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  • FIRST POST
    • alivingstone
    • By alivingstone 20th Apr 17, 1:29 PM
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    alivingstone
    Cashing Out Defined Benefit pension?
    • #1
    • 20th Apr 17, 1:29 PM
    Cashing Out Defined Benefit pension? 20th Apr 17 at 1:29 PM
    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!

    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.
Page 1
    • xylophone
    • By xylophone 20th Apr 17, 1:42 PM
    • 21,654 Posts
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    xylophone
    • #2
    • 20th Apr 17, 1:42 PM
    • #2
    • 20th Apr 17, 1:42 PM
    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
    • By dunstonh 20th Apr 17, 2:10 PM
    • 88,168 Posts
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    dunstonh
    • #3
    • 20th Apr 17, 2:10 PM
    • #3
    • 20th Apr 17, 2:10 PM
    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?
    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.
    • LHW99
    • By LHW99 20th Apr 17, 2:17 PM
    • 761 Posts
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    LHW99
    • #4
    • 20th Apr 17, 2:17 PM
    • #4
    • 20th Apr 17, 2:17 PM
    I think the transfer value may represent the cost of buying a similar pension on the 'open market' and can change over time.
    • alivingstone
    • By alivingstone 20th Apr 17, 2:46 PM
    • 12 Posts
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    alivingstone
    • #5
    • 20th Apr 17, 2:46 PM
    • #5
    • 20th Apr 17, 2:46 PM
    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
    • By lovinituk 20th Apr 17, 2:51 PM
    • 5,250 Posts
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    lovinituk
    • #6
    • 20th Apr 17, 2:51 PM
    • #6
    • 20th Apr 17, 2:51 PM
    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.
    Originally posted by dunstonh
    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).
    The following is my forum signature and not necessarily a response to your post:
    "To be truly successful you must live a few years of your life like others won’t so you may live the rest of your life like others can’t"
    • dunstonh
    • By dunstonh 20th Apr 17, 3:10 PM
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    dunstonh
    • #7
    • 20th Apr 17, 3:10 PM
    • #7
    • 20th Apr 17, 3:10 PM
    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.
    Last edited by dunstonh; 20-04-2017 at 3:39 PM.
    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.
    • lovinituk
    • By lovinituk 20th Apr 17, 3:29 PM
    • 5,250 Posts
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    lovinituk
    • #8
    • 20th Apr 17, 3:29 PM
    • #8
    • 20th Apr 17, 3:29 PM
    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.
    Originally posted by dunstonh
    OK, got it. I think I jumped on the wrong thread to ask that particular question. Thank you.
    The following is my forum signature and not necessarily a response to your post:
    "To be truly successful you must live a few years of your life like others won’t so you may live the rest of your life like others can’t"
    • woolly_wombat
    • By woolly_wombat 20th Apr 17, 3:54 PM
    • 467 Posts
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    woolly_wombat
    • #9
    • 20th Apr 17, 3:54 PM
    • #9
    • 20th Apr 17, 3:54 PM
    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.
    Originally posted by alivingstone
    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
    • By Malthusian 20th Apr 17, 4:23 PM
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    Malthusian
    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
    • By greatkingrat 20th Apr 17, 4:34 PM
    • 19 Posts
    • 18 Thanks
    greatkingrat
    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.
    • alivingstone
    • By alivingstone 20th Apr 17, 4:51 PM
    • 12 Posts
    • 2 Thanks
    alivingstone
    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.
    Originally posted by Malthusian
    Agreed - but I have no way of converting this debt to low interest. there is no equity in the house as we recently moved and I am unable to secure any loans.
    • alivingstone
    • By alivingstone 20th Apr 17, 4:55 PM
    • 12 Posts
    • 2 Thanks
    alivingstone
    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.
    Originally posted by greatkingrat
    Well "large amount" is relative I suppose.
    I pay 10% of my wage into the pension and my employer matches this.
    If i drop my percentage payment my employer will do likewise and what looks to be enough to be comfortable in retirement very quickly becomes not enough to live on.

    Dropping to 5% makes a massive difference in my pesnion projection but doesn't give me much more in my pocket each month to make any appreciable impact on the unsecured debt.
    • dunstonh
    • By dunstonh 20th Apr 17, 5:26 PM
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    dunstonh
    I pay 10% of my wage into the pension and my employer matches this.
    That makes sense as you should always try and match the employer contribution to the maximum.
    Are you a higher rate taxpayer? (how much do you earn)
    Does the total gross contributions of both yours and the employer exceed £4000 a year?
    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.
    • xylophone
    • By xylophone 20th Apr 17, 5:34 PM
    • 21,654 Posts
    • 12,452 Thanks
    xylophone
    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.
    You don't "draw down" a DB pension. You are usually able to take a Pension Commencement Lump Sum and then a scheme pension for life.

    What you seem to be wanting to do is obtain a CETV from the DB pension administrators and transfer this in cash to a DC pension either now or when you reach the earliest age that you can access a pension.

    You would then be seeking to access the 25% tax free PCLS and flexibly access the balance as a taxable lump sum.

