Not worth transferring old pension?

Badgergal

I gather from reading these threads that it is generally unadvisable to transfer a final salary scheme to a stakeholder scheme?

I'm 25 and worked for my old company for just over two years (final salary scheme). My deferred pension would therefore be £635. Transfer value they have given me is £2,648.

I am now working for a new company, on a higher salary, who have a stakeholder pension scheme. I contribute 5%, they contribute 10%. Am I right in thinking I'm better off keeping the old pension rather than transferring it?

I realise this is probably something that comes up rather a lot, but I really don't know what I'm doing at all and just wanted to make sure I wasn't one of the exceptions to the general rule that you shouldn't transfer final salary schemes.

Replies much appreciated. Thanks!

dunstonh

Am I right in thinking I'm better off keeping the old pension rather than transferring it?

nine times out of ten the answer would be yes.

ender4

dunstonh wrote:

nine times out of ten the answer would be yes.

i don't get why its better to leave the pot in the final salary scheme, rather than transfer it to the new pension.

Surely, it wouldn't make any difference, as the pot is going to grow at a certain rate whichever pension it is in?

Don't know that much about pensions, but that seems to be the logic to me. Have i missed something that means the final salary would grow faster than a money purchase scheme?

Thanks for any info.

exil

Final salary means DEFINED BENEFIT - that is, the scheme is obliged to pay you a fixed amount when you retire. What the stakeholder scheme pays depends on how your investments perform.

You will have to "do the math".

Option 1 - keep the money where it is

assumptions - pension is uprated in line with inflation

so - you get £635 in today's money when you are 65.

Option 2 - transfer

£2648. Assume investment grows at 5% - your pot grows to £18,000
by age 65. Assume annuity rate of 5% - this gives you a pension of £900. However when you knock off inflation at 3% this will only be worth £300 in today's money ie half what you'd expect from the old scheme.

Final Salary scheme carries the risk that the old employer may go bust just before you retire leaving the pension underfunded. There are safeguards but who knows what they will be in 40 years time. With a stakeholder scheme this risk doesn't exist - but you don't know how much the pension you get will be!

Other risk - we may have a huge dose of inflation beyond the 2.5% that preserved pensions are obliged to cover.

In some ways this doesn't compute - common sense suggests that investments should in the long term beat an inflation-proofed preserved pension. But the devil is in the transfer value. This is set to protect the pension fund against people taking too much money out when they leave and assumptions about the future are "conservative".

All we can say is that on average the money is better off where it is - but nothing can be guaranteed.

tyllwyd

But in 40 years time, that possible £300-£900 per annum is (hopefully) going to be a drop in the ocean compared to the main pension. And it is going to be a pain keeping the old scheme provider informed about changes in circumstances during that time. So, considering that nothing is certain and the differences in the amount of pension payable aren't likely to be huge since it only represents a couple of years, wouldn't there be a benefit in keeping things tidy by transferring now?

dunstonh

That old pension is index linked (or increased by some method each year). So, it retains it's real value.

Is it better to have one pension paying out £1200 a month or 4 pensions paying out a total of £1800 a month?

Its largely irrelevent anyway as it would be hard to find another scheme willing to take a transfer from a final salary occupational pension without getting an IFA to sign off on it first. This is because most final salary schemes are best left where they are. That lesson comes from the pension mis-selling days when occupational pension transfers were done willy nilly. Indeed, I recall one complaints handler saying to me that they estimate that four out of five section 32 contracts sold between 1988 and 1993 were mi-sales. (section 32 contracts were the plans that took the occupational pension transfer).

EdInvestor

tyllwyd wrote:

But in 40 years time, that possible £300-£900 per annum is (hopefully) going to be a drop in the ocean compared to the main pension.

Indeed, but when it comes to the time, you will marvel at the fact that you will get an annual index-linked pension every year which may be small, but at the same time is approximately equivalent to the total contributions you made while you worked there.:eek:

And it is going to be a pain keeping the old scheme provider informed about changes in circumstances during that time.

It's not atcually a requirement.

So, considering that nothing is certain and the differences in the amount of pension payable aren't likely to be huge since it only represents a couple of years...

Not so, they can be substantial.

..wouldn't there be a benefit in keeping things tidy by transferring now?

Not IMHO - I thought this too and attempted to do a transfer of one of my own small pensions years ago, but was required to have a transfer value analysis done, as it was just after the major misselling incident.The TVA was very convincing and the outcome since has confirmed its finding in spades.

Ian_W

And they're only giving you just over 4x the annual amount payable whereas in 40yrs time at 65yrs of age your life expectancy may well be a further 30yrs.

If inflation over the next 40yrs mirrors that of the last 40 your £635pa pension will be £8289.67pa - though it will only buy what £635 will to-day.

Funny old thing that inflation! :eek:

missile

Be sure to keep the documents safe and advise pension provider(s) of any future change of address.