Early retirement questions

Wanna_retire

I am a deferred member of a defined benefits scheme, aged 54. I wish to start drawing my pension asap, and have obtained figures from the administrators.

As an alternative to taking my pension from the scheme, could I take a transfer and immediately buy an annuity? What would be the mechanics of this, would the transfer have to be via some other form of pension rather than directly into the annuity?

I don't have a transfer value, but I do have a "capital value" given for the purpose of comparison with the Lifetime Allowance. Is it reasonable to assume that the transfer value would be no higher than this?

Working with the above figure, I've looked at an online annuity calculator. The income from an annuity with matching benefits (full RPI increases, 50% spouse's pension, 5 years guarantee) falls well short of what I've been offered by the scheme. My only reason for hesitation is the possibility that my health may be poor enough to get a significant enhancement to an annuity, though I suspect not. I have stable angina (both parents have had bypass surgery), ME and depression. Is anyone able to guesstimate what percentage enhancement, if any, I might get?

jamesd

You could transfer and then purchase an annuity with some or all of the pension pot provided a "transfer value analysis" was done by a suitably qualified IFA and produced a result that said you were likely to be better off by transferring. That's very unlikely to be the case just before retiring. Except that you might get an enhanced annuity rate and an IFA could also tell you about this. I doubt it'll be enough to matter because of the high spousal benefit you're after.

If you wanted to use income drawdown, otherwise known as an unsecured pension, you might be able to take more income now because you wouldn't need to provide for the spousal pension, since your spouse would inherit the pension pot from you.

I think that it's very unlikely that you'll benefit from transferring and hence unlikely that you will be able to find an IFA who will take the risk of signing off on a transfer, knowing that they could be financially liable for the consequences if they were wrong.

Have you asked the pension plan administrators about their arrangements for ill health early retirement? I don't think that this would apply to your situation but if it did it might produce a substantial increase in pension payment.

Wanna_retire

jamesd wrote: »

I think that it's very unlikely that you'll benefit from transferring and hence unlikely that you will be able to find an IFA who will take the risk of signing off on a transfer, knowing that they could be financially liable for the consequences if they were wrong.

Have you asked the pension plan administrators about their arrangements for ill health early retirement? I don't think that this would apply to your situation but if it did it might produce a substantial increase in pension payment.

Thanks for the reply, jamesd.

I'd prefer not to delay things by waiting for a transfer value and TVA, but am trying to reassure myself that I'm not losing out by staying in the final salary scheme. Wouldn't an IFA be on safe ground with the immediate transfer into an RPI linked annuity that I'm pondering? It would surely be clear at the outset that it would (or wouldn't) produce a guaranteed pension higher than my current scheme?

As regards ill health retirement: I left my employment (with a bank now part of the Santander group) in 1995 following my ME diagnosis. Until shortly before I left, a medical retirement was available to anyone too ill to continue in their current post. However shortly before I left, the rules were tightened up so that one had to be too ill to be expected to do any sort of work ever again . I was, quite rightly, not awarded a pension on those terms, but was allowed to leave on voluntary redundancy terms.

Since I left work, the scheme has been changed to have two tiers of medical retirement, "Incapacity" and "Total Incapacity". The "Incapacity" pension is described in the scheme booklet:

"If the Company agrees that your condition prevents
you from permanently following your normal or a
reasonable alternative occupation or seriously impairs
your earning ability, you may be eligible for an
”Incapacity“ pension.
If the Company decides, and the Trustees agree, that
your condition is so serious that you are not expected
to work again, you would be eligible for a ”Total
Incapacity“ pension.
In each case, the Company decides what medical
evidence is required and may appoint its own medical
adviser for this purpose.
How is the Incapacity pension calculated?
It will be calculated in the same way as your pension
at your normal retiring date but based on your final
pensionable salary at the date you retire and the
following period of notional pensionable service:
the greater of 15 years; or your completed
pensionable service plus 5
years,
but not more than the pensionable service you
would complete, if you
worked until your normal
retirement date."

dunstonh

Wouldn't an IFA be on safe ground with the immediate transfer into an RPI linked annuity that I'm pondering?

No. The IFA has to look at all options and not just pick one that may be right. Documentary evidence would need to be taken. Also, that would mean doing a transfer rather than using the open market option. So, a transfer pack would be required anyway.

jamesd

If you haven't asked about whether ME meets the requirements for an incapacity pension that seems like your best option. That's because it would avoid the reduction in pension that you get by taking it early, since it would pretend that you were retiring at the normal age (or one of the other calculations, all of which improve your position).

