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    • normanna
    • By normanna 15th Sep 17, 2:34 PM
    • 13Posts
    • 4Thanks
    normanna
    Conversation with IFA about DB transfer
    • #1
    • 15th Sep 17, 2:34 PM
    Conversation with IFA about DB transfer 15th Sep 17 at 2:34 PM
    Hi

    We spoke with an IFA today as we'd previously decided to transfer out of our defined benefit schemes. We haven't come to this decision lightly but it feels the best route for us. We have around £900k and £800k values currently.

    The IFA would charge £6.5k each and we would require the funds to be managed by his company (no tie in period) and his initial advice was to invest into a cautious moderate fund with growth rate of between 5.5% and 6.2%. Charges would then be 1.48% ( 0.73 fund charge, 0.25 platform charge and 0.5 his ongoing advice charge). Taking inflation into account the returns would in reality mean around an increase of between 1 to 2% a year.

    He said we could explore other options if we wanted to increase risk. He also said that we would find it difficult to find an IFA to sign off on the transfer if we wanted to self manage a personal pension or SIPP - I'm not too sure what the difference between the two is.

    We had been thinking about self managing as we do manage other investments ourselves and would probably split into cautious and higher risk with cautious funds being the majority. He also said it is worthless to consider tracker funds as they are a waste of time with such a large investment as there would be too much risk.

    Would be good to hear others thoughts on what he's said along with the charges please
Page 2
    • martin1959
    • By martin1959 16th Sep 17, 1:48 PM
    • 228 Posts
    • 197 Thanks
    martin1959
    The DB scheme is fine if you live long enough!

    Without taking the cash lump sum the pension would be £12k pa. Assuming my wife survives me, she would have to live until around 83 until she had used up the equivalent of the CETV. Should she die at any point after me (unless within 5 years of drawing her pension), there would be nothing to leave.

    There is minimal risk from bad tenants assuming we use an agent with rent guarantee policy. Yes the value of property may fall, but in the longer term property has never been a been a poor investment vehicle, unless you HAVE to sell in a depressed market. Rent for property will almost certainly rise with inflation due to the constant demand outstripping supply.

    So at age 83 my wife will have had constant rent for the 23 years, of a similar amount to what her monthly pension would have been, but allowing for even moderate price increases, the £200k flat would be worth £300k plus to leave as part of her estate.

    I agree, without children, we would probably just leave the DB pension alone, but as the true value of the DB pension is dependent on how long you live for, this too is a considerable gamble.
    20 plus years as a mortgage adviser for Halifax (have now retired), and I have pretty much seen it all....
    • kidmugsy
    • By kidmugsy 16th Sep 17, 3:29 PM
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    kidmugsy
    You've missed the crucial point of a DB pension. It's insurance against outliving your money. Talking about age 83 is all very well but what if she lives to 105?
  • jamesd
    Currently have a DB pension that would now give me £1000 pm pension, or £44k and reduced pension of £660 pm. If we went down this route I would take the cash and reduced pension.

    Offered CETV of £290k.

    My plan is to take max tax free cash £75k and use as deposit for Buy to Let flat PP £200k. Each year take make lower tax wdl from pension fund £35k (I earn £5k pa from part time job - and yes I know there will be a £6k tax liability) and pay £30k off of mortgage.
    Originally posted by martin1959
    Using the method of the outdated 4% rule, average investment performance would give a withdrawal rate of 6.5% of the pot in the US, ignoring costs, so about £18,850 a year. Going below that is to handle the bad cases.

    If you're willing to be flexible on income the transfer offers you the potential to retire earlier and on more money, subject to the risk of possibly dropping lower than the DB pension if investments do unusually badly while you're retired. The transfer option provides a 100% spousal pension. State pension deferral is typically a good value for money way of dealing with long life cases, with ten years of deferring taking it from the common 8k to 12k.

    Reducing the mortgage doesn't look like a good move because you should be able to make 10% after allowance for bad debt from secured P2P lending. So any mortgage overpaying makes you worse off.

    You can use a residential mortgage secured on your own home for the BTL and still deduct the interest as long as that's permitted. Usually lower interest rates that way.

    You can do a bit of VCT buying to get rid of the income tax liability if you're willing to wait five years before getting at most of the money spent on the VCTs.

    Experiment with cfiresim and see what it says. With the state pensions to come you'll probably be pleasantly surprised.
    Last edited by jamesd; 16-09-2017 at 3:40 PM.
    • Terron
    • By Terron 16th Sep 17, 8:38 PM
    • 33 Posts
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    Terron
    Rent for property will almost certainly rise with inflation due to the constant demand outstripping supply.
    Originally posted by martin1959
    I have just had to drop the rent on the flat that was my former home from £975 to £850pm, after a 2 month void. Locally demand has dropped off just as supply has increased.

