Alternative to an annuity?

Linton

bumblebee5 wrote: »

Hi bigadaj
Just picking up from an earlier point you made re Defined Benefit Scheme and taking 25% tax free lump sum.


I have DB scheme (not paying in any more) due to take in 2015 and was considering taking the 25% tax free, the scheme has a transfer value of, allegedly, £133k as of today.


What are the reasons not to take the 25% please?

Quite often the lump sum is worth substantially less than the pension given up. However it depends on:
- The detailed numbers: your provider may be unusually generous
- Your specific circumstances. For example if you had a large expensive debt taking a lump sum to pay it off could be the best option.

bumblebee5

Thanks mania 112.


Separate question - have spoken with pension company and tried to find out what benefits I would potentially lose if I transfer out, but are there any questions I can ask, or paperwork to request to make sure I am looking at all the info?


I am single, no dependants hence may look at a transfer.

Linton

bumblebee5 wrote: »

Thanks mania 112.


Separate question - have spoken with pension company and tried to find out what benefits I would potentially lose if I transfer out, but are there any questions I can ask, or paperwork to request to make sure I am looking at all the info?


I am single, no dependants hence may look at a transfer.

Are you talking about your DB scheme or a separate DC one?

bumblebee5

Mania 112 - I have two.


1. Aviva Stakeholder Pension, still paying in, current fund value £43k, am in good health.


2. Aviva DB, not paying in anymore, current transfer value £131k.

kidmugsy

bumblebee5 wrote: »

1. Aviva Stakeholder Pension, still paying in, current fund value £43k, am in good health.

2. Aviva DB, not paying in anymore, current transfer value £131k.

I'm not familiar with the idea of a DB pension being with Aviva (unless you worked there) but that may just be ignorance on my part. [Did your employer's scheme buy pensions coverage from Aviva?] Anyway, if the DB pension is secure and inflation-linked, it would probably make a fine base for your retirement income, even if you are single, given that you are in good health. (It would justify your making more volatile investments in the 75% remaining of the DC fund e.g. a large proportion in equities.)

On the subject of the DB lump sum, you need to calculate the ratio of Lump Sum to corresponding amount of annual pension forgone. If the ratio is low (e.g. 12) the pension is better value. If it's above, say, 20 there's more of a case for taking the lump sum. It does depend on what you plan to do with the lump sum e.g. "bridge" to the onset of your State Retirement Pension. If compromise is possible, and if this "commutation rate" is acceptable to you, it may be best to ensure that the two lump sums give you an emergency fund + imminent expenditure fund that you are happy with, and then take the rest of the FS benefits as pension and 75% of the DC as Income Drawdown.

If the FS pension offers a truly lousy commutation rate, it may be wiser to "bridge" by borrowing (e.g. on a mortgage - best fixed up before you retire), so taking advantage of the unprecedentedly low interest rates at the moment.

N.B. It's the "commutation rate" that you need to check, and the nature of the inflation guarantee. Fully linked to RPI is gold dust; linked to CPI with a cap at 2.5% p.a. is not.

bumblebee5

kidmugsy - thanks for the long reply. Not sure I understand all that you say. Can you perhaps please explain in simpler language for me?


The Aviva pension was with NU (Pension Ombudsman involved) and is definitely Defined Benefit.

bumblebee5

Aviva DB pension is not inflation linked, appears to be a set amount per annum, will not change.

kidmugsy

bumblebee5 wrote: »

Aviva DB pension is not inflation linked, appears to be a set amount per annum, will not change.

Good grief! I find that odd: compulsory inflation protection for DB pensions came in under the Major government.

bumblebee5 wrote: »

kidmugsy - thanks for the long reply. Not sure I understand all that you say. Can you perhaps please explain in simpler language for me?

I'll try. (i) Thanks for finding out that there is no index-linking on the pension. Does that apply to both stages? In other words, does it mean that there is no inflation-linking while the pension is deferred (i.e. before you take it) and also when the pension is in payment?

(ii) The key thing to find out is the "commutation rate", that is to say the ratio of the lump sum it will pay you to the annual amount you need to give up to get that lump sum. So if taking a lump sum of, say, £30k were to reduce your annual pension by, say, £3k p.a., the commutation rate would be £30/£3 = 10, which is normally reckoned lousy. But of course "normally" assumes index-linking of the pension, which is another reason that you need to be certain that you've got the correct info on index-linking.

Given how unusual your problem is, I'd suggest you take it to an IFA.

bumblebee5

kidmugsy - Many thanks - language is easier to me to understand,. I will seek IFA advice, but am trying to understand what is going on/has happened and not to be blonde, or bury my head in the sand!


I will check again about the compulsory inflation linking for DB, but I've asked several times, always been told it is not. Could it be because the pension was with NU (as I said before scheme was with ombudsman for a variety of reasons) then to NU? I will check back through any old NU documentation that I have. If I find it was inflation linked with NU, should this have been transferred?


(i) I have requested a new projection for DB pension, yesterday, but all previous paperwork and conversation suggests the pension amount without a tax free lump stays at the same amount (£7k), therefore not inflation linked. The transfer value, without the lump sum, has however increased from £78k, in 2009 to £131k, as of yesterday. I thought I asked that question and was told the pension I would get would be maximum £7k. Is there another question I should ask?


(ii) On the figures from 2009, I have worked out the 'commutation' rate, (£22k lump sum, reduction in pension is 1.5k, therefore 22/1.5=14.66). Is 14.66, is that better or worse than your 10?


Thanks for your time!

sandsy

bumblebee, when did you leave the employer of the DB scheme?
And was the original scheme one where the benefits were bought out with NU at some point?