Taking DB Pension which option is best

boxedin

am looking at taking my pension at 61 having deferred for over 4 years because of early reduction factor. I have avcs and a DB pension and a CETV value. I do not benefit from some of the scheme benefits (not married no kids)


I am concerned about the following

DB Pension
If I take the pension it is effectively a yield on the CETV of 3.6% if you exclude the schemes benefits. At that rate it will be 27 years before the CETV is exhausted (ignoring any money that the CETV may make in the interim). I am assuming this is because of the benefits spouse pension, childrens pension, and rpi to 5% .( note : I can't see an age of spouse limit in the scheme booklet so need to marry a much younger woman to get maximum advantage.)


If I were to buy a like for like annuity or as near as dammit it would still be the best option






However, if I were to buy a flat rate annuity the best figure (AVIVA) was 31% more than the DB pension and it would take 15 years for the DB pension to overtake it based on 2.5% per annum uplift with approximately £68k more being paid by the annuity. It would take 19 years to deplete the CETV value as opposed to 27 years for the DB pension and I would have received 68k more in pension in the 15 year period.


I wondered if anyone had actually gone down the route of buying an annuity with their CETV for a DB scheme and what did they see as the advantages/disadvantages


25% Lump Sum
Current convention seems to be that it is best to take the 25% tax free lump sum however when I have looked at it if I take the Lump Sum it effectively is 5.5% yield pre tax for the income I will sacrifice, less benefits pro rata. The Lump sum figure would run out in 18yrs. This is because the Lump sum quoted is not 25% of the CETV value its actually about 17.78% Therefore it makes sense to me to take the full pension (as I don't need the capital). Is there anything I am missing here


The AVC's quote is more in line with the annuity figures and so I can take these as non rpi protected and no spouse pension this would help get my pension up to the figure I was hoping for so I would take these as part of the DB scheme. (unless I went down the annuity route in which case I would take them as annuity




Any views would be appreciated
Many Thanks

Linton

Some views....

1) In calculating the 27 year payback time for the DB pension you seem to be ignoring inflation, inflation matching being one of the key points of a DB pension. Assuming 2.5% inflation would bring the 27 years down to 22, which is perhaps 3-4 years less than average life expectancy for a male aged 61.

2) People here say that normally it is not a good idea to take the tax free lump sum with a DB pension, but is with a DC pension. In your calculations you seem to have ignored the fact that the TFLS is tax free whereas annuity payments arent. The other point is that having taken the TFLS you can immediately invest it in an ISA gaining you further tax free benefit. So you dont lose the 5.5% yield, or all of it anyway.

kidmugsy

Your best choice is perhaps either

(i) DB pension without lump sum, or
(ii) Transfer, take max tax-free lump sum, and buy annuity.

If the annuity starts off bigger than the DB pension would have been - which is your intention - you could always contribute £2880 p.a. to a personal pension of some sort (£3600 grossed up) as a way of saving to get compensation for inflation later in life.

xylophone

Don't forget that if you are transferring out of a DB scheme, any receiving scheme is almost certainly going to require you to have taken advice from an IFA qualified in pension transfers - if you delay until after 6 April, almost certainly will be certainly, and if the scheme happens to be an unfunded public service DB pension, a transfer out is not likely to be possible at all.

https://forums.moneysavingexpert.com/discussion/comment/67633211#Comment_67633211 see post 5

Linton

Another comment....
From what you say I take it that the Transfer Value is 27 times the initial annual pension. If that is the case, the TV is unusually generous and so your choice is not the complete no-brainer that most such queries are. For public sector pensions, which I guess yours isnt, the TVs are less than 20X the annual payment sometimes as low if I remember correctly as 12X.

boxedin

Thanks for the replies re the comments

Re Lintons points
I am not in a public sector scheme I am in a WaterPension Scheme

Yes the transfer value did take me by surprise I was expecting it to be over £100k less so it has made me think

I am assuming it will cost me to get an IFA to advise. One has just rung from Hargreaves Lansdown I was playing around on their annuity search engine last night. They are saying the best they are getting is Churchills which is about £1,500 lower income per annum so that dilutes the case. Aviva were the best on a different annuity search engine but that may be an old/incorrect figure when firmed up. If the Aviva figure isn't available it tips the balance back towards taking the Full pension out of the DB scheme for me