    You may be right long term, but I wouldn't want to risk my livelyhood on a single property.
    • martin1959
    • By martin1959 17th Sep 17, 11:07 AM
    • 228 Posts
    • 197 Thanks
    martin1959
    You've missed the crucial point of a DB pension. It's insurance against outliving your money. Talking about age 83 is all very well but what if she lives to 105?
    Originally posted by kidmugsy
    That was an idea of how long she would need to live, drawing the DB pension before she 'won'.

    If she lived to 105 then she would still be receiving the rent from the property, and said property would probably be worth in excess of 500k based on the past 45 years......

    If the DB pension was insufficient it would be tough. If the rent from the property was not sufficient then at some point she could always sell it and invest the sale proceeds.

    Of course there is always the possibility of a void period for a rental property, but in our area you can always take a lower rent (normally about 10% below market) and secure a local authority guaranteed tenancy (assuming the property has at least two bedrooms)

    Of course anything is a risk, but as we will unlikely be dependent on her DB pension due to inheritances etc, I think leaving and drawing a DB pension is a bigger gamble, if you are concerned about leaving money to children. Live to 90 then you probably win....but who knows....

    As I have always said, I would rather live to 90 and be poor, than die at 70 rich......
    20 plus years as a mortgage adviser for Halifax (have now retired), and I have pretty much seen it all....
    • normanna
    • By normanna 18th Sep 17, 9:31 AM
    • 13 Posts
    • 4 Thanks
    normanna
    Thanks to all for their comments so far. Always good to get a wide range of views on something this important.

    We thought long and hard about whether we should transfer before even seeing a financial adviser - he is an IFA. The meeting was for an initial discussion prior to transfer and he has been used by a number of colleagues and he was recommended. We both work in the Financial Industry and have a mix of other investments of around £500k which we manage ourselves so whilst we are absolutely not pension experts I wouldn't be called naive.

    I have taken a decent redundancy package and will no longer be contributing to my DB pension and my husband is looking to retire at 55 which is 4 years away. If we both take the DB at 55 with 15% actuarial reduction the pensions would be £23k and £20k so to us the transfer values become increasingly attractive.

    The IFA didn't really add to the risks we'd thought about ourselves but we did discuss them more fully. He has said he 'approves' what we want to do but wants the £13k as the charge for advice as the next step and to do the transfer then 1.48% annually. We were looking for someone to sign off on the advice at a reasonable cost and perhaps manage in a portfolio ourselves but I'm not adverse to taking ongoing advice for a fee.

    We thought the initial charge was too much and seemed greedy which put me off him. I asked and he confirmed we would not be tied in and could move elsewhere after the transfer. I have read about a lot of pension providers needing to see the advice before accepting a DB transfer. I think we will speak to some other IFAs.
    • bostonerimus
    • By bostonerimus 18th Sep 17, 12:43 PM
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    bostonerimus
    I like that you will be taking other advice. I have a question abut your pension values. Do you know the discount rate used in the calculation......a present value of 900k and a pension of 23k implies a very low discount rate. Also what life expectancy is being used, is it index linked and what are the death benefits? Do you have those numbers?
    Last edited by bostonerimus; 18-09-2017 at 12:46 PM.
    Misanthrope in search of similar for mutual loathing
    • atush
    • By atush 18th Sep 17, 1:54 PM
    • 16,236 Posts
    • 9,909 Thanks
    atush
    Charges are Far too high.

    And trackers are fine for part of your portfolio.

    Run a mile from this guy
    • martin1959
    • By martin1959 18th Sep 17, 9:40 PM
    • 228 Posts
    • 197 Thanks
    martin1959
    The charges vary, but I have been advised by a friend (who has no axe to grind as he does not get personally involved in CETV's) that the average cost for advice tends to be around 2-3% of the fund being transferred, with ongoing charges levied by the pension provider.
    This seems high, but advisors have to have indemnity insurance in case a client sues at a later date, and by all account, the premiums are very high.

    I did enquire with one Company, Tideway, who charge 1% of fund being transferred, but want to invest and manage in their own funds, at a further 1% per year. I declined their service.

