 PM
    • #8
    • 18th Oct 16, 5:04 PM
    Totally changes the numbers I think!
    it does significantly as you are already through the lifetime allowance band (on current value) with years to go if you were to transfer. Whereas not with the DB scheme.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • username12345678
    • By username12345678 18th Oct 16, 5:15 PM
    • 8 Posts
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    username12345678
    • #9
    • 18th Oct 16, 5:15 PM
    • #9
    • 18th Oct 16, 5:15 PM
    it does significantly as you are already through the lifetime allowance band (on current value) with years to go if you were to transfer. Whereas not with the DB scheme.
    Originally posted by dunstonh
    Can I clarify this LTA point so i'm sure I understand;

    The LTA isn't a function of contributions - it is calculated through size of fund?

    Could someone on a DC scheme theoretically invest £50,000 in Company A, see the share price go up 20 times in 6 months (I know), and then find that's it for their LTA?

    And if that's the case why is the Annual Allowance structured the way it is?
    • dunstonh
    • By dunstonh 18th Oct 16, 5:35 PM
    • 85,148 Posts
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    dunstonh
    The LTA is a bit of an anomaly. It is a tax on success and makes little sense with an annual allowance in place. However, there are legacy issues that it mainly still exists for.

    Could someone on a DC scheme theoretically invest £50,000 in Company A, see the share price go up 20 times in 6 months (I know), and then find that's it for their LTA?
    Yes. And yet the same person could invest badly and end up with 10 times in 6 months (i know that too) and would be below the limit.

    And if that's the case why is the Annual Allowance structured the way it is?
    it was to combat the abuse of the system for firms paying off directors by putting the bulk of their golden handshake into the pension. It was then seen as a source of revenue in the bash-a-banker days when anyone earning over £50k or had larger amounts was seen as an easy target.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • username12345678
    • By username12345678 18th Oct 16, 5:57 PM
    • 8 Posts
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    username12345678
    Thanks for the explanation dunstonh - even if it wasn't exactly what I wanted to read.

    So my starting point for whatever calculations I need to do is c£1,170,000.
    • bowlhead99
    • By bowlhead99 18th Oct 16, 6:10 PM
    • 5,146 Posts
    • 9,076 Thanks
    bowlhead99
    The LTA isn't a function of contributions - it is calculated through size of fund?

    Could someone on a DC scheme theoretically invest £50,000 in Company A, see the share price go up 20 times in 6 months (I know), and then find that's it for their LTA?
    Originally posted by username12345678
    Yes, the concept of a lifetime allowance is, not how much did you pay for it, but how big a pile of assets do you have wrapped up in your tax protected wrapper when you're going to take benefits from it. It is separate from the annual contributions allowance concept.

    If I invest 250k today and it goes up by 7% a year then it will be 500k after a decade and £1m after two. Of course, most people don't have £250k to invest all at once and you can't put as much as £250k in on one day (because of annual allowance) but you are right on the gist of the basic concept.


    And if that's the case why is the Annual Allowance structured the way it is?
    The Annual allowance helps stop people with massive salaries or redundancy payoffs sticking them entirely into a pension to defer their tax bill for years and years. Providing for your retirement rather than being a burden on the state is a good thing which they encourage with a tax break, but there is a somewhat arbitrary limit set for for much of your salary is reasonable to stuff away every year (used to be a higher limit but now lower and reducing further for high earners who society probably thinks don't need it).

    By contrast the Lifetime allowance is more along the lines of hmrc saying: if you have over a million of value in your pension pot (which is enough to pay a pretty high amount of income each year compared to the average household income of normal working families), you probably don't need the incentive of government tax relief to make further contributions to it. And in fact you haven't paid tax on any of this money (being effectively received from your employment gross of tax), so if you are building up a massive pot we will tax some of that pot, over our arbitrary lifetime limit. If we change the limits on you, you can "lock in" your entitlement and have a specific allowable pot of money grow, subject to restrictions.

    I think most of us taxpayers recognise that the measures make some sort of sense in terms of a periodic contribution limit on DC schemes (where the annual contributions are visible but you can't know what you'll end up with) and a "total value" limit on DB schemes (where the amount 'going in' during a particular year is difficult to measure because its the benefits that are defined and not the contributions).

