Reduced Pension Transfer Value?

mgdavid

DB pensions are valuable - very valuable. And don't forget that if severely underfunded and the tap is turned off(the co. goes bust etc) then the state PPF will take over and guarantee 85% of your benefits. It's as cast iron as that.
What are you planning to do with the (example) £100k lumpsum? If you don't need it, regard that as part of the inheritance - but pass it over when available and your children are young enough to enjoy it / make best use of it.

LeCoop

Daniel54, I say DB is only 50% indexed linked because the scheme has passed thru a lot of hands and undergone many changes, the last of which was that Final Salary became money purchase for last 5yrs before deferment. So, for reasons beyond me that an IFA would hopefully understand, my former employer is not obliged to index link all of my pot; my annual statement shows it all in detail. Also in writing is that my spouse will get 50% of my pension if she survives me.
DaveMcG, hope you are correct; kidmugsy says otherwise - still unsure.
Dunstonh, comments much appreciated; explains why transferring a smaller Aegon pension from annuity into drawdown is a small one-off charge and transferring out a DB will cost £5k or more for stating the obvious.
Overall, I have been surprised at the defence of my DB scheme and been given much food for thought.
Notwithstanding the important guarantee of income for life from the DB scheme, my own thoughts were as follows;
If I compare what I could transfer out of the scheme right now and invested somewhere where capital was protected but growth was minimal, I would still be around 76 before I got the same amount out of my DB pension ...which, surprise-surprise, also happens to be the age at which an actuary would expect me to croak.
If I live longer than this, then DB would be the obvious choice but if not, my family will benefit from my transferring out.
Is my thinking flawed?
n.b. Just to add, I am fortunate enough that I do not anticipate ever being stuck for money, so any decision about my pension is less about financial need and more about what will give me maximum return.

DaveMcG

I would still be around 76 before I got the same amount out of my DB pension ...which, surprise-surprise, also happens to be the age at which an actuary would expect me to croak.

hmmm don't think so

Here are some fairly recent life tables

http://howlongwillmyfundlast.co.uk/life_tables.html

You would be expected to live more than 22 years at age 60 and these tables are based on all lives - those with pensions are expected to live longer.

LeCoop

I'll be chuffed if I live to 82 but 76 is far more accurate for my lifestyle & family medical history.

kidmugsy

mgdavid wrote: »

don't forget that if severely underfunded and the tap is turned off(the co. goes bust etc) then the state PPF will take over and guarantee 85% of your benefits. It's as cast iron as that.

I must enter my usual objections. (i) If my major final salary scheme went bust, the PPF would replace my 100% CPI inflation protection by protection capped at 2.5%p.a., and applied to only one quarter of my pension. This alone would swipe away something greater than 30% of the value, judging by a quick look comparing commercial level annuities with index-linked annuities. (ii) The PPF is not a state scheme, except in the sense that legislation set it up. It does not have a Treasury guarantee, and it is funded by a levy on DB schemes, not by the taxpayer. In other words, it could go bust itself.

I don't deny that it's a good deal better than nothing; as a response to small schemes failing, or being looted a la Robert Maxwell, it's a useful creation. But could it really cope with even one of the big schemes failing? I hope we don't find out. If we did find out, I suspect that the government of the day would "rescue" it, on terms that implied further cuts for the pensioners.

Daniel54

LeCoop wrote: »

Daniel54, I say DB is only 50% indexed linked because the scheme has passed thru a lot of hands and undergone many changes, the last of which was that Final Salary became money purchase for last 5yrs before deferment. So, for reasons beyond me that an IFA would hopefully understand, my former employer is not obliged to index link all of my pot; my annual statement shows it all in detail. Also in writing is that my spouse will get 50% of my pension if she survives me.

It would seem that you have two separate pensions -one DB and one money purchase.The employer would have no obligation to guarantee the returns from the money purchase/DC scheme .Maybe a trip to an IFA would be a good idea,in the absence of any more details here.

I initially made the same assumption as you made in your example,and found it to be incorrect.Your pension is the annual benefit and the spouses pension is 50% so in your example that would be £10k.If you decide to commute part of your pension by taking a lump sum,that does not reduce the spouses pension by 25% - it remains at £10k

That is how it works for both my DB pensions and that is why I suggested you check with your scheme as you might well be making an incorrect assumption and thereby further undervaluing the benefits of the DB pension.

As you assume you will die first,you really do need to consider what will provide the best "return" for your wife in your absence and I would find it hard to look past a guaranteed inflation linked income for her.

mgdavid

kidmugsy wrote: »

........ (ii) The PPF is not a state scheme, except in the sense that legislation set it up..... .

My reading of
https://www.gov.uk/government/organisations/pension-protection-fund
says 'PPF is a public corporation of the Department for Work and Pensions'
I'm not going to split hairs or go all pedantic over this, and I'm not sure exactly what a 'public corporation of DWP' is legally but it's close enough to state for me.
The OP is 60 next year so wouldn't suffer much from the age cap; I don't understand why only 25% of your DB pension would be covered, and therefore can't say if this would apply to the OP.
In general PPF pays 90% (not 85% as I originally said) with a cap of just under £33k - which I think would cover the vast majority of DB retirees.

kidmugsy

mgdavid wrote: »

My reading of
https://www.gov.uk/government/organisations/pension-protection-fund
says 'PPF is a public corporation of the Department for Work and Pensions'
I'm not going to split hairs or go all pedantic over this, and I'm not sure exactly what a 'public corporation of DWP' is legally but it's close enough to state for me.

Fair enough.

mgdavid wrote: »

...I don't understand why only 25% of your DB pension would be covered, and therefore can't say if this would apply to the OP.

WKPD explains: "It is worth noting that the loss compared to what a pensioner would have received may be considerable. Easily as much as 50% over his predicated average life if most pension years were earned before 1997." [That's me.] "As an example, a 50 year old with a fully RPI protected pension before entering PPF of £4000 in today's money will lose over £100,000 over his expected life-span when that pension is converted into a PPF pension, assuming 2.5% CPI inflation. Considerably more to be lost if inflation goes over 5%."

See: if there's any spell of brisk inflation I (and presumably many others) would lose heavily. I would get protection capped at 2.5% CPI on one quarter of my final salary pension, rather than uncapped on all. Potentially ruinous.

"Furthermore, if at some point in the future the PPF has insufficient funds to pay benefits then the level of benefits or increases can be restricted." Yep: if a big enough scheme gets in trouble so that the PPF can't cope, parliament has to act. There is no Treasury guarantee: you are punting on whether parliament feels like raising taxes to bail out pensioners.

mgdavid

thanks; I'd seen the pre-1997 reference but didn't realise it applied to you.

kidmugsy

mgdavid wrote: »

thanks; I'd seen the pre-1997 reference but didn't realise it applied to you.

Do you happen to know how the PPF deals with widows' pensions?