    I have settled on a IFA who has agreed to add their £500 initial advice fee to an agreed end of transfer fee. In total just under 2%.
    20 plus years as a mortgage adviser for Halifax (have now retired), and I have pretty much seen it all....
    • bostonerimus
    • By bostonerimus 18th Sep 17, 10:50 PM
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    bostonerimus
    The whole requirement to get an IFA to sign off on a DB transfer really annoys me. I can see how this is supposed to protect the customer, but in many cases it seems like a way to hold the transfer hostage and extract high fees with the excuse that the IFA might get sued for bad advice. For people who can DIY this is a really bad deal and amounts to a completely unnecessary extra tax.
    Misanthrope in search of similar for mutual loathing
    • kidmugsy
    • By kidmugsy 19th Sep 17, 12:06 AM
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    kidmugsy
    then 1.48% annually
    Originally posted by normanna
    Good grief. That could easily be 40% of your income going to him, only 60% to you. Just say no.
    • Aegis
    • By Aegis 19th Sep 17, 9:43 AM
    • 4,761 Posts
    • 2,840 Thanks
    Aegis
    I don't think this adviser sounds like the right person to use, but it's worth reading the breakdown to see that he's actually only taking 0.5%. As such, it's not 1.48% to him, but about 1% to investment platforms and managers, and 0.5% to the adviser.

    Still quite pricey if you prefer DIY portfolios of tracker funds, but let's be entirely fair to the adviser here.
    I am an Independent Financial Adviser
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
    • bigadaj
    • By bigadaj 19th Sep 17, 10:16 AM
    • 9,907 Posts
    • 6,326 Thanks
    bigadaj
    The whole requirement to get an IFA to sign off on a DB transfer really annoys me. I can see how this is supposed to protect the customer, but in many cases it seems like a way to hold the transfer hostage and extract high fees with the excuse that the IFA might get sued for bad advice. For people who can DIY this is a really bad deal and amounts to a completely unnecessary extra tax.
    Originally posted by bostonerimus
    Well considering you are in the us then it's a bit irrelevant whether this annoys you or not.

    One of the key issues with these db schemes is that they were primarily funded by employers and the employee would typically put a tiny amount of the contribution in, at least consciously. They are also a cohort that will probably have little experience of handling large sums in general.

    The option to transfer out is effectively a perk, people's heads have been turned by huge cetvs and now see this as their right; their right is to receive a benefit as detailed in their contract consisting of a regular payment ar retirement, any other option is a perk.
    • bigadaj
    • By bigadaj 19th Sep 17, 10:18 AM
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    bigadaj
    I don't think this adviser sounds like the right person to use, but it's worth reading the breakdown to see that he's actually only taking 0.5%. As such, it's not 1.48% to him, but about 1% to investment platforms and managers, and 0.5% to the adviser.

    Still quite pricey if you prefer DIY portfolios of tracker funds, but let's be entirely fair to the adviser here.
    Originally posted by Aegis
    I'm not sure we want to be entirely fair to the adviser, slightly fair maybe.
    • Linton
    • By Linton 19th Sep 17, 10:37 AM
    • 8,174 Posts
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    Linton
    Well considering you are in the us then it's a bit irrelevant whether this annoys you or not.

    One of the key issues with these db schemes is that they were primarily funded by employers and the employee would typically put a tiny amount of the contribution in, at least consciously. They are also a cohort that will probably have little experience of handling large sums in general.

    The option to transfer out is effectively a perk, people's heads have been turned by huge cetvs and now see this as their right; their right is to receive a benefit as detailed in their contract consisting of a regular payment ar retirement, any other option is a perk.
    Originally posted by bigadaj
    Exactly.

    It was I believe an unintended consequence of the new flexibility of DC pensions and the existing rarely used right to transfer out of a DB pension to buy an annuity which would only be worth doing in exceptional circumstances. The imposition of the IFA approval requirement was a last minute attempt to prevent a future mis-selling disaster.

    It is strange the criticisms comes from the USA where there seems to be no ability to transfer out of DB schemes.
  • jamesd
    The option to transfer out is effectively a perk, people's heads have been turned by huge cetvs and now see this as their right; their right is to receive a benefit as detailed in their contract consisting of a regular payment ar retirement, any other option is a perk.
    Originally posted by bigadaj
    The schemes are required by law to provide CETVs according to a somewhat specified methodology and pay the money in transfers out. It's not simply a perk, it's the law.

