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Swap final salary pension for SIPP?
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# 1
goosander
Old 05-01-2008, 10:19 PM
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Default Swap final salary pension for SIPP?

My former employer is trying to reduce the liabilities of their final salary pension scheme and is currently offering incentives for people to transfer out. I'm trying to work out whether or not it is in my interests to transfer out to a personal pension plan of some sort, preferably a SIPP.

The pension is quite small (transfer value of approx £11750) but an additional cash payment of £1530 is on offer if I decide to transfer out by the end of January. According to the figures supplied with the offer, I would need an annual investment return of 8.7% to match the benefits offered by the current scheme, falling to 8.1% if I choose to invest the additional cash in to the pension as well.

I have about 27 years left before retirement, and am quite happy investing in equities rather than gilts or bonds for greater returns, but am I likely to be able to beat a return of 8.1% per annum over the longer term?

If I do choose to transfer out, ideally I would like to setup a SIPP of some sort but am not sure if it is worth it for such a small pension. As an alternative to the SIPP, my former employer has negotiated a deal with Legal & General for a personal pension plan with low charges (0.35% annual charge) which offers a limited amount of investment choice (various L&G tracker funds and a few external funds).

Any views on whether it would be a good idea to transfer out would be much appreciated.
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# 2
jamesd
Old 05-01-2008, 11:10 PM
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The long term market return for the UK markets is something in the 12% range before fees of say 2% so provided you're mostly invested in equities and pay regular (at least annual) attention to the quality and performance of your investments you should be able to beat those targets.

Are they also firing you so that your final salary does not increase? Or if not, how are they allowing for increases in your final salary in their calculations? Particularly as salaries tend to increase at a rate higher than inflation, so there is an expectation of a long-term gain.

Why do you want a SIPP specifically? If it's solely to get a large range of unit trust and OEIC investment choices there are cheaper non-SIPP personal pensions that will do that job, complete with online investment management. Seems unlikely that you want to buy an office building or other commercial property with the low value of your SIPP so that reason for preferring a SIPP can't apply.
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# 3
goosander
Old 06-01-2008, 12:32 AM
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I'm not being fired, the pension was from a former employer I left 7 years ago, so the pension is frozen (I forget the pensions term for this).

I would like a SIPP so that I can choose to invest in individual shares as well as funds, and also have access to a wider range of funds than most personal pensions allow. I do not need or want to invest in commercial property or any of the other investment classes a full SIPP allows.
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# 4
EdInvestor
Old 06-01-2008, 2:02 PM
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IMHO it's not a very attractive offer.Your f/s pension is guaranteed to increase by 5% or inflation to retirement without you doing a thing. This way you take all the risk with no guaranteed return and quite a high target.

I would stay put.
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# 5
goosander
Old 06-01-2008, 2:16 PM
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True, but I seem to recall reading somewhere (probably on here) that the government is considering lowering the maximum rate of increase of deferred FS pensions to 2.5% which is less than inflation (real world not government figures).

Other considerations are that the pension scheme might go bust, OK so there is the PPF but 90% of a pension that might have been erroded by 25 years of below inflation increases (if the above happens) doesn't sound good, and who knows if the PPF will still be around in 20 years.
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# 6
kennyboy66
Old 06-01-2008, 3:38 PM
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Quote:
Originally Posted by jamesd View Post
The long term market return for the UK markets is something in the 12% range before fees of say 2% so provided you're mostly invested in equities and pay regular (at least annual) attention to the quality and performance of your investments you should be able to beat those targets.
easily beat 12% in future ??????

I would doubt it.
US housing: it's not a bubble

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# 7
EdInvestor
Old 06-01-2008, 3:54 PM
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Quote:
Originally Posted by goosander View Post
True, but I seem to recall reading somewhere (probably on here) that the government is considering lowering the maximum rate of increase of deferred FS pensions to 2.5% which is less than inflation (real world not government figures).
That won't apply restrospectively

Quote:
... who knows if the PPF will still be around in 20 years.
Pension funds in run-off have a much longer shelf life than 20 years.
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# 8
Milarky
Old 06-01-2008, 7:54 PM
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If the employer is making offers to reduce FS pension liabilities now then the chances are that transfer value would be even higher in (say) 5 years time. In other words, isn't a transfer from DB to DC always available anyway - and don't the 'real cost' of these rise each time longevity assumptions are changed (as they are periodically) so the 'cash-in' value of your DB frozen pension is always likely to be going up???
.....under construction....
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# 9
moneyandmountains
Old 07-01-2008, 6:45 PM
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Quote:
Originally Posted by goosander View Post
. According to the figures supplied with the offer, I would need an annual investment return of 8.7% to match the benefits offered by the current scheme, falling to 8.1% if I choose to invest the additional cash in to the pension as well.
That sounds uncannily like my old employer, with a decision date of 31st January

I have a slightly different way of viewing this, as opposed to comparing directly with James' stock market returns of 12%.

