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Transfering DC Fund into Government pension scheme

I have just joined a government organisation that offers a DB scheme and I have the option to transfer in my existing DC fund.

Per £10k of fund I can buy additional years that translate to £394 pension per annum, a lump sum of 3x the pension and a spouses pension of just over 50%. The pension will increase in line with salary increases while I am employed and by CPI thereafter.

I have 18 years to go before I reach the schemes retirement age of 65 and expect to be working at the company for 2-5 years, possibly more. I am not expecting any significant pay rises or promotions in this time.

Does it make sense to transfer all or part of my fund to secure this pension now or will investment returns and future annutiy rates beat this.
if i had known then what i know now

Comments

  • atush
    atush Posts: 18,731 Forumite
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    Personally I would do it. If as you say, you leave in 5 years, your DB pension will remain and grow until you take it.

    Future contribs can go into another DC pension, which you could access earlier so as to delay taking the DB pension until scheme age.
  • I'd transfer too because of the security it offers. It's a good scheme and you will know exactly what you are getting at the end of it. No one can say what investment returns will be over the next 18 years, or whether annuity rates will be better than their present dire rates at the point when you want to draw the pension.
  • atush
    atush Posts: 18,731 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Do be aware there will be a time limit, generally 6-12 months after starting.
  • cash99 wrote: »
    I have just joined a government organisation that offers a DB scheme and I have the option to transfer in my existing DC fund.

    Per £10k of fund I can buy additional years that translate to £394 pension per annum, a lump sum of 3x the pension and a spouses pension of just over 50%. The pension will increase in line with salary increases while I am employed and by CPI thereafter.

    I have 18 years to go before I reach the schemes retirement age of 65 ...

    Break out the champagne and start celebrating. Sign the transfer before they change their insane minds.

    Commercial annuity (RPI index-linked, 50% spouse death bennie) rate is 2.8%. There's no lump sum included in that.

    You buy it today for 3.94%, all your investment risk disappears. This includes a commencement lump sum of three times annual pension income, so it's as if you get it at 62, not 65, in fact slightly younger since it's tax free.

    Well, it's not entirely a no-brainer. Your existing fund would need to grow at 2.3% above inflation per year above inflation for 15 years to buy the same benefit commercially. That's just below the FCA-mandated pension-projection figure of 2.5% real, but it's not much of a risk premium for the uncertainty you'd bear.

    Warmest regards,
    FA
    Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...
    THE WAY TO WEALTH, Benjamin Franklin, 1758 AD
  • hugheskevi
    hugheskevi Posts: 4,346 Forumite
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    edited 13 December 2013 pm31 8:58PM
    Well, it's not entirely a no-brainer. Your existing fund would need to grow at 2.3% above inflation per year above inflation for 15 years to buy the same benefit commercially. That's just below the FCA-mandated pension-projection figure of 2.5% real, but it's not much of a risk premium for the uncertainty you'd bear.

    What are you assuming about salary escalation pre-retirement and what allowance are you making for the RPI/CPI differential in indexation between the annuity and the DB pension?
  • FatherAbraham
    FatherAbraham Posts: 1,024 Forumite
    Part of the Furniture 500 Posts Combo Breaker
    edited 13 December 2013 pm31 9:15PM
    hugheskevi wrote: »
    What are you assuming about salary escalation pre-retirement and what allowance are you making for the RPI/CPI differential in indexation between the annuity and the DB pension?

    What difference does salary escalation make? None whatsoever, since it's a purchase of extra pension in exchange for a capital sum.

    For CPI/RPI difference, I ignored it. But you knew that, since I didn't mention it.

    I also used a commercial annuity rate at 65, when it should've been a lower one at 62, to account for the three-year lump sum (or rather, a three-and-three-quarter-year lump sum, since it's tax free).

    I also see that the spouse's benefit is actually slightly over 50%, not 50%.

    Warmest regards,
    FA
    Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...
    THE WAY TO WEALTH, Benjamin Franklin, 1758 AD
  • Thanks for all the replies, I was leaning towards transfering but concerned that I could do better by sticking with my DC scheme.

    My comparison calcualtions were based on a 3.7% annuity rate, (http://www.hl.co.uk/pensions/annuities/annuity-best-buy-rates) taking a 25% tax free lump sum, and assuming a CPI / Salary increase rate of 2.5% and a 20 year payment period. Based on this I only need to secure a return of 3% on my DC fund to get the same result.

