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  • FIRST POST
    • ssmi
    • By ssmi 15th Jun 17, 5:44 PM
    • 33Posts
    • 3Thanks
    ssmi
    Transfer from Final Salary Scheme - Am I being naive?
    • #1
    • 15th Jun 17, 5:44 PM
    Transfer from Final Salary Scheme - Am I being naive? 15th Jun 17 at 5:44 PM
    I'm really asking for feedback on my thought process - I am no financial whiz and I want to know if I am missing something. I am 57 my husband is 62. Between us we have a few pension pots worth about 250K. I will get a reduced state pension due to lack of contributions but see no point it topping up as I believe I will lose any extra income in tax. He will get full state pension and still works part time. We are mortgage free and have a couple of properties we rent out, also mortgage free. The question really is over a final salary scheme I have. I was quoted a couple of years ago 22K pa to take at 65. I have now asked for a transfer value and been offered 397K. In my simplistic view this would mean I would have to live to 83 roughly to break even. I was thinking of taking the money now, taking 25% of it tax free to add to some other money we have, buying another property and then doing something with the remaining 75%. Is it really as simple as that or am I missing something? I know I will need to seek formal advice but wanted some informal view before I start the process. Thanks in advance for any pointers.
Page 1
    • p00hsticks
    • By p00hsticks 15th Jun 17, 6:06 PM
    • 5,429 Posts
    • 4,974 Thanks
    p00hsticks
    • #2
    • 15th Jun 17, 6:06 PM
    • #2
    • 15th Jun 17, 6:06 PM
    Is it really as simple as that or am I missing something?
    Originally posted by ssmi
    A couple of things you may be missing are;

    Unless you have health issues, a woman your age has a life expectancy greater than 83

    Your DB pension will be index linked to rise in line with inflation and may also provide a spouses pension on your death.
    • ssmi
    • By ssmi 15th Jun 17, 6:13 PM
    • 33 Posts
    • 3 Thanks
    ssmi
    • #3
    • 15th Jun 17, 6:13 PM
    • #3
    • 15th Jun 17, 6:13 PM
    Thenk you p00sticks. Yes it does provide a spouses pension but should I consider the fact that my husband is 5 years older than me so may not get that advantage? But yes I had omitted the index linked consideration - so in actual fact when I arrive at 65 will it be more than 22K? Plus it will rise over the years. However should I consider that when I do arrive at 65 the pension fund might not be enough to pay out? Should I factor in a 'bird in the hand?'
    • coyrls
    • By coyrls 15th Jun 17, 6:15 PM
    • 782 Posts
    • 774 Thanks
    coyrls
    • #4
    • 15th Jun 17, 6:15 PM
    • #4
    • 15th Jun 17, 6:15 PM
    I will get a reduced state pension due to lack of contributions but see no point it topping up as I believe I will lose any extra income in tax.
    Originally posted by ssmi
    There is no 100% tax rate. Assuming you are a basic rate tax payer, you would "lose" 20% of any extra income.
    • ssmi
    • By ssmi 15th Jun 17, 6:20 PM
    • 33 Posts
    • 3 Thanks
    ssmi
    • #5
    • 15th Jun 17, 6:20 PM
    • #5
    • 15th Jun 17, 6:20 PM
    Yes you are right coyrls, perhaps I should look at this again
    • Thrugelmir
    • By Thrugelmir 15th Jun 17, 7:17 PM
    • 53,810 Posts
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    Thrugelmir
    • #6
    • 15th Jun 17, 7:17 PM
    • #6
    • 15th Jun 17, 7:17 PM
    However should I consider that when I do arrive at 65 the pension fund might not be enough to pay out?
    Originally posted by ssmi
    What conviction do you have that the next couple of decades are going to be ones of economic prosperity? A higher return requires acceptance of risk. Large lump sums have an enormous attraction. Choosing the right home to invest the money has the potential to be a life changing event. A secure index linked base income is worth having.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
    • ssmi
    • By ssmi 15th Jun 17, 7:31 PM
    • 33 Posts
    • 3 Thanks
    ssmi
    • #7
    • 15th Jun 17, 7:31 PM
    • #7
    • 15th Jun 17, 7:31 PM
    So Thrugelmir, you're saying a lot depends on where you put the lump sum?

    I was kind of asking if the funds are secure if left in the scheme.
    Last edited by ssmi; 15-06-2017 at 7:37 PM. Reason: missed a thought
    • sandsy
    • By sandsy 15th Jun 17, 8:04 PM
    • 1,105 Posts
    • 635 Thanks
    sandsy
    • #8
    • 15th Jun 17, 8:04 PM
    • #8
    • 15th Jun 17, 8:04 PM
    Most DB schemes are secure and the promises will be met. Only a very small number out of the total population fail and even then, there is fund which will pay up to 90% of your accrued benefits (it's closer to 90% the nearer you are to receiving the pension).

    Whilst many currently appear to be less than financially strong, if interest rates rise, the position will be much improved and economic forecasts suggest this will be the case eventually.

