Small Final Salary - Transfer

Humanista

I have a small deferred final salary pension that I stopped contributing towards in 2000, but I'm thinking of transferring it to my UK or Canadian private pension. I'm 44 and don't plan on drawing any pension until I'm 65 all being well.

According to the Actuary, the FS pension will increase at 5% per annum or in line with inflation if lower. They estimated (assuming 2% pa) it will pay 2,412.84 on retirement, but they didn't give a transfer value.

I realise the benefits of a FS pension, but with 21 years to retirement I feel as though a transfer would be a better option than leaving it alone as inflationary rises don't compare against the good returns I'm getting on my private pensions.

So obviously this is dependent on the transfer value they give to me, which I will request and do a few calculations.

I'm just interested to hear any thoughts you might have?

PensionTech

"inflationary rises don't compare against the good returns I'm getting on my private pensions"

This would be a valid consideration if the transfer value that you get is already enough to secure an annuity on retirement that will be equivalent to the rate of your preserved pension, and all you need to worry about now is guarding that value against inflation. Unfortunately, it won't be - that is not how transfer values work.

What you will need to take into account, when you get the transfer value, is the return you will need on that value in order to have a large enough pot to secure an annuity equivalent to your final salary pension on retirement. That is what an IFA will work out for you, and you'll find in many cases that the returns needed are very large indeed - requiring a greater risk tolerance than you may be comfortable with. That is why DB to DC transfers are not frequently recommended.

Of course, there are other considerations as well - whether you are already expecting a reasonable guaranteed income in retirement and would prefer this cash to be paid in a form other than an annuity; whether you have or are likely to develop a life-limiting illness that would mean you probably wouldn't end up receiving much of your FS pension before you die; and if you are overseas (not sure from your post whether you are based in Canada now, or whether that came before?), you might have to consider all sorts of things about taxation and different legislation in the two countries.

You sound like you're looking at this objectively and rationally, so you'll hopefully be able to work out - maybe with the help of an IFA - whether it's a good idea or not. But don't be fooled by the fact that your FS pension is inflation-linked whereas your other pensions get nice investment returns. That doesn't mean that one is performing better than the other. It just means that the value of your FS pension is already locked in, whereas your other pensions are a bit of a gamble.

Linton

It is meaningless to simply compare the increase with inflation with investment returns. This is because what is being valued is a commitment to pay you an inflation adjusted pension in 21 years time. The value now as a lump sum would take into account the investment returns the insurance company would make between now and then. The value now isnt the cost of paying the current value of the pension.

This should be clear when you get the transfer value.

atush

Are you married? Dependants? In good health and expect to live a normal, long life?

If so, this small DB pension could be a good foundation to your plans, esp if you dont plan to retire before 65 when it would pay out? Could mean you could just raise the risk level a tad on your DC pension as this other money is 'guaranteed'.

Humanista

Great replies, thanks! Much food for thought.

I'm in very good health, married with 2 kids and live in Canada. I'll probably retire here too so that brings a whole new raft of complications.

I might contact an FA, although I'm loathed to spend the money. Otherwise, if in doubt do nothing I suppose.

FatherAbraham

Humanista wrote: »

I have a small deferred final salary pension that I stopped contributing towards in 2000, but I'm thinking of transferring it to my UK or Canadian private pension. I'm 44 and don't plan on drawing any pension until I'm 65 all being well.

According to the Actuary, the FS pension will increase at 5% per annum or in line with inflation if lower. They estimated (assuming 2% pa) it will pay 2,412.84 on retirement, but they didn't give a transfer value.

I realise the benefits of a FS pension, but with 21 years to retirement I feel as though a transfer would be a better option than leaving it alone as inflationary rises don't compare against the good returns I'm getting on my private pensions.

So obviously this is dependent on the transfer value they give to me, which I will request and do a few calculations.

I'm just interested to hear any thoughts you might have?

Oh man.

Read Warren buffet's letter about the costs of making promises to pay future pensions: http://fortune.com/2013/08/15/the-1975-buffett-memo-that-saved-wapos-pension/

Then decide not to transfer.

Warmest regards,
FA

kidmugsy

Humanista wrote: »

I have a small deferred final salary pension that I stopped contributing towards in 2000, but I'm thinking of transferring it ... I'm 44 and don't plan on drawing any pension until I'm 65 all being well.

According to the Actuary, the FS pension will increase at 5% per annum or in line with inflation if lower.

You could look on that as the cautious bond-like part of your pension portfolio, letting you keep the rest heavy in equities. It also gives you a bit of international diversification.

Though there must be some value of CETV that makes transferring irresistible, there's no way to find out except to ask.

xylophone

http://www.aviva-for-advisers.co.uk/site/public/tech-centre/tech-article-detail/overseas-opportunities-for-personal-pension-members

may be worth a read.

Rrunner

I'm also in Canada and in a similar position to the OP, currently age 49 with a final salary pension in the UK due to pay up at age 65. I received a (in my opinion) fairly low ball transfer value against a predicted pension of approx. 10,000GBP/yr.
I've spent quite some time debating the best course of action with myself and am leaning towards bringing the transfer value over here and investing in a series of index ETFs through one of the self directed broker RRSP funds that are QROPs approved.
The pros, for me, are to have control over the investment choices and to have a fund that is realizable to my spouse and family on my demise.
As far as I can predict I have no intention of returning to the UK to retire (all my family is here) which is also a factor in my decision.

kidmugsy

Rrunner wrote: »

I received a (in my opinion) fairly low ball transfer value against a predicted pension of approx. 10,000GBP/yr.

When? Low gilt yields have increased a lot of CETVs recently.

Rrunner wrote: »

and to have a fund that is realizable to my spouse and family on my demise.

You can use life insurance for that.

Humanista

Good to hear from someone in the same boat.

I've also considered shifting everything over here into one of my two RRSPs, which are both QROPs approved, especially seeing as the exchange rate seems quite reasonable at the mo.

It feels odd having my pension funds split between countries like this and I can only imagine the tax complications if I leave them as is and draw from both countries on retirement. It would be much easier only having to file a single tax return each year ....especially as dementia kicks in :-)