    What have I missed?
    if i had known then what i know now
  • hugheskevi
    hugheskevi Posts: 4,346 Forumite
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    edited 14 December 2013 am31 11:34AM
    What difference does salary escalation make? None whatsoever, since it's a purchase of extra pension in exchange for a capital sum.

    Since the OP said "I can buy additional years...The pension will increase in line with salary increases while I am employed and by CPI thereafter" then salary expectations and assumptions are very relevant. The OP further says "I am not expecting any significant pay rises or promotions in this time" so based on this it may be reasonable to assume CPI revaluation throughout. Alternatively, it may also be reasonable to assume some sort of weighted average between average earnings growth and CPI.
    For CPI/RPI difference, I ignored it. But you knew that, since I didn't mention it.

    Based on the Office for Budgetary Responsibilities expectation of the gap between RPI and CPI, the annuity increasing by RPI will be about 30% higher than the DB pension increasing by CPI after 23 years (ie the expected duration of the pension based on life expectancy).

    I think that is too large a difference to be assumed away when making equivalent value calculations.
    I also used a commercial annuity rate at 65, when it should've been a lower one at 62, to account for the three-year lump sum (or rather, a three-and-three-quarter-year lump sum, since it's tax free).

    You need to also factor in the 25% tax free lump sum taken from the DC pension and how that affects the incentives.
    Thanks for all the replies, I was leaning towards transfering but concerned that I could do better by sticking with my DC scheme.

    Do you have any other DB pension? If you are expecting to have pensions totalling £20,000 or more, flexible drawdown from the DC scheme may be particularly attractive.

    A 20 year payment period is probably too conservative unless there is a reason you expect to have lower life expectancy than average. Assuming you are male aged 47, your remaining life expectancy at 65 based on latest estimates will be 23.5 years. Using 25 years would be prudent, although I cannot immediately see how this affects your calculations given the comparison is between annuity and DB pension, so payment duration in both cases should not matter, unless you are planning different indexation.

    The 3.7% annuity rate looks high, and that is because it is only 3% escalation, so doesn't provide inflation protection. Using the rates here suggests 2.9% to 3.1% would be more appropriate. You might prefer something like 3.2% to make a crude allowance for the RPI-CPI difference, depending on how you are allowing for the lump sum from the DB scheme.

    However, RPI linked annuities are very expensive in terms of expected value (about 75%), so the inflation protection is expensive. You may also wish to have more income earlier in retirement, in which case you may prefer a higher early rate with lower escalation. That would improve the calculations for the annuity value considerably, as the expected value of non-escalating annuities is about 90%. Alternatively, you may prefer capped drawdown which would improve expected return again (albeit with an increase in investment risk).

    As you don't expect salary growth and anticipate you may be an early leaver (2-5 years), you should study carefully how the final pensionable salary in the scheme is calculated. Some schemes look at best of last few years of service, inflation adjusted. That can be very valuable (maybe making a 10% difference to your pension if you left about 4 years, say) in the event your salary remains flat. I doubt it relevant in this case, but if you were a bit older and didn't expect pay increases it may be optimal to transfer in then immediately defer the pension as the CPI increases from deferment can be more valuable than the extra pension accrual if pay is frozen and the calculation of final pensionable salary doesn't look at previous years and apply an inflation adjustment.

    Do consider that public service pensions are probably at more risk of legislative change than DC pensions (eg the RPI-CPI change, sporadic mutterings from politicians about caps on amount of pension payable, etc), so whilst you are removing investment and annuity risk, you are increasing risk elsewhere. But on balance the gain from no investment and pre-retirement longevity risk would be expected to outweigh the increased risk of legislative change as long as the required rate of investment return to beat the DB pension is above the return expected from low risk investments.
  • cash99
    cash99 Posts: 274 Forumite
    Part of the Furniture 100 Posts Combo Breaker
    hugheskevi thanks for the detailed reply, and thanks for pointing out the error in my calculations.

    Using a 3% annuity rate means that my dc fund needs to grow by 1.5% (DB 2.5% , DC 4% assumed growth) more per annum to deliver the same expected value at retirement ( cash lump sum + 25 years x pension at retirement less tax) , although I appreciate one pension will increase at CPI and the other at RPI. Mortality has only a minor impact but the tax free lump sum is double the amount under the DC scheme so tax post retirement is a factor

    I don't have any other pensions, however by the time I leave the DB scheme I may have secured a £20k pension and could still have 10-15 years to grow another DC pot.

    On balance I think transfering to the DB scheme takes a significant risk out of a large chunk of my retirement income and there is a potential opportunity to increase my pension significantly if I do get a pay rise above the annual settlement.
    if i had known then what i know now
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