Pension Transfer Questions?

nabowla

For the past five-and-a-half years I have been in a final salary pension scheme. My employers paid an 8% contribution of my annual salary and I paid the other 8%.

Two months ago I started a new job and joined a new non contributory money purchase pension scheme. My new employer is paying 12% of my annual salary into the pension - although it's a lower % overall than my old pension, it's actually worth more in monetary terms as I had a significant salary increase.

I'm wondering whether to transfer my old pension into the new pension scheme. I know that final salary pensions are supposed to be better than money purchase but my old salary wasn't especially high and I've got another 30-35 years before I retire. I think I'd do much better to invest the money in a new pension fund that has a chance to grow over the long term.

How do I compare the pension transfer value against what I might get from my final salary scheme in 30 years' time? And how do I work out what my old pension will actually give me in 30 years' time? What other questions should I be asking before I make my final decision?

dunstonh

Final salary transfers are rarely a good idea. Some exceptions as always but not many.

How do I compare the pension transfer value against what I might get from my final salary scheme in 30 years' time?

You do an analysis using TVAS software or get someone to do it who has access to TVAS software. That typically means using an IFA. Many schemes will not accept final salary transfers without an IFA signing off on it due to the high chance of it being the wrong thing to do.

EdInvestor

Obviously we are talking rough estimates at best.

Take the transfer value and work out by using one of the many savings calculators on the web what it will be worth in X years time, adding in your own contributions and using a percentage return rate of 7%. Ignore the tax aspect.

This will give you a lump sum estimate. Then assume a return on that final figure of 6% for annuity income per year net, 7.5% if you plan to retire late.

And how do I work out what my old pension will actually give me in 30 years' time?

You can get your company to tell you this.Deduct tax @22% for a comparable result.

The above doesn't take into account inflation.Note that the old pension will be uprated by inflation or 5% whichever is the greatest over the years. The new pension won't be updated automatically.At present rates of inflation,regarded as low, values are approximately halved over 20 years.

nabowla

dunstonh wrote:

Final salary transfers are rarely a good idea. Some exceptions as always but not many.



You do an analysis using TVAS software or get someone to do it who has access to TVAS software. That typically means using an IFA. Many schemes will not accept final salary transfers without an IFA signing off on it due to the high chance of it being the wrong thing to do.

Oh dear. I was really hoping that wouldn't be the answer as I can't afford an IFA at the moment! I suppose the best thing would be to leave everything as it is for the time being and review the situation in a couple of years' time. The trouble is that a)I don't understand how my paltry frozen final salary contributions would be worth anything in 30 years' time and b)I'm not very impressed with the final salary scheme administrator. I'm still chasing them for a transfer value estimate three months after I first contacted them, and I imagine I'll move about quite a bit in the next 30 years. I can just see them losing my file at some stage :rolleyes: I'm also worried because the old scheme has a very high number of members who are due to retire in the next 5-10 years time, and very few new joiners. I know that my old employer is putting in extra money to cover a shortfall but I still don't see how a scheme with very few new joiners can work properly. Perhaps that's just because I don't fully understand pensions?

The good thing about my new money purchase scheme is that we actually have a say in how our money is invested - we can either pick the percentages for each of the funds or go for a pre-select portfolio, depending on our individual circumstances and appetite for risk. Because I'm still youngish (30), I've gone for a reasonably aggressive portfolio on the grounds that my money will be invested for so long that I can afford to wait out any downturns. When I get older I can gradually switch to a moderate/conservative portfolio.

dunstonh

four out of five occupational pension transfers that have ever been done were wrong to do so.

If you want to work on the basis of probability, then leaving it where it is, is probably the best option.

a)I don't understand how my paltry frozen final salary contributions would be worth anything in 30 years' time

Your contributions have nothing to do directly with the value of the pension. Final salary schemes are subsidised by the employer. Many dont even have employee contributions. The benefits are not based on what you paid in but based on years of service. Usually, the leaving salary for the which the years of service calculation is based on gets increased annually to keep up with inflation.

)I'm not very impressed with the final salary scheme administrator. I'm still chasing them for a transfer value estimate three months after I first contacted them, and I imagine I'll move about quite a bit in the next 30 years. I can just see them losing my file at some stage :rolleyes: I'm also worried because the old scheme has a very high number of members who are due to retire in the next 5-10 years time, and very few new joiners

Pension administrators on final salary schemes are notorious for this. Many now get external companies to do it but even they can be slow at times. Some companies require the pension trustees to sign off the transfer value information so your request gets bumped between the administrators and the trustees and back again. They wont lose you as its stored under NI number.

I'm also worried because the old scheme has a very high number of members who are due to retire in the next 5-10 years time, and very few new joiners. I know that my old employer is putting in extra money to cover a shortfall but I still don't see how a scheme with very few new joiners can work properly. Perhaps that's just because I don't fully understand pensions?

Some of whom will die early. A number of those already in retirement will die and the investments will give a return and the employer will pay into it.

The good thing about my new money purchase scheme is that we actually have a say in how our money is invested

That is a benefit. However, it will probably pay you less pension on a like for like basis than the final salary scheme.

nabowla

Thanks for the replies Dunstonh - your explanations really helped me to see things more clearly. I was probably worrying unnecessarily as most people my age haven't even started a pension yet but I thought I ought to try to make an informed decision rather than a wild stab in the dark!