Sipp

MRMX9

Fleming wrote: »

I approached him about investing the lump sum. I hadn't heard about SIPP before the initial meeting. Today met with another IFA and he is advising not to get a SIPP and I will now stay in the university pension scheme. I actually feel much better about this as I had a bad feeling about the original financial advisor, especially when he quoted the 13k to set it up.

Very sensible.

Why on earth would you transfer out of a final salary defined benefit scheme to a SIPP when you are so close to retirement and suffer from a debilitating condition like diabetes?

Your pension pot would guarantee you – assuming no lump sum - £17,000 a year for the rest of your life rising annually by CPI in the university scheme potentially. Your wife would also get survivor benefits for the rest of her life if you die before her - plus there are other potential ill health benefits/life insurance and the ability potentially to go part time as your near retirement while drawing down part of your pension.

Your SIPP funds would be subject to the vagaries of the stock market and annuity rates/other factors.

I would really like to know on what basis the original IFA suggested this would be a good idea?

Thrugelmir

MRMX9 wrote: »

I would really like to know on what basis the original IFA suggested this would be a good idea?

The fee. It's what makes people lack trust in "professional" people.

atush

your 330K pot would have only bought a pension of abt 12K indexed. It may have gone higher with an enhanced annuity but I am not sure it would have gotten to 17K. And that is with no TFLS. With a tax free sum, you'd be looking at maybe 9K pa.

You only take this type of deal if you can be sure you can beat an enhanced annuity, indexed with spousal pension of 50%.

Good call in going elsewhere.

Fleming

The basis for the original advice was the fact that I have type 1 diabetes. The first chap said that the SIPP would give a better return than the pension but if it was around 12k that is not the case. I am very grateful to this forum and all the advice in the replies. The new IFA also advised to take the max lump sum with the lower pension as the lump sum is tax free and this can be invested. He spoke about using all the ISA allowances as well and we meet again next week.

kidmugsy

What advice has your new iFA given you about the size of tax-free lump sum to take?

atush

He said Max, which normally I would disagree with. As commuting pension to LS usually has a dire rate.

But as a hedge on LE in case he has a health crisis early with his type 1 is an Ok suggestion i guess. much depends on his scheme rules abt the spousal pension and how that is affected?

Fleming

He advised 55k lump sum there is about 4 different options and he has taken the paperwork away with him and will get back. My wife would get 7 k

mania112

I wouldn't be able to sleep charging half what the original adviser quoted.

Not least of all because the recommendation would have been wrong.

jamesd

USS is interesting in that the forward and reverse commutation rates are the same. Those depend on age and at 60 for a male it's 19.622:1. At 55 22.032, at 65 17.058. This means that at 60 you'd get £19.622 of lump sum per Pound of inflation-linked income you give up or get £1 of inflation-linked income for every £19.622 of normal lump sum you give up.

I think that the new IFA is being sensible in advising you to take the maximum normal tax free lump sum and not to buy further lump sum that would be taxable. It's a good blend of taxable pension with untaxed lump sum that can be moved over time into an ISA to produce ongoing growth and/or income as well as being potentially available for inheritance or care needs.

While the age 60 commutation rate is £19.622:1 because the normal lump sum is tax free and can be moved into an ISA to generate ongoing tax free income the effective net cost for a basic rate tax payer is really more like £19.622 * 0.80, so £15.698. To get that lower income would require a 6.37% income rate increasing with inflation, if capital drawing is ignored, so it's not really likely to be achievable in normal circumstances. However there is value in having the lump sum and also in allowing for your life expectancy being lower than normal. Also, it's not fair to ignore capital drawing because buying more USS income would have spent the capital, not left it alone, if you'd bought more pension. Allowing for a life expectancy of say 20 years you'd be able to draw at 1.38 times the usual rate to be left with nothing at death. That means that the 6.37% target would drop to 4.616% and that isn't an unreasonable target. For 30 years it's 1.2 times and the required income would drop to 637% / 1.2 = 5.31%. A touch high but not unreasonably so given the potential capital availability desire.

The 1.2 and 1.38 times factors don't change so you could plug in the commutation factor for your actual age times 0.88 and use 1/that to get the equivalent income then divide by the two factors to get the investment target. Given the historic 5% or so plus inflation that's the better/worse point. But that ignores the value of having the capital and that value isn't really ignorable.

I've also just used drawdown for comparison. I could and perhaps the IFA will get an initial check of annuity purchase rates for enhanced annuities. However given your objective of preserving some capital I'd also be happy if that wasn't done and it'd cost the IFA time and hence you money, in some direct or indirect way, so OK not to do it.

It's also worth knowing that USS reverse commutation doesn't increase the amount that USS will pay to the spouse on death. Which also means that it's not really true that forward and reverse commutation is the same - reverse gets you less benefit than forward buys you unless you're single. What that means is that the comparable enhanced annuity wouldn't be the 50% spousal benefits one that atush mentioned, just single life with no spousal benefit.

Overall I'm happy with what the new IFA is doing. Seems to be doing sensible things and I have no issues at all with what you've described so far. A fruitful bit of shopping around.

Thrugelmir wrote: »

The fee. It's what makes people lack trust in "professional" people.

Sometimes an IFA will prefer to decline business by quoting a fee that the client won't accept. Other times some may take the view that the client really wants something even if it's a bad idea and quote the fee they would want for doing that, allowing for their risks of doing it anyway. The ones who post here are more likely just to tell the potential client "no" with a brief reason but there's variety in approach in all forms of business. It's also fair to the first IFA to wonder what they thought potential life expectancy would be since it wasn't that long ago that type 1 diabetic would have a far shorter potential lf expectancy than today. Since life expectancy is pretty important that alone could have explained an IFA initially thinking it made sense. Though enhanced annuity quotes should have disabused the IFA of that notion pretty quickly when they came back lower than anticipated based on more realistic understanding of life expectancy these days. Though I don't really think that the first IFA would have got enhanced annuity quotes anyway.

bigadaj

mania112 wrote: »

I wouldn't be able to sleep charging half what the original adviser quoted.

Not least of all because the recommendation would have been wrong.

What a unique ifa!