    The law doesn't currently require schemes to provide for partial transfers, so almost none do. That pretty much reveals whether schemes think it's a perk they want to offer rather than something they only do because the law compels it.
    • cloud_dog
    • By cloud_dog 19th Sep 17, 12:25 PM
    • 3,166 Posts
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    cloud_dog
    It is strange the criticisms comes from the USA where there seems to be no ability to transfer out of DB schemes.
    Originally posted by Linton
    Yes but if they did it would probably be the Carlsberg transfer scheme.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • bostonerimus
    • By bostonerimus 19th Sep 17, 12:47 PM
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    bostonerimus
    Well considering you are in the us then it's a bit irrelevant whether this annoys you or not.
    Originally posted by bigadaj
    An opinion from a relatively disinterested party can often be a useful perspective. There's always something to learn when different assumptions and norms are applied to a situation.
    Misanthrope in search of similar for mutual loathing
    • bostonerimus
    • By bostonerimus 19th Sep 17, 1:06 PM
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    bostonerimus

    It is strange the criticisms comes from the USA where there seems to be no ability to transfer out of DB schemes.
    Originally posted by Linton
    I don't think that's strange at all. It's perfectly normal to comment on something that is different from your own experience and there's often something to be learned from an opinion that starts from some different assumptions.

    However, it is possible to transfer out of DB schemes in the US, but it is generally limited to small amounts and requires the permission of the IRS, the company and the employee. I actually took a buy out from a DB scheme I had about 3 years ago as I had more than enough guaranteed income already. Pension transfer values are calculated using the IRS segmented rate tables and life expectancy tables. I calculated that I would need 5% return from the DC pot to match the pension benefit out to age 85 and so I'm running a 30 year experiment. The money is in a 60/40 multi-asset fund and so far has returned 7%. Importantly there was no cost associated with this transfer. I could easily have paid for advice, but I wasn't forced to pay for something I didn't want or need. In the UK DB transfers might be perk (or legal right) for employees, but they are certainly a perk for financial advisers who more often than not seem to charge some pretty high fees.

    I have also done the reverse and bought into my last employer's DB plan just before I retired, again this required permission from the IRS, my employer and myself. I took $280k from my DC pot and bought a $20k index linked pension at age 53 that started at age 55. If you do the maths you'll see what a good deal that was.
    Last edited by bostonerimus; Yesterday at 1:19 PM.
    Misanthrope in search of similar for mutual loathing
    • bowlhead99
    • By bowlhead99 19th Sep 17, 1:07 PM
    • 6,688 Posts
    • 11,879 Thanks
    bowlhead99
    The schemes are required by law to provide CETVs according to a somewhat specified methodology and pay the money in transfers out. It's not simply a perk, it's the law.
    Originally posted by jamesd
    Point taken, it is their 'right' by law to extract the 'cash equivalent' money from their scheme, subject to the regulatory rules.

    However, we do see an awful lot of people upset that they can't get their hands on 'their money' without consulting IFA etc, when at no point in their previous of decades of employment did their employer set the expectation that the retirement benefit they were working for was going to be available as a cash lump to spend or invest however they wanted it.

    "Back in the day", they were working their x hours a week for y salary and a package of z benefits upon reaching retirement age. The concept of CETV was merely so that if you wanted to roll your package of benefits from an old employer into the new pension benefits from a new employer there was a mechanism to work out how much it would 'buy' if the new employer had different terms. All the annual pension statements would refer to what benefits you had bagged so far and what benefits you would get if you carried on working for the same place until retirement. CETV was not something the typical employee wanted or needed.

    I somewhat sympathise with the people who have been faced with high professional costs to move their millions of CETV from a DB plan into a more accessible scheme and might consider this cost leakage as some sort of extra 'tax'. It makes sense that they would be aggrieved that it costs them to do something that they hoped would not cost them anything.

    However, whether you call it a legal right or a perk, they are wanting to do something that was not envisaged at the time they started working for the benefit and is something that would presumably improve their situation which is why they want to do it. I find it hard to get weepy for people who have a lot more wealth than the average member of society (with high levels of guaranteed income for life which are out of reach for most), being offered the opportunity to get an better result for themselves that they had originally envisaged - and had not hitherto been part of their planning - by taking it even more flexibly, and then complaining that they have to undergo the 'vetting' procedure for permission to transfer, which costs them something.

    This is not to say the fee quotes from specific IFAs versus specific asset sizes and personal situations are fair or unfair. It's just a little moan from me about the number of complainants who feel they are entitled to something that they would never have asked for or grumbled about if it hadn't kindly been put on the table for them.

    I could imagine some WASPI woman complaining on the one hand that she wants a state pension at 60 because that's what she thought she'd get three decades ago, and her expectation was set accordingly ; and then complaining on the other hand that she can't cash in her huge DB occupational pension without a professional fee when there was absolutely no expectation when she carried out the work which earned the pension, that it could possibly be delivered to her as a 100% cash lump with total freedom on how to draw it.

    So, a moan about moaners
    Last edited by bowlhead99; Yesterday at 1:17 PM.
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