1) You have 27 years to retire, so presumably this isn't your only pension.
2) Generally, when investing in a pension portfolio, like any investment portfolio you would invest in a mixture of equities and fixed interest products.

Therefore, you could just view this 8.1% as the fixed interest part of your portfolio (compare with the yield on bonds). Then you can do asset allocation as required to suit your risk profile.
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# 10
goosander
Old 07-01-2008, 10:17 PM
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No its not my only pension, and having thought about it more I agree with your view that it should be regarded as a fixed interest part of my portfolio so I think I'll leave it as it is. FYI, the scheme in question is Racal/Thales.

One final thing though, the above pension has a small (£1000ish) protected rights element which it seems you can't transfer to a SIPP, so if I did ever want to transfer out to a SIPP, what would happen to the protected rights fund? Would this mean that any transfer out would have to be to a PPP rather a SIPP.
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# 11
EdInvestor
Old 07-01-2008, 11:32 PM
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Quote:
Originally Posted by goosander View Post
One final thing though, the above pension has a small (£1000ish) protected rights element which it seems you can't transfer to a SIPP, so if I did ever want to transfer out to a SIPP, what would happen to the protected rights fund? Would this mean that any transfer out would have to be to a PPP rather a SIPP.
The two components can be split with the non-PR money into a SIPP and the other to a PP.But from October this year it is expected that PR money will be allowed into SIPPs,so the problem should be solved.
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# 12
jamesd
Old 08-01-2008, 8:38 AM
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kennyboy66, 8.1% is the target to beat. That's too high a target for fixed interest investments or really for say a balanced managed fund but not for equities. Even for equities it doesn't leave a really comfortable margin if it's just straight FTSE100 tracker. Fortunately finding funds with records nearer 13% long term is doable enough.

The offer definitely isn't generous and there may well be a better one around the corner if they don't get many takers. Particularly once they revise their longevity expectations.
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# 13
dunstonh
Old 08-01-2008, 9:03 AM
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8.1% basically rules out fixed interest, property, balanced managed, cautious managed (or lower), distribution and FTSE trackers. If you are going to do this you have to be willing to risk outperformance and look at a medium/high risk spread (or higher).
I am a Financial Adviser. 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.
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# 14
margaretclare
Old 08-01-2008, 9:46 AM
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No, No, NO! Never give up on an employer's final salary scheme! They are becoming as scarce as hens' teeth. Ask yourself WHY is your employer 'offering incentives to transfer out'? Not out of the goodness of his heart, you can be sure of that.

If you want a SIPP, have one in addition, not instead of.

HTH

Margaret
Ær ic wisdom funde, ær wearð ic eald.
Before I found wisdom, I became old.
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# 15
moneyandmountains
Old 08-01-2008, 6:05 PM
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Quote:
Originally Posted by goosander View Post
FYI, the scheme in question is Racal/Thales.
... Eyes glaze over, thinks of days back at RRL.
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# 16
DennisRevell
Old 31-01-2008, 6:36 PM
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Question Advice for Ex-Pat Please!

Hi. I've got pretty much the same offer, but I'm ex-pat, US resident (yea, I know). As such I've found getting advice pertaining to my situation a bit hard to get. I've been a resident here since around about the mid 1990s.

Heath Lambert Consulting (HLC) have been given the offer to manage. I'd like to get a 2nd opinion on what I understand from them so far:

Initially HLC told me that I couldn't participate in the offer because I wasn't a UK resident or taxpayer, but they seem to have modified their position on that. I'm now told that any scheme purchased as part of the offer must be a US based scheme - they specify a 401k, but that may be because that's the most familiar option to non US residents.

Basically they're saying that I can not transfer to any UK personal pension scheme owing to my tax and residency status. So my understanding is that if I leave the money in the current scheme, I will sometime become eligible for a pension denominated in GB£s, but that I can not keep that denomination were I to take up the offer, but would have to transfer to a scheme obviously denominated in US$s; which I'm getting more and more to regard as eventually being of use as fire starters. In order of decreasing toxicity, we seem to have: $ - £ - € - I guess that's partly the price of the first 2 bearing the cost of attempting to steal all that ME oil.

It seems a little strange to me that tax status or for that matter residency status - I am still a British citizen - enables me to keep the GB£s denominated final salary pension scheme, but disallows me from transfer to a GB£s denominated personal pension. One of the Transfer Scheme options offered, btw, offers a transfer to Legal & General, I guess to make the transition easier for those who don't want to mess around hunting for another personal pension provider.