    Most financial advisers are not trained to assess the strength of a scheme and it's likelihood of failing.
    • Daniel54
    • By Daniel54 15th Jun 17, 9:32 PM
    • 567 Posts
    • 660 Thanks
    Daniel54
    • #9
    • 15th Jun 17, 9:32 PM
    • #9
    • 15th Jun 17, 9:32 PM
    If your figures are correct,that is a very mediocre transfer value ( less than 20:1) After taking the 25% PCLS ,you would need to 'do something",as you put it,to generate a return on £300k equivalent to a reduced DB pension of £16.5k,inflation linked.That is a very big ask unless you are prepared to take a very high level of risk and hope for the best.
    • ssmi
    • By ssmi 16th Jun 17, 10:33 AM
    • 33 Posts
    • 3 Thanks
    ssmi
    Thank you Daniel54, I used an online checker to give me an indication of what the transfer value should be and there was quite a difference in the 'from' 'to' figures so wasn't sure what to expect. Is the offer negotiable? Is it the done thing to go back and ask for more?
    • PeacefulWaters
    • By PeacefulWaters 16th Jun 17, 10:38 AM
    • 6,408 Posts
    • 7,847 Thanks
    PeacefulWaters
    That's an awful transfer value. Ask them to check it.

    As it stands, take the income and inflation proofing that the scheme is offering you.
    • ssmi
    • By ssmi 16th Jun 17, 11:01 AM
    • 33 Posts
    • 3 Thanks
    ssmi
    Thank you PeacefulWaters. Is it really that bad? What information have you used to come to that conclusion so I can check the figures I have given you again? But assuming the info is all correct what would you expect it to be roughly?
    Last edited by ssmi; 16-06-2017 at 11:01 AM. Reason: misspelled name
    • PeacefulWaters
    • By PeacefulWaters 16th Jun 17, 11:37 AM
    • 6,408 Posts
    • 7,847 Thanks
    PeacefulWaters
    Thank you PeacefulWaters. Is it really that bad? What information have you used to come to that conclusion so I can check the figures I have given you again? But assuming the info is all correct what would you expect it to be roughly?
    Originally posted by ssmi
    I got £600k from a scheme where service had accrued an £18k income from age 62.
    • ssmi
    • By ssmi 16th Jun 17, 11:41 AM
    • 33 Posts
    • 3 Thanks
    ssmi
    Wow PeacefulWaters, that's quite a difference! Thank you again, I'll get the figures checked.
    • Silvertabby
    • By Silvertabby 16th Jun 17, 11:54 AM
    • 1,135 Posts
    • 1,275 Thanks
    Silvertabby
    It depends on the scheme. If OP is with the LGPS, then the offered transfer value could well be correct. The LGPS uses transfer factors set by GAD, whereas private schemes are linked to Government gilts, hence the current high values.
    • ssmi
    • By ssmi 16th Jun 17, 12:01 PM
    • 33 Posts
    • 3 Thanks
    ssmi
    Thank you Silvertabby, it is a private scheme but it would have had members transferred into it from government schemes if that would make a difference?
    • daveyjp
    • By daveyjp 16th Jun 17, 12:30 PM
    • 6,891 Posts
    • 5,230 Thanks
    daveyjp
    OP. A compound interest calculator can be used to show how long it will take for the pension to pay out £397k.

    I suspect its a better deal for the pension company than yourself.
    • kidmugsy
    • By kidmugsy 16th Jun 17, 12:47 PM
    • 9,329 Posts
    • 6,122 Thanks
    kidmugsy
    On the information you've given us, it's probable that your best moves are (i) keep the FS pension, and (ii) make up your national insurance contributions to maximise your state pension. Depending on his circs, your husband might be wise to make pension contributions out of his part-time earnings.

    If you really are set on increasing your exposure to the residential property sector, use TFLS money from your other pensions. But you might be wiser to diversify away from property.
    • bostonerimus
    • By bostonerimus 16th Jun 17, 12:54 PM
    • 349 Posts
    • 189 Thanks
    bostonerimus
    "Doing something with the other 75%" isn't really a plan. Educate yourself a bit so you can achieve your goals in a sensible way.

    If we assume 2% inflation then at age 65 your pension will be £26k. If you take the payout and manage to get 4% return then at age 65 it will be worth £565k and if you continue to get 4% annual return you would be able to support the same income as the pension to age 91. Your life expectancy is 88.

    Assuming you live to age 91 and putting those numbers into a growing annuity calculator shows that with 2% index linking the internal rate of return of the pension is equivalent to 3.5%

    So the decision is the usual one......do you feel lucky? Or rather are you confident in your ability to generate an an average annual return of at least 4% if you do drawdown or would you rather go with the pension with it's life time guarantee, but lack of flexibility.

    Bear in mind that if the future statistics of the stock and bond markets are similar to those of the past then a sensibly managed low cost portfolio should allow you to withdraw an inflation linked income starting at around 3.5% for 30 years with a high probability of success. 3.5% of you potential balance at age 65 (£565k) is around £20k which is less than your pension, but with drawdown you might be able to draw more or leave something to your heirs depending on how the markets perform.
    Last edited by bostonerimus; 16-06-2017 at 1:41 PM.
    Misanthrope in search of similar for mutual loathing
    • ssmi
    • By ssmi 16th Jun 17, 1:10 PM
    • 33 Posts
    • 3 Thanks
    ssmi
    Thank you kidmusgy and bostonerimus. I appreciate I need to give this a lot more thought - it's taken a fair time to get a transfer figure from the scheme and until I got this as a starting point I didn't know whether it was worth even considering anything other than taking the pension as offered. I've looked at some scenarios with annuities etc but am aware there are other (low risk) investments that might be available also. I really do appreciate all the input here, it's difficult to get an unbiased view.
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