Pension v Transfer Out

kemsing

I will retire at the end of the year, been notified that my pension will be £7400pa indexed at 3% min 5% max. 50% to spouse on my early demise. Annuity quotes for a similar pension (4%) show me I would require a fund of £185,000 to purchase this on the open market. I have asked for the fund transfer value as I have a SIPP where I could put this transfer, not received the quote yet.
The company operates in a difficult market and although the pension fund seems adequately funded (last valuation 2 years ago) there must be a finite chance it will fail in the next 5 years.
1) What happens if the pension fund proves inadequate 10 years from now when the parent company no longer exists? Am I guaranteed a 100% pension from the Gov Scheme?
2) Given that I have these misgivings about the scheme, what threshold of transfer value (TV) do you consider I should stay with the scheme or get out? ie get out if the TV is above £100,000
and stay in if its below, for example? Obviously the point of getting out is to get a smaller pension but with 100% security.
Note. This pension will not be my only one.
Many thanks for advice/comments.

MikeJones_2

Hi kemsing,

So we can be sure to point you in the right direction, can I just clarify:

(a) Is the scheme a final salary scheme (a type of defined benefit scheme)?
(b) When you 'retire at the end of the year' will this be at your scheme's Normal Retirement Date, or early retirement?
(c) What is your age?
(d) Are you male or female?
(e) Are you in good health, suffer from any ailments, (smoke etc)?
(f) Marital status?
(e) Does your spouse/partner (how old) have own pension benefits?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

kemsing

a) Is the scheme a final salary scheme (a type of defined benefit scheme)? YES
(b) When you 'retire at the end of the year' will this be at your scheme's Normal Retirement Date, or early retirement? NORMAL, AT AGE 65
(c) What is your age?ALMOST 65
(d) Are you male or female? MALE
(e) Are you in good health, suffer from any ailments, (smoke etc)?YES, NO, NO
(f) Marital status?MARRIED
(e) Does your spouse/partner (how old) have own pension benefits? 64, YES

MrChips

On current inflation expectations, 4% is significantly above a 3% min 5% max indexation.

The generosity of transfer values can vary significantly from scheme to scheme but it would be extremely unusual for a scheme to offer one which is close to the cost of the annuity ("buy out") option.

I won't advise you about what level of TV you should consider accepting (just not possible without knowing your detailed circumstances) but just to warn you many schemes won't offer transer values to members within 1 year of retirement age. Are you sure you will be allowed to take a transfer value?

MikeJones_2

Hi kemsing,

You can see why I asked the questions now.

MrChips is correct in that because you are within 12 months of your Normal Retirement Date (NRD), there is no legal requirement for the trustees of your scheme to provide you with a transfer value.

They may do so, and I have come across schemes that have done this in the past, but there is no statutory requirement to have to provide you with a transfer value given the proximity to your NRD.

To answer your specfic question therefore:

1) "What happens if the pension fund proves inadequate 10 years from now when the parent company no longer exists? Am I guaranteed a 100% pension from the Gov Scheme?"

Scheme members who have reached their Normal Retirement Date (i.e. 'pensioners') rank as the highest priority in every situation i.e. if a pension scheme is wound-up, or if the sponsoring employer fails.

The Pension Protection Fund (which incidentally doesn't cover all defined benefit schemes) is there to pick up the pieces if this latter situation arises; if the scheme qualifies for the PPF; and if it passes the PPF's assessment of eligibility. There's plenty of information on the PPF's website.

Note that, where a scheme is accepted into the PPF, pension payments (i.e. 'compensation') made to pensioners (above NRD) would be at the rate of 100% of what pensioners were entitled to under the 'failed scheme' BUT other benefits such as pension increases, spouse's and dependants' benefits may quite likely be less than your previous scheme would have granted. So, whilst it's a welcome safety net - it is not the 'exact fit' many people think it is (but it's better than nothing).

2) "Annuity quotes for a similar pension (4%) show me I would require a fund of £185,000 to purchase this on the open market."

"Given that I have these misgivings about the scheme, what threshold of transfer value (TV) do you consider I should stay with the scheme or get out? ie get out if the TV is above £100,000"

Did you do like-for-like benefits on this? i.e. did you match the spouse's pension and any guarantee period such as a 5 year guarantee?

If you do receive a transfer value, remember that it might have been reduced to reflect any deficit that the scheme is in. If it is, then the transfer value statement will detail this.

As an observation, and in respect of your comment "Obviously the point of getting out is to get a smaller pension but with 100% security." Given my comment above about how pensioners' benefits form the highest priority in the situation of a scheme failure, I'm not too sure that your reference to 100% security is entirely relevant now. What do you feel?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.