Thanks for the point about TFLS being better for an annuity however the lump sum would be larger than the 15k isa allowance in my case, so I would need to find another home for the difference

The CGT allowance being a useful £11,880 for 2015/2016 and tax losses being able to be offset against gains is something I should think about using as well

Kidmugsy
Thanks for the useful advice on taking the lump sum I hadn't thought of that and contributing 2880 to my sipp which I might do anyway whichever route I take if I don't use it my beneficiaries could get the benefit as part of my estate

If I don't take a tax free lump sum then I can't fall foul of the pension recycling rule. I am a bit hazy about under what circumstances the recycling rule applies so need to read up

I have also tried to protect my income by having national savings index linked certs and rolling them over (while ever they last) to the value of over my expected salary if I don't touch them until I need them then I thought the compound increases would be available to use at a later date

I would need to review that if took the full DB pension. It might make sense to switch out, at least on maturity and put into other options such as direct orb corporate bond investments as some yield about 5.5% at the moment a lot more than rpi although they are taxable of course whereas the index linked aren't

Thanks all for all your advice it was very useful

kidmugsy

boxedin wrote: »

contributing 2880 to my sipp which I might do anyway whichever route I take if I don't use it my beneficiaries could get the benefit as part of my estate

Usually money still in pension funds isn't part of your estate, which is why it's reasonably easy for the government to introduce the new rule that make "inheriting" a pension so advantageous from the point of view of Inheritance Tax.

brewerdave

That multiplier of 27 seems remarkably high -have you asked for a recheck ? I ask because I didn't believe the figures I was first given -rightly so, as it happens - the initial pension seemed very low for the Transfer value & when recalculated the ratio of Transfer value to pension was nearer 20 !!
As to lump sum -I was advised that if your commutation rate is ~ 20 or more then taking the lump sum is a reasonably good deal - mine was 19.9 so I took the cash to invest in other areas.

kidmugsy

brewerdave wrote: »

As to lump sum -I was advised that if your commutation rate is ~ 20 or more then taking the lump sum is a reasonably good deal - mine was 19.9 so I took the cash to invest in other areas.

That's what I did too: the investment "in other areas" we found was deferral of our State Retirement Pensions. That has worked out well so far. The OP is too young for that tactic to be particularly attractive.

boxedin

Kidmugsy


Yes I understand that my db scheme nor any annuity will be part of my estate unless, in the case of the DB scheme, I were to transfer the CETV pot to my SIPP and go into income drawdown then the options for me seem to be at the moment




Pre April 2015
Beneficiary/s can take a lump sum less 55% (death tax) but that may be subject to IHT dependant on size of estate currently £325/650k single/couple
Beneficiary/s can continue to drawdown income and pay tax on the “pension” at his/her rate of income tax (avoiding any IHT)
Spouse or Dependant can use the fund value to buy an annuity (avoiding any IHT) but pay income tax on the pension


Post April Expected legislation change


Die before 75
Beneficiary/s can take the pension value as a lumps sum without 55%death tax but subject to IHT
Beneficiary can take the drawndown income (TAX FREE) no IHT
Spouse or Dependant can convert their part of the sipp into annuity no IHT but they pay income tax at the rate that applies to them


Die after 75
Beneficiary can take some/ all as lump sum subject to tax at highest marginal rate currently upto 45%
Beneficiary can take the fund as income subject to their income tax rate
Spouse or Dependant can convert their part of the sipp into annuity no IHT but their income tax rate applies




As far as I can see in terms of Wills it means in my case that


Beneficiarys probably better off being given income drawdown especially if it turns out to be tax free income. (I am assuming that the beneficiaries can go into drawdown if they are under 55 need to check this )


Someone needs to manage the SIPP after my death


Assuming that IHT applies to my estate any lump sum awarded out of the SIPP to a beneficiary needs to be minus the IHT otherwise the other beneficiaries might be paying part of the tax


Of course this is not legislation yet and may change given the politics so it makes planning difficult




Thanks for the comment again Kidmugsy