Transfer out or hold on in

tomdhu

I am entitled to a deferred pension from a previous employer’s scheme. This employer went bust in 1991 and is now only just in the final stages of being put to bed by the insolvency practitioners. Yes, 17 years! It is a defined benefit scheme now operating as a closed fund.
The trustees have just advised that in their view ‘the members interests would be better served by buying out the benefits with an insurance company and completing the winding up of the scheme’. I contacted the administrators and they confirmed that it would stay as a defined Benefit Scheme as it would be fully bought out. The last transfer valuation (May 08) was ₤170k or a pension of ₤8,400 pa.

I do have other investments and a very small SIPP that I started a few years ago, but this DB scheme represents a big part of my retirement funding and so I am concerned about not getting caught out. I’m 62 and working part-time and will continue so for as long as I can. One hears worrying stories about insurance companies taking over company schemes. So my question is … should I transfer the money out before the insurance company gets involved and put it a SIPP?

Debt_Free_Chick

tomdhu wrote: »

I do have other investments and a very small SIPP that I started a few years ago, but this DB scheme represents a big part of my retirement funding and so I am concerned about not getting caught out. I’m 62 and working part-time and will continue so for as long as I can. One hears worrying stories about insurance companies taking over company schemes. So my question is … should I transfer the money out before the insurance company gets involved and put it a SIPP?

You probably need an IFA to do a transfer value analysis for you, but there's the risk that investment of the £170k doesn't generate the same income as the DB pension you would forego.

SIPPS are better suited to longer term investments, however and at 62 with this pension being so important to you, you really must think hard about the risk that your SIPP will end up paying out less than the DB pension you're giving up.

Having the DB pension bought out with an insurance company is a relatively safe, certain thing to do.

What worries do you have about insurance companies? The worries you have might not be relevant to the type of policy that the Trustees will buy for you. They will buy an annuity which pays out exactly the same amount that the scheme would have paid out and which will include other benefits, like the same annual increases and same benefit paid out on your death.

Air your worries here and we may be able to help.

dunstonh

One hears worrying stories about insurance companies taking over company schemes. So my question is … should I transfer the money out before the insurance company gets involved and put it a SIPP?

You need to be aware that insurance companies will offer personal pensions, SIPPs, stakeholders and section 32 buy out bonds. There is very little difference between a SIPP and a stakeholder or personal pension apart from the charges and investment options. Indeed, for most people, a SIPP is the worst option of those three.

I'm not sure why you are concerned about insurance companies. Indeed, a section 32 buy out bond may be the best option, if that is available to you (and i wouldnt be surprised if that is the option being offered).

jamesd

Someone significantly younger than you might usefully consider taking the transfer value and investing it, after a professional transfer value analysis by a suitably qualified IFA to work out the critical investment yield needed to do better from transferring than remaining. You should not transfer without getting this work done.

For someone who is 62 the certainty of a buyout makes that option very attractive compared to the variation in value that you can get with a pension directly based on investments. Even if you take the view that now is a good time to be investing, as I do, there's a high degree of risk and very unpleasant consequences for your retirement income if things get worse between now and whenever you stop working.

How long you can work will have a major effect on what you should do. At 62 there's also a substantial risk that stopping working may not be entirely voluntary.

If you think that you'll take the extra income from this pension when you can while continuing to work part time that also tends to favour retaining this pension. If you desire you can take it as soon as you can and put some or all of the money into SIPP or other personal pension contributions to provide for a higher pension income later. That would gain the prospect of future investment growth to produce a higher income but with much lower risk than taking all of the money as a lump sum.

My own opinion is that it's not likely to be worth taking the risk, given your age and what I assume to be less than ten years to needing the income, perhaps five or fewer. It seems more prudent to retain this pension with insurance company backing and make additional stocks and shares ISA and SIPP or other pension contributions to accumulate a higher income and large tax-advantaged lump sum via the ISA and 25% of SIPP or PP pension options.

Simply: too much risk to take with too little time to recover from stock market volatility risk.

tomdhu

Many thanks to you all for the comprehensive responses. On the balance of things, I think I'd feel comfortable staying with the scheme rather than the SIPP.