    What we mostly think is silly is trying to legislate for an annual contribution limit on DB schemes and a lifetime limit on DC schemes. The vast majority of people don't hit either limit but it is something pretty messy to deal with if you do, and further reform would be made if the government listened to this forum!
    • AnotherJoe
    • By AnotherJoe 18th Oct 16, 6:38 PM
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    AnotherJoe
    I think with that much of an income and a multiple of around 25x you'd be barking to transfer it unless you have very poor health or are desperate to leave a lump sum to dependents.
    I suspect you'll also have any hard job even finding anyone who will take on your case at these sort of figures let alone recommend you transfer, because the penalties for them even if you transfer against their advice, can be huge.
    • hugheskevi
    • By hugheskevi 18th Oct 16, 7:15 PM
    • 1,835 Posts
    • 2,156 Thanks
    hugheskevi
    One thing which may be worth noting for future planning is that the LTA is calculated as 20 times the amount put into payment.

    So you could have a pension of £80,000 p/a with a normal pension age of 65, take it at age 55 with an actuarial reduction of, say, 45% and have a pension of £44,000 p/a from age 55 paid. Whereas the pension would be valued at £1.6m if drawn at age 65 and be well above the LTA, if drawn at age 55 it would be valued at £880,000 and not have any LTA charge.
    • username12345678
    • By username12345678 18th Oct 16, 8:35 PM
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    username12345678
    I think with that much of an income and a multiple of around 25x you'd be barking to transfer it unless you have very poor health or are desperate to leave a lump sum to dependents.
    I suspect you'll also have any hard job even finding anyone who will take on your case at these sort of figures let alone recommend you transfer, because the penalties for them even if you transfer against their advice, can be huge.
    Originally posted by AnotherJoe
    What sort of CETV would start to make it a marginal call? And a no-brainer?

    One thing which may be worth noting for future planning is that the LTA is calculated as 20 times the amount put into payment.

    So you could have a pension of £80,000 p/a with a normal pension age of 65, take it at age 55 with an actuarial reduction of, say, 45% and have a pension of £44,000 p/a from age 55 paid. Whereas the pension would be valued at £1.6m if drawn at age 65 and be well above the LTA, if drawn at age 55 it would be valued at £880,000 and not have any LTA charge.
    Originally posted by hugheskevi
    I was originally planning on leaving at 55 and using my ISA's to bridge the income gap until my pension kicked in at 60 which is the normal retirement date.

    This prevents me bringing payments forward and mitigating the LTA charge.

    So as it stands £50,000pa is the magic cut-off figure after the commuted portion?
    • AnotherJoe
    • By AnotherJoe 19th Oct 16, 8:19 AM
    • 4,210 Posts
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    AnotherJoe
    What sort of CETV would start to make it a marginal call? And a no-brainer?
    Originally posted by username12345678
    It's hard to say, there are several factors in play here some of which are subjective.
    First of all, you have to offset certainty of a known figure, vs what you might get but with the risk you'll get less.
    Next is tax, suppose you could get £75k from your astute investing vs their £55k (which would be a big ask)
    Although that's £20k difference, now you have to take tax off. At 40% you are getting £12k more. And that's not inflation adjusted whereas your DB likely is. So after a few years there might not be too much difference.
    Then there's the size of the sum. £55k is pretty decent income. Would your lifestyle be much different if it was £67? So is it worth the risk for the extra (decreasing each year) £12k?
    Then there is the hassle. You can either take the decent income and be done with it, or spend a fair bit of time and energy managing investments, income and tax and so on for the rest of your life instead of doing something more interesting.
    So for me, there would need to be a substantial difference. I know I'll get less than 4% annuity on my DC funds when I retire next year, so drawdown which can give around that and still preserve the capital sum is a no brainer. If I could get say 8% (which I can from one small portion, and will) then I wouldn't bother with drawdown,

    In your case I think I'd maximise what I could put into ISAs over the next ten years and then drawdown from that until the pension kicked in at 60 (unless the reduction for taking early was reasonable)
    • username12345678
    • By username12345678 19th Oct 16, 9:54 AM
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    username12345678
    Thanks Joe.

    I hadn't fully thought about the stress aspect and the idea that knowing you've got a steady (if possibly less) income has a value in itself.
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