Final Salary Pension - inducement offered to leave

helvelyn

My husband and I both have deferred final salary pension benefits from a company we worked for a while ago. The pension was closed to new applicants in 2010. The company we worked for ceased trading late last year, the parent company is still trading. My husband is 51 and I am 54. we expect to start drawing these pensions at age 65 and 60 respectively. I only have 3 years pension rights built up (I left the company in 1990) but my husband has 20 years built up (he left in 2004), therefore his pension is the most important and so as not to confuse the issue I will mostly give details for him.

We have just received an offer from the company offering enhanced benefits if we transfer out. For my husband this amounts to a current transfer assets of £113,557 PLUS an enhancement of £62,812 PLUS a cash payment of £8,818 (this last of course to be subject to NI and income tax).

My husband has a company pension where he works now but it is not a very good performer, and he doesnt want to transfer any money into this. I suspect setting up a private pension would carry high costs and have not heard good things about most of them.

The thing is - can you ever beat a final salary pension? Would we be foolish to even consider this offer? The last forecast my husband received was in 2008 and projected a yearly pension at 65 of £10,500 per annum.

We have no money to pay a financial adviser to help with this and although the company say they have paid for an IFA for pension members to consult how do we know this advise would be in our bests interest since the company is paying the IFA (they say it is private and confidential but how do we know this to be truthful?)

Our gut instinct is to stay as we are but would appreciate any thoughts others have on this.

Also since I only had 3 years pensionable service and have no other pensions at all myself, would I be reasonable in asking them to consider paying me the pension as a lump sum when I am 55 (end of April) as my total pension rights would be under £15,000 ... this is a suggestion made by a friend of mine, I have no further knowledge on how this works.
edited to add: I have recently been diagnosed with cancer and had a major operation to remove my spleen, and although I am currently on watch and wait, there is of course a chance I may not be around to draw my pension at retirement.

robmatic

helvelyn wrote: »

Also since I only had 3 years pensionable service and have no other pensions at all myself, would I be reasonable in asking them to consider paying me the pension as a lump sum when I am 55 (end of April) as my total pension rights would be under £15,000 ... this is a suggestion made by a friend of mine, I have no further knowledge on how this works.

Your friend is talking about taking benefits as a lump sum on the grounds of triviality. Unfortunately, you can only do this between the ages of 60 and 75.

helvelyn

robmatic wrote: »

Your friend is talking about taking benefits as a lump sum on the grounds of triviality. Unfortunately, you can only do this between the ages of 60 and 75.

Thank you - that at least clears that up and we can concentrate on the main points.

Meeper

helvelyn wrote: »

We have just received an offer from the company offering enhanced benefits if we transfer out. For my husband this amounts to a current transfer assets of £113,557 PLUS an enhancement of £62,812

So, total transfer value at the moment of £176,369.

The thing is - can you ever beat a final salary pension? Would we be foolish to even consider this offer? The last forecast my husband received was in 2008 and projected a yearly pension at 65 of £10,500 per annum.

Yes you can.

Ok, let's consider. A transfer value of £176,369. If that went into a personal pension on a relatively low-ish risk profile (say 3 or 4 out of 10 to give you something to relate it to), you might expect an average annual return of approximately 3.5% after charges. That would mean that your husband's pot size would then be worth approximately £285,487 at age 65. Assuming annuity rates of around 4% at the time, that would get him a tax-free lump sum of £71,371 and a taxable income of £8,564 per annum. You haven't mentioned whether your husband's current final salary scheme has an initial tax-free lump sum along with the £10,500 income, so I'll assume not. On a like-for-like basis therefore without taking any tax-free lump sum, the £285,487 would get your husband an annual income of £11,419 which is better than the £10,500 in the projection given by the final salary scheme.

That's not quite the end of the story though, because there are some assumptions made in my example, whereas the figures from the final salary scheme will be guaranteed and likely include indexation, meaning that the benefits will go up in line with inflation year-on-year. The subsequent benefits may therefore be significantly enhanced on the final salary option. There will also doubtless be an automatic spouses's benefit on the final salary scheme, whereas this will need to be priced in to the personal pension model which will reduce the amount of income payable.

