Is this wise? DB scheme to DC Scheme

wessy53

In January 2014 our DB scheme was closed to future accrual.
So i now have a deferred pension.

In its place We were enrolled into a Standard life DC scheme we pay 5% in to the pot, the company pays 15%. So although it is not as good as the DB scheme it is quite generous.

However i have 40 years service, i am 61 and at retirement in 2018 could expect from my DB scheme 23k pension, or reduced pension and lump sum option. Plus around 30k will be in my DC scheme by 2018.

So it could be worse.

My dilemma is that several of my colleagues are transferring out of the DB scheme with pots of around 500k, and report that the lump sum option is way better than our DB scheme.

Many have left at 56 years old, despite the annual loss incurred for retiring at around 8% per year.

They say that the benefits are a no brainer ?
Surely there must be some risk involved? are they failing to mention the downsides?

Like possible hidden charges, or annuities that do not increase year on year.

My instinct is to play safe take a 50k lump sum and a guaranteed pension that rises year on year plus my 30k DC scheme. Plus i would be very worried about picking the wrong provider.

Am i wrong to be cautious?

kidmugsy

If you (and your spouse?) are in decent health, and in particular are from long lived families, it's pretty likely that a DB pension is the better bet. It might even be that it's a better bet not to take the lump sum from the DB scheme, just taking a bigger pension instead. Are there any worries about the financial health of the DB scheme, or are your pals just keen to lay hands on the 25% tax-free?

How good is the inflation-protection on the DB scheme? For instance, does it offer unlimited linking to the RPI measure of inflation, or is it linked to CPI, or is it capped at, say, 5% p.a. or 2.5% p.a.?

It would be pretty unusual circumstances to justify "despite the annual loss incurred for retiring at around 8% per year". Or put otherwise, that's probably bonkers. Are you quite sure it's 8%? Golly!

Let's try this. Suppose someone gets £500k and withdraws the £125k tax-free. I shall assume that they plan to spend that (else why the rush?). So they are left with £375k. If they invest it and draw, say, 3%p.a. that will give them an income of £11250 p.a. They are taking the gamble that there won't be a collapse in the value of their investments: if there is a collapse early in their retirement they could be in real trouble. But at 3%p.a. they could hope not to deplete their capital in the face of minor ups and downs in the market. If they wanted to match your £23k, they'd have to withdraw about 6%p.a. which would be in danger of depleting their pot. Of course, nobody lives for ever, but do they really know the life expectancy of healthy individuals aged about 60? (Answer: not a long way short of 30 years). Your income, however, is index-linked, and theirs is not. Yours brings no management hassles with it; theirs could have them fretting the whole time. Yours will carry on even as your ability to cope with financial affairs declines later in life; theirs leaves them with lots of hassle when their brains may not be up to it.

They are probably leaving themselves horribly vulnerable to some future burst of inflation. Of course that might never happen. But it might. If you have no spouse, then the transfer might make more sense, since the DB will provide a widow's pension that's of no use to you.


If someone had a lot of expensive debt to clear, or had some other compelling use for the £125k, fair enough. But they are (probably) going to pay heavily for it later on. One other point: what are the senior company executives doing? If they are bolting for the door too, that would get me worried about the security of the scheme. (Are they even in the same scheme as you?) Or are they applauding their success at getting large pension liabilities off the firm's books?


In your shoes I might pay to discuss it with an IFA, preferably not one provided by your employer or your union.

wessy53

Thanks for such a comprehensive reply, i am married we are both in good health with mothers still alive 80+. with a 50% widows pension.

The DC scheme also as a death in service benefit at 7 x my salary.

I have no pressing debt, not sure about the financial situation of those leaving the scheme, its a Global company with a good track record in terms of reducing the schemes deficit.

We do have have a senior management section, those leaving presently are in my scheme. I take your point though in terms of watching how it develops. And yes it is about reducing the risk for the company.

I asked our pension manager and she quoted me 8% per annum to leave early, also the ratio used to calculate the lump sum offer is factored on the low side too keep funds in the scheme.

I can't recall if it is fixed at 3% or index linked will look this up.

kidmugsy

At 8% actuarial reduction I wouldn't touch it. One policy that might be attractive (unless you've come to hate your job) might be to find out the latest permitted date for transferring out. (For my scheme it was one year before my official retirement date.) Then a couple of months before that date reconsider. Unless, of course, the transfer value were to decrease as you approach retirement age. That is unpredictable: who knows what the trustees might do?

jamesd

Your instinct is probably right but it does depend on what is being offered. An 8% per year actuarial decrease all the way to 56 is pretty nasty. It is possible for transferring out to be a good choice, there's just no way to know without having real numbers.

Income drawdown and investments are what might make it attractive. It's a pretty commonly used assumption that 4% of an initial drawdown pot increasing with inflation can be taken as income without undue chance of suffering a seriously reduced income later. A half million Pound pot could using that assumption pay £20,000 a year. With the potential to have a significant reduction if there is a long term market drop, particularly just after retiring - a Great Depression just after retiring case. Such drawdown inherently provides 100% spousal pension, lots of capital value flexibility and the potential for a substantial inheritance, as well as the chance of significantly higher income than £20k if markets do well rather than badly.