    Not only would you pay a lot of tax but also, having flexibly accessed a DC pension, you would be subject to the MPAA in respect of contributions to any then current DC pension .



    https://www.fidelity.co.uk/static/pdf/personal/pensions/mpaa-factsheet.pdf

    Remember that the cost of advice from a pensions transfer specialist is likely to be high and you would not necessarily obtain a positive recommendation.

    The obligation is to obtain the advice not to follow it but in practice you could find a limited choice of providers ready to accept the transfer.
    • alivingstone
    • By alivingstone 20th Apr 17, 5:35 PM
    • 12 Posts
    • 2 Thanks
    alivingstone
    That makes sense as you should always try and match the employer contribution to the maximum.
    Are you a higher rate taxpayer? (how much do you earn)
    Does the total gross contributions of both yours and the employer exceed £4000 a year?
    Originally posted by dunstonh
    I just scrape into the higher rate, so yes over £4k a year - I have worked for BT for the past 10 years (and 5 before that as a contractor with no pension contribution ).
    • alivingstone
    • By alivingstone 20th Apr 17, 5:38 PM
    • 12 Posts
    • 2 Thanks
    alivingstone
    A bit of background - we are a family of 6.
    We had a large 5 bedroom detached house, nice cars & holidays and things were going well.
    Within a few months a number of things hit us which meant we lost between £1500 - £2000 a month net income.
    My wife was no longer able to work, I lost extensive O/T from my main job and lost a lucurative 2nd job.
    This hit hard and debts rose quickly - we are not entitled to any benefits (bizarely if I 'seperated' from my wife and lived in a bedsit she would be entitled to considerable benefits!).
    We were forced to sell up at less than market price and downsize considerably but retained a large chunk of unsecured debt.

    I'm working though it as best I can - including delivering pizza a few nights a week - and I am making all our commitments currently. It's not easy supporting 4 adults and 2 children when I am the only one bringing money in but it is doable. The two teenagers are in full time education at a local college and will both finish in another year, they have been trying to find part time jobs for the last year or so but so far have been unsuccessful. My wife is unable to work due to illness although this is not recognised by the government... We have two younger children - one who has medical needs which again are not recognised by the government.

    It's not a sob story - I'm working hard to maintain our family, things will get better over time.
    One day the 2 older boys will get jobs and be able to contribute to the bills or eventually move out...
    Maybe my wife will be able to find something suitable that she can do again to bring in a little extra.
    Until then I will do what I have to to make ends meet.

    Cashing in pension1 in 7 years is light at the end of the tunnel for me.
    It would pay off all unsecured debt and a portion of the outstanding mortgage.
    By this stage the 2 teenagers will be in their mid 20's - possibly moved out and we could move to a smaller house again with a very minimal mortgage.
    Come retirement in my mid 60's we should have enough to be comfortable from the pension from my current employer.

    If releasing capital from my 1st pension at 55 to cover this isn't an option I need to start looking at other solutions now... I have briefly looked at IVAs but I don't like that route, I'm currently able to make all payments and am not looking for an easy out...

    Oh and thanks to the person for the suggestion of the tent in leiu of family holidays - we do have a 6 person tent but have found that it is very challenging due to medical needs, it also tends to rain a lot in Northern Ireland!
    • dunstonh
    • By dunstonh 20th Apr 17, 6:38 PM
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    dunstonh
    I just scrape into the higher rate, so yes over £4k a year - I have worked for BT for the past 10 years (and 5 before that as a contractor with no pension contribution ).
    So, this means that you would pay 40% on the taxable part of the pension.
    You would also lose child benefit that year.
    You would also lose your personal allowance (creating nearly £5000 in additional tax)
    You would also have to reduce your pension contributions which would mean losing some of the employer contribution (free money).

    So, you would lose around half that pension in tax and benefits as well as future lost free money.

    I would start looking at the other options. IVAs you may not like but it is almost certainly the cheaper option.
    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.
    • atush
    • By atush 21st Apr 17, 1:11 PM
    • 15,957 Posts
    • 9,688 Thanks
    atush
    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.
    Originally posted by Malthusian

    A far more senisble plan would be to go to the debt free forum, and post an SOA. helpful folks will look over your outgoings and help you to reduce them. This creates 'wiggle room' as would be increasing yoru income with a second job, getting your spouse back into work DT is they arent etc. Selling used items on Ebay etc.

    Then use this spare money to Snowball your highest debt. Once that is eliminated, go for the next highest etc.

    This will be a far better option for your future than what you are planning.

    Also, tell us mroe about your other pension. Is it DB or DC? A tax free lump sum from a DC pension at 55 would be the only option to truly consider using.
    • atush
    • By atush 21st Apr 17, 1:21 PM
    • 15,957 Posts
    • 9,688 Thanks
    atush
    A side note, concerning your teenagers. Once they finish college and get work, charge them rent. I charge mine 50 a week to live and eat at home.

    This could be 400 a month towards your CCs.

    Consider http://debtwise.org.uk/
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