Do I transfer out of a DB scheme???

232607

Hopefully some of you knowledgeable people may be able to help.

My company shut the DB 1 year ago & I’m looking at the merits of taking the DB out to an investment environment. I appreciate the generic advice for this is NO & I’d need IFA “sign off” but I’ve asked & received a transfer value & now want to do a more “in depth” analysis that will lead me to the critical yield needed in an investment environment to match the DB when I’m 65.

I’m 48 Y/O this month so a far as the calcs are concerned, I’m looking at a 17 year period albeit I’m likely to go at 60 or sooner.
When the DB was shut I received the following statement of my pension. It was split in to 2 sections:-

Part “A” = £7588. This was relative to the number of years I had in prior to 2002 and had already been calculated up to when I’m 65 using 5% increases (scheme rules).

Part “B” = £7464. This hadn’t been calculated up and is subject the higher of RPI or my salary increases. For the purpose of my calcs I’ve assumed RPI of 2% but salary increases beating this by 1% which is historically typical, therefore 3%.

So if we look at my pension at 65 I’ve worked out Part “A” £7588 + Part “B” factored up for 18 years @ 3% £12707 = £20295.

Conversely if I factor down for today’s date to compare against the transfer value I get Part “A” factored down by 17 years @ 5% £3311 + Part “B” factored up by 1 year @ 3% £7688 = £10999.

I’ve been given a transfer value of £283,399 and this is valid for 3 months.

A little bit about if I kept in DB and took the pension:-
It has a minimum pay out period of 5 years.
It has a 50% widows pension albeit I’m not married so as it stands this would be lost.
It increases by CPI up to a maximum of 3%.

So considering all this, is anyone able to work out what the critical yield may be?

PS – This isn’t my only pension:-
I have a section 32 pension that pays approx £5000 when I’m 65.
I would get the new top level state pension @ 67.
I’m projecting to build up a pot of approx £350,000 by the time I’m 60 in the new DC scheme based on heavy contributions over the next 12 years & stock market returns of 4%.

Thanks in advance, I appreciate this is a lot of information.

warwicktiger

In short no.
Why would you want to transfer out, and lose guaranteed benefits?

232607

warwicktiger wrote: »

In short no.
Why would you want to transfer out, and lose guaranteed benefits?

I'm not married (widows pension wasted) but do have a daughter & Grand kids & I don't fancy losing all the legacy and not leaving anything to them.
Also I think with gilts at current "rock bottoms" now may be a good time, IE that transfer value would lower as these increased.

kidmugsy

232607 wrote: »

I... do have a daughter & Grand kids & I don't fancy losing all the legacy and not leaving anything to them.
Also I think with gilts at current "rock bottoms" now may be a good time, IE that transfer value would lower as these increased.

An answer to your first point is that perhaps it would be wiser to provide an inheritance by taking out a Whole-of-life insurance policy, which would be put in trust for them so it would not be exposed to IHT. You'd want one with a level monthly subscription: it's no good if the provider has the right to jack up the cost as you age.

Your second point sounds good, but people have been predicting an imminent rise in interest rates for five years now, and it hasn't happened. Conceivably we are now Japan, and are in for a generation of low interest rates and lousy returns on assets. Nobody knows.

How about keeping the DB schemes as comparatively low-risk investments, balancing the DC scheme as high risk and also as potentially a provider of legacies? It's a natural diversification of risks.

How big would the actuarial reduction be if you drew the DB pensions at 60?

mgdavid

Diversification is key in so many areas. You have an S32 (which may well have a guaranteed annuity rate attached to it), you have the DB pensions (solid, predictable, low risk) and you plan to build a DC pot. Sounds a very good and sensible mix to me.

232607

kidmugsy wrote: »

An answer to your first point is that perhaps it would be wiser to provide an inheritance by taking out a Whole-of-life insurance policy, which would be put in trust for them so it would not be exposed to IHT. You'd want one with a level monthly subscription: it's no good if the provider has the right to jack up the cost as you age.

Your second point sounds good, but people have been predicting an imminent rise in interest rates for five years now, and it hasn't happened. Conceivably we are now Japan, and are in for a generation of low interest rates and lousy returns on assets. Nobody knows.
Appreciate we could be Japan but without knowing the critical yield I can't make any judgement.

How about keeping the DB schemes as comparatively low-risk investments, balancing the DC scheme as high risk and also as potentially a provider of legacies? It's a natural diversification of risks.
Yep I thought about that but the DC is whats going to let me retire early hence a fair chunk of that will be gone when the others kick in.

How big would the actuarial reduction be if you drew the DB pensions at 60?

5% per year.

232607

mgdavid wrote: »

Diversification is key in so many areas. You have an S32 (which may well have a guaranteed annuity rate attached to it), you have the DB pensions (solid, predictable, low risk) and you plan to build a DC pot. Sounds a very good and sensible mix to me.

The S32 does have GAR attached and that's what gets it to the £5000.
I understand it's all a sensible mix but if the critical yield is very low on moving the DB I may be temoted.
Sort of a glass halve full or halve empty decision.