It's quite unlikely that an annuity will offer you better terms than taking the work pension early and I think that you probably would have to pay a fixed fee for the service of working it out, so I don't think it's likely to be to your advantage to take this route. Your "problem" here is that final salary pension schemes still tend to be more generous than those in the free market. So switching to the free market isn't likely to help you.

dunstonh, do you see any reasonable prospect of it being worth spending the money for a transfer value analysis in this situation? Any sign of any useful service that an IFA might deliver?

dunstonh

dunstonh, do you see any reasonable prospect of it being worth spending the money for a transfer value analysis in this situation? Any sign of any useful service that an IFA might deliver?

In my experience, it would be unlikely unless poor health or single. I dont see the figures coming out better on a like for like basis with the main scheme.

MikeJones_2

Hi Wanna-retire,

I have a couple of observations on your posts which I hope you don’t mind me adding.

Tax Free Cash Lump Sum
quote=Wanna_retire:I am a deferred member of a defined benefits scheme, aged 54. I wish to start drawing my pension asap, and have obtained figures from the administrators.

You haven’t mentioned whether you will (a) be taking a tax free cash lump sum and (b) if ‘yes’ to (a), whether the lump sum is in addition to your pension or whether it is by commutation (exchanging part of your pension for the lump sum).

This could prove important if you are considering taking a lump sum by commutation – depending upon what the commutation rate is in the defined benefit scheme.

It is feasible that a transfer might produce more cash – it’s only a thought – and given the complexities involved is too complex to go into here (which is where a specialist IFA would be able to help).

Capital Value and Transfer Value
quote=Wanna_retire: don't have a transfer value, but I do have a "capital value" given for the purpose of comparison with the Lifetime Allowance. Is it reasonable to assume that the transfer value would be no higher than this?

A ‘capital value’ and ‘transfer value’ are likely to be mutually exclusive in the circumstances that you describe. A capital value will measure the value of your benefits, as you point out, for testing against HM Revenue & Customs limits.

A ‘transfer value’ on the other hand is supposed to represent the ‘value’ of your deferred benefits held within the scheme (so will include an element for benefits other than your pension, such as a spouse’s pension, pension increases up to and during retirement, dependants’ benefits where any exist, guarantees such as GMP or a 5-year guarantee payment period).

It is now the responsibility of the scheme trustees to make sure that transfer values are fair – but there is a wide degree of scope and quite substantial differences can occur in what may appear to be similar schemes. Remember too, that trustees may reduce a transfer value if the scheme is in deficit, although you will be told of this on a Transfer Value Statement.

Conversely, some employers are actively encouraging transfers-out and will offer a Cash Inducement and/or an enhanced transfer value.

Spouse’s Pension
quote=Wanna_retire:Working with the above figure, I've looked at an online annuity calculator. The income from an annuity with matching benefits (full RPI increases, 50% spouse's pension, 5 years guarantee) falls well short of what I've been offered by the scheme.

You’ve mentioned the spouse’s pension – but I was left wondering whether you ACTUALLY do have a spouse – or whether you’ve simply quoted it because it is what the defined benefit scheme provides.

If you don’t have a spouse, or if your spouse has OWN pension provision which is robust enough to suit your joint circumstances, this could impact upon whether purchasing an annuity with a spouse’s pension provision might be more appropriate for you. I simply don’t know – I’m just drawing your attention to this.

Incapacity
quote=Wanna_retire:Since I left work, the scheme has been changed to have two tiers of medical retirement, "Incapacity" and "Total Incapacity". The "Incapacity" pension is described in the scheme booklet:…

You need to confirm with the scheme administrators whether preserved members may be eligible for early payment on the grounds of ‘incapacity’, as the text you have quoted may only be relevant to an active member. Many defined benefit schemes have ceased to offer ill health benefits to all but active members.

Enhanced / Impaired Life Annuities
quote=Wanna_retire;17288475:I have stable angina (both parents have had bypass surgery), ME and depression. Is anyone able to guesstimate what percentage enhancement, if any, I might get?

As an outsider looking in on this post, my personal thoughts are that I’d have thought it was worth taking the time to do a full comparison of all options available.

Summary
I hope I haven’t clouded the issue here as jamesd and dunstonh have covered most of your original comments.

Of course it does depend on the amounts involved. The larger your pension benefit, the more you have to gain by considering all avenues.

Hope this helps.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a 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.