-1 Can an expert here confirm that that is the case? ie: that any transfer to take advantage of their offer must be to a US based US$ denominated scheme, and can not be to a UK based GB£ denominated scheme?

In addition, I noted that the first poster here (goosander) gives figures of £11,750 for Transfer Value with a Cash Payment Offer of £1,530. The documentation I have received from HLC gives the Transfer Value in my case of £18,317.16, but a Cash Payment Offer of only £1,275.

-2 Apart from feeling all miffed and picked upon ;-); out of curiosity as much as anything, why does my higher Transfer Value seem to have attracted a lower Cash Payment Offer? What other factor(s) might be at play here?

-3 Does anyone know if it's possible to purchase a pension scheme denominated in Euros (say from a Continental Bank/Company, French/Dutch/whatever). If so, any ideas/experience to offer how to go about it?

-4 From what I've read of the HLC documentation, I think as an option that, on retirement, I could take one quarter of the pension amount as cash. Would the relevant amount (if taken now) be one quarter of the £18,317.16 mentioned above, ie: £4,579.29?

Thanks in anticipation of better answers than I've got right now.

Dennis Revell, formerly RTSL.

Last edited by DennisRevell; 31-01-2008 at 6:46 PM.
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# 17
jamesd
Old 01-02-2008, 5:57 PM
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DennisRevell, tax considerations mean that you can only transfer to a US scheme if it meets certain UK standards if you're to retain the pension tax protections. There are some US pensions that do meet those standards but I forget the details. You must find out about those schemes first to see what investment options they offer you. Somewhere on the net there's a list of authorised US pension transfer receivers.

I can't tell you if it's mandatory to transfer ot a US scheme, just that your US scheme choices will be limited.

US tax law is extremely punitive when it comes to US people owning foreign-based collective investments. Don't be surprised if you see horrendous tax charges if you try to dodge US options.

You should really start your own UK to US pension transfer discussion to better attract the eye of those familiar with this area.
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# 18
DennisRevell
Old 02-02-2008, 8:16 AM
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Default Thanks James

Just thought in time not to make that "Thank you James" ;-) sounds a bit butlerish.

Thanks, good idea about another thread - wish I had more time. I wouldn't try to dodge any options, I know 401ks are quite punitive if you want to take money out early - though I think somewhat more flexible than with UK pensions.

Actually, this pin-money sized pension accruement had slipped way to the back of my mind, almost to the point of forgetting about it, until I got the packages of information from HLC.

About another thread - the $ is getting toxic (with the £ getting that way too) so I'd want to avoid any more involvement with it like the plague. Hence I'd probably more likely want to start one seeking advice on the possibilities of getting an acceptable (acceptable to Thales/Mercer/HLC) Euro-denominated scheme to get the Transfer Value shifted to. I am a Euro-citizen as well as still a British Citizen.

Oh, why, oh why didn't the UK shift to the Euro!?! Misplaced nationalism or europhobia or something, in my view ( hmm. probably some US pressure too?)

Thanks again
Dennis R.
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# 19
EdInvestor
Old 02-02-2008, 7:43 PM
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You need to transfer it to a QROPS.

Google for a reference the the HMRC (tax) website.
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# 20
TRUSt_NO_1
Old 02-02-2008, 9:37 PM
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I am in a similar position, but am looking to transfer out into a SIPP through my own choice.
The only obstacle is I am looking for market value as a transfer amount, that is, how much would it cost me to buy the same pension in the market place.
They have currently offered me significantly less than market value,so I have refused …for now.
So I would find out what the market value (not their transfer value) is and base your decision on that.
If you are being offered market value, I would transfer it.
True inflation is running above 5% (over 10%..look at food,energy etc).Your FS indexation is capped at 5%, so your pension is being devalued each year.
If you get market value you just have to beat 5% perfoemance on your investments to gain .
If you take a lump sum from a final salary scheme, the scheme trustees will probably have a free hand to disproportionately reduce your pension.
My final salary pension scheme only allows approx 12% to be taken as a tax free lump sum, then my pension will also get clobbered …at the ‘trustees’ discretion
A SIPP allows 25% tax free,with no effect on the buying power of the remaining fund.
Also death shortly after retirement can leave your dependants well out of pocket if you have a company pension,depending on the scheme rules.
With a SIPP your dependants get the lot as a lump sum, less some tax maybe.
If your ex company goes bust you rely on the PPF.
The pension industry is going to have a crisis on it’s hands soon and the PPF will buckle under the strain.
I will put money on the PPF running into underfunding problems and the 90% of pension guarantee will go to 80% then lower…

In summary make sure you are getting market value as a transfer value and go for it.At least you will be in control.
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