Transferring DB pension - why wouldn't I ?

Daniel54

milford59 wrote: »

This is what I think I am going to do.... Take the 997k transfer from the DB scheme, and add it to the 803k from my DC schemes.... Then I will crystallise the whole lot by taking all my available TFLS - (I have Fixed Protection 2014, so my LTA is 1.5 mio)

So I will get 375k Tax free, and I will pay 55% tax on the other 300k. After all that is done, it will leave a balance of 1125k invested, and that can then grow as much as it likes and I don't have to worry about the LTA any more. I don't need the money for at least the next 4 years, and maybe not even then.

The 510k I have released will be invested, although I appreciate that any gains above CGT allowance will be taxable, so I will give half to my wife.

With this plan you are effectively reducing your CETV by £165k to ( in round figures) £845k.Makes the deal rather less of a no brainer ,although still possibly attractive

If you have children and IHT is an issue,I would also think seriously about the wisdom of taking the maximum PCLS in one go and dropping it into your estate unprotected

I have exceeded my fixed protection,at least on paper,so have been through some not dissimilar thought processes and have much appreciated the input of my IFA.

Currently,the key decision point in terms of LTA crystallisation is 75.For me that is at 3 governments and 14 years away,and longer for you. i'm not going to volunteer to pay tax now when I may well not need to down the line ( my DB pensions have taken up 90% of the LTA and I'll leave the SIPP (15% of LTA) until nearer 75. The SIPP is set up for phased drawdown ( each drawdown 25% tax free) so I can take income/capital from it if required and leave the balance uncrystallised.In reality I will take totally tax free drawdown from ISAs in priority to the SIPP.

It never made sense to me to look at a CETV because of the tax implications and because the DB income and other income such as the ISAs is more than enough to live off comfortably.

You might want to investigate the advantages of putting at least some of your PCLS in an offshore bond ( life wrapper so falls outside the estate,yield rolls up gross ,capital can be drawn down).Talk to your IFA as this may or may not suit you - works best for a higher rate tax payer.

milford59

Thanks very much for your thoughts Daniel54 - I don't mind paying that tax now, in the expectation that my funds will grow over the coming years, without any constraints from the LTA.... The one thing that I have been certain of since I stopped making AVC contributions about 10 years ago is that Pensions are very similar to a pyramid scheme, and the goalposts only ever move one way.

Now that I have the opportunity to get out, I am very keen to do so. A bird in the hand etc. I feel that planning is virtually impossible since no-one knows how the rules will be changed in the future.

Again, I appreciate your input.

kidmugsy

milford59 wrote: »

Sorry - I phrased that badly - I meant that the money would be in a DC scheme as opposed to a Pension that will be worthless if my wife and I die...

But if you want to make a bequest consider just buying whole-of-life insurance.

Al.

I believe there are some sound reasons why transfers from DB to DC should be at least considered, and not dismissed out of hand as they traditionally have been. As you illustrate, transfer values have risen significantly, making the maths more compelling.

Then there is flexibility. A DB arrangement pays out a guaranteed pension to you, and then 50% to a spouse or civil partner. It dies when they do. But, if you move it, a pension fund can be bequeathed.

If the pension is transferred into a DC plan, the owner can take control. They can vary the income payments they take from the pension, but there's more risk of course. So, lots of pros and cons.

None of the above is advice. My advice would be to seek advice! Everyone is different.

milford59

Just an update on my situation - after several months of looking into it and after going backwards and forwards with the Compliance department and several Committees, the advice I have received is not to take the CETV, so for the time being I will leave the DB scheme alone.

White_flag

How bizarre.... On what basis?

Brightspark87

jamesd wrote: »

With around 1.8 million in pension pots after the transfer and protected 1.5 million LTA you'll need currently a market drop of around 17.5% to take benefits from it all without exceeding the LTA. Since markets drops of 20% or more are routine and you have timing flexibility it appears reasonable not to regard the LTA as actually reducing your benefit from transferring out.

Since you're experienced investing and the return required to match benefits is only 3.3% plus inflation that seems reasonable enough.

If you don't mind living in Portugal for several years you might also benefit substantially in income tax using their scheme that uses a 0% income tax rate for foreign income. This can be used to allow withdrawing of the whole pension pot tax free using flexi-access drawdown.

On the available facts, I'd do the transfer.

Given your level of assets it seems sensible for you to start making significant use of VCT investments. Those have a wide range of risk levels, including some solely asset-backed (meaning secured on physical property) options. The 30% income tax relief is capped at your income tax in the year of purchase so to maximise benefit under this you'd need to do it while still working and paying significant income tax. In return you can get around 5-7% tax free income, equivalent to 8-10% after allowing for the 30% tax refund. You can sell and repeat the tax relief claiming after five years, though 7-8 is more likely to be sensible. Given the benefit it could also be worth doing gradual crystallising of parts of the pension to fund this.

It's also interesting that you are no longer affected in practice by the reduction of the money purchase annual allowance from £40k to £10k because you're already effectively barred from making more pension contributions by the LTA protection requirements. So no need to restrict drawing to just the tax free lump sum. Of course the income tax rate that would apply to any taxable withdrawing needs to be considered so it may still be unwise to withdraw taxable parts.

Sorry did you just suggest VCT's funded by transferring out of a DB scheme?? This is scary. VCTs are very illiquid and although may pay an 'income' mostly is for the tax play.

OP you need an Independent IFA with the qualifications to be able to advise on a possible DB TV out. They will help and produce something called TVAS report (transfer analysis basically) which will help in making this decision.

milford59

In order to buy an annuity, in 4 years time, that will match the benefits that my DB scheme will provide (including a 2/3rds widows pension) requires some ridiculously high critical yield, with the current assumptions that the IFA's have to use - as prescribed by the FCA.

I may revisit the situation in a year or two, or maybe I will just leave it alone. The advice I have been given, at the present time, is to leave it.

bigadaj

Brightspark87 wrote: »

Sorry did you just suggest VCT's funded by transferring out of a DB scheme?? This is scary. VCTs are very illiquid and although may pay an 'income' mostly is for the tax play.

OP you need an Independent IFA with the qualifications to be able to advise on a possible DB TV out. They will help and produce something called TVAS report (transfer analysis basically) which will help in making this decision.

Don't think you understand or have followed the thread as a whole. The approach is not conventional but is an option given the posters specific situation and the implication of very high marginal tax rates being applied due to the lifetime allowance being exceeded.