My husband has a company pension where he works now but it is not a very good performer, and he doesnt want to transfer any money into this. I suspect setting up a private pension would carry high costs and have not heard good things about most of them.

Not necessarily, and don't listen to the majority of the naysayers on this forum who bemoan advisers. Your case would absolutely 100% without doubt require an adviser, because no pensions provider will accept a transfer from a final salary scheme without analysis and recommendation from a suitable qualified pension transfer specialist (an IFA with G60 or AF3 qualification).

We have no money to pay a financial adviser to help with this and although the company say they have paid for an IFA for pension members to consult how do we know this advise would be in our bests interest since the company is paying the IFA (they say it is private and confidential but how do we know this to be truthful?)

There are many methods of paying for advice. Speak to an IFA for some options.

Our gut instinct is to stay as we are but would appreciate any thoughts others have on this.

Use that as your starting point, and if an IFA says you would be best to take the offer, make sure he explains why and that you fully understand what he is saying.

xylophone

http://www.barnett-waddingham.co.uk/news/2005/12/revaluation-for-early-leavers/ might be of interest.

Linton

Personally I suspect that Meepers initial assessment of likely pension is rather optimistic, and that accounting for inflation would have a major impact. However its all a quick estimate, none of us know your detailed circumstances, nor the details of the current scheme. Then as Meeper says there is the question of provision for yourself should your husband die first.

The factors affecting the decision are complex and a lot depends on the details and on your likely needs in retirement and attitude to risk. You and your husband need to understand the issues and be happy that this irrevocable decision was made after full consideration. This cannot be sensibly handled on a net forum.

So I would agree strongly with Meepers view that you do need to consult an IFA.

jamesd

As such offers go this looks like quite a reasonable one. The trouble is that a company only offers them when it expects to benefit. So if all prospective pensioners took them, they would on average end up worse off. But there are ways to gain from them.

1. If your husband has reason to believe that his life expectancy is lower than normal. Normal is around 88 for 65 year old men, a bit lower for 51 year olds. That's how long at least half can expect to live. In this case an enhanced annuity could pay him more or income drawdown could leave you more. But no certainty, just a possibility.

2. To match the pension deal today assuming it's inflation linked he'd need to get investment returns of 5.7% plus inflation. That's not too bad and that's taking today's value and taking that as pension income today instead of waiting for more growth. This is a big part of what makes it a fairly good deal as these go.

3. Your husband can use income drawdown to produce a pension income. On his death you would inherit 100% of this pot into a pension for yourself, so you'd get a 100% spousal pension with no reduction in his income. That's a better benefit for you than most work schemes pay. Doesn't apply if he buys annuities with all or some of the money, in that case you get whatever the annuity pays.

4. You can take the personal pension at any age from 55 up with the income depending on the value of the investments. Even if not needed for income it can be a tax advantage to start taking it early and pay the money into another pension to accumulate a second tax free lump sum and more tax relief. You wouldn't buy an annuity if you were to do this, it wouldn't make a lot of sense to do that when doing this.

So my view on this specific offer:

Provided you're comfortable with investments or willing to appoint an IFA of your own to help you to manage them, the offer looks reasonable to good and worth giving serious consideration to. It could well make you better off. But in exchange for that potential gain, you also end up with the investment risk that the company currently has.

You have no choice about using an IFA if you want to take the offer. It's an FSA requirement that you must have advice because these deals are so often bad for the prospective pensioner. Ask the company if they will pay a fixed amount to an IFA of our own instead of their IFA. If not, use their IFA and ask for the critical yield and other advice. Then, if it looks good, appoint your own IFA to get a second opinion before going ahead.

The problem with defined contribution workplace pension schemes isn't so much that they are bad as that they have much lower levels of employer contributions and most people don't know much about investing so tend not to make very good decisions. They can be an excellent deal for those who know how to use them well or who get professional advice.

helvelyn

Many thanks for all the replies so far. Your input is appreciated. I should have added that there is indeed a good widows pension for me as part of the final salary scheme.

tocsin

One other thing to consider (along with the advice already given) is the stability of the company and how well it has funded the pension scheme. There is the Pension Protection Fund as a backstop, but some (particularly those below pension age) have been disappointed.