deferred Final Salary Vs Private Pension - with a twist

y002cjw

Well I think it is a twist anyway.

I am 50. I was made redundant by RBS 9 years ago with a deferred pension with approx 23 years service out of a possible 40. My Deferred pension at leaving was £14k

The most recent statement I can lay my hands on is from Aug 2010 where my benefits are..

Estimated Full Pension at age 65 - £29k a year

or

Lump sum £120k, reduced pension £18k a year

The cash transfer value is £290k

I am wondering whether or not to transfer out the cash value and invest it separately. The reason is the annual increase is fixed at 2.75% p.a. If I were to invest elsewhere I could reasonably expect double that over the next 10 years.

Based on the above figures the £290k pot would grow to £435k at 2.75% p.a. growth by age 65 but would grow to £470k at 5% p.a. growth by age 60.

Am I over simplifying my calculations or am i on the right track?
Am I omitting something obvious?

My normal retirement age in this scheme is 65 - this apparently cannot be changed even though I elected this at approximately age 22 without any financial advice whatsoever.

I also have the option of taking my pension early with benefits reduced by 4% p.a. So in the above example my Estimated Full pension would become approx £17k if I took it at Age 55.

Any advice gratefully received.

Proxy

You'd need signoff from an IFA to agree that.

But why do you know you can reasonably double that over ten years? Any kind of potential return of magnitude has a lot of risk attached.

jamesd

Lets say it grew to £470k. You could with current annuity rates buy an annuity paying around £14,000 a year and increasing with RPI with that money.

The RBS pension is a great deal compared to moving the money out and you're on a completely wrong track if you were to actually do it.

What that RBS pension does when in payment is qualify you for Flexible Drawdown, where you can take out all of the money in a pension pot as fast as you like. That helps to make other pension contributions an even better deal than they usually are. The qualification is £20,000 of guaranteed income, including work pensions, the state pensions and annuities. Exploiting this is likely to be a good way to go.

bilbo51

^^^^^

My thoughts exactly.

GhIFA

Very roughly speaking, to achieve the same benefits by taking the transfer and managing yourself would require the fund to grow in excess of three times (probably closer to 4) from it's current transfer value (based on the full income with no lump sum). To do this you are taking on all of the risk. It's not just about the annual income, but the inflation proofing, and the death benefits that the RBS pension also gives you.

If you want to take the pension earlier than 65, this would in all likelihood still be more valuable through the RBS pension with penalty. This is all based on the assumption that you are in good health. But even so, I can see very little reason why transferring these benefits out would be in any way a good idea.

kidmugsy

y002cjw wrote: »

Estimated Full Pension at age 65 - £29k a year

The cash transfer value is £290k

the annual increase is fixed at 2.75% p.a.

i) Based on the transfer value, you can already expect an annuity of 10% p.a. at age 65. Break out the champers!

ii) Moreover, the pension will increase by 2.75% between now and then, or do you mean that once it's in payment it'll increase at that rate? It's not a bad guarantee either way.

iii) Furthermore, if you decide to draw it early they'll penalise you by only 4% for each year: some schemes would charge 6%.

Why on earth would you want to leave this rather good scheme and assume all the risk yourself?

atush

What a fantastic pension. No wonder the bank went down paying all that out.

Don't transfer it (even if you could find an IFA stupid enough to sign off on it).

In the meantime, whack as much into another pension as poss as you will qualify for flexible DD.

benalder284

Have to agree with the others - why give up a guaranteed income at this stage plus the degree of risk you would have to take on to get an equivalent through your own investment; the maths just emphasises why employers were keen to get final salary pension scheme liabilities semi-capped by closing down such schemes.

sandsy

I think you're on the wrong track.

It is the £14k pension at date of leaving that is increasing by 2.75% for each of the 24 years between the date of leaving and retirement, ie. £14k*1.0275^24=£29k.

Effectively, what that means is that the final salary pension scheme has £290k put aside now to pay you out £29k for life when you reach 65yo (which I'm guessing will increase each year in line with inflation up to 5% plus, I'm guessing, a spouse's benefit).

By the time you get to age 65, the pension scheme actuaries are probably estimating that the figure of £290k will have increased to about £800k if the funds earn 7%pa over the next 15 years, ie. £290k*1.07^15=£800k.

So, if you transfer out, you need to be able to average 7% per annum after charges to be able to match what the scheme is offering you.

The chances of finding any pension transfer specialist to sign that off should be remote because, quite simply, you'd be mad to give up a guaranteed benefit that good for an uncertain benefit which is so dependent on high returns year after year after year.

y002cjw

Wow - I thought no one had replied - I didn't get any email notifications.

The £29k projected includes projected 2.75% p.a. increases.

Food for thought - I will mull over and come back to you.

One thing I am unsure about is Spouses benefits - must look into that.

Stupendous replies - thank you all.