Final Salary Options

danny_boy_4

Thanks to those who confirmed the rather sad news on my early retirement quote.
I now have to decide whether to keep the funds where they are or potentially move them to the SIPP where my last pension is invested . Briefly I am 52,stopped work to help with my disabled wife and had planned to draw all my pensions post A Day.
Projecting to age 75 and assuming inflation at 2.5% and discounting at 4% (are these reasonable rates to use) retiring early has a present value of £95,000. Waiting until I am 65 and again drawing until 75 has a PV of £ 139,000 . Taking the proposed transfer value and obtaining Income Drawdown from 54 through to 75 has a PV of £133,000 assuming income of 6.5% and that the fund grows from whatever means at 5% (again are these reasonable assumptions to us)
While in many ways waiting until I hit 65 is the least risk-free option,I have some AVCs with this plan where the only option allowed by the Trustees is to buy an annuity which I don't really want to do when I am only 54 on A Day.
I have calculated the PVs of the proposed annuity streams and compared them to what I would get with Income Drawdown using the same assumptions as above and Income Drawdown wins by approx 30% although much of this is the 65% of the residual sum that will pass on my death .

So on the one hand I favour keeping the final salary in place until I am 65 but I need to generate more income.Getting drawdown on the AVCs seems preferable to an annuity but that would mean taking the transfer value on the final salary element .

Are the options that I suggest above all permissable either now or on A Day and what advice to people have.

Thanks to anyone who helps

Pal

Transferring out of the final scheme may not be in your interests. The transfer value will assume an investment return of something like 7-8% p.a., so you are unlikely to get full value from transferring and are unlikely to be able to make that back up again, especially if you are drawing down income at the same time. If you feel like a challenge, try working the figures again valuing the final salary income stream and discounting it back to a present value using the same assumptions. You should find that it is greater than the value of the transfer value. Remember to build annual increases into the final salary payment amounts.

Your assumptions look reasonable although 4% seems a little low for a discount rate. A reasonably risk free bond fund should generate about 5 - 5.5% a year for you. Depends how safe you want to be in your projections. In practice though most people looking at income drawdown want to invest in equities or property, hoping for greater reward for the additional investment risk. Investing in bonds or cash is so similar to investing in an annuity that there is little point in taking the additional drawdown risk.

My only other thought is that your total fund values look a little low to be considering income drawdown. I am not sure it is something that should be considered for anyone with a fund less than £250k, as the downside risk has much more impact on the income of someone with a smaller fund.

A difficult one. You should probably speak to an IFA.