Keep the final salary or venture forth?

taktikback

I know there have been a million and one "should I cash my final salary pension" threads - and I know the stats show it's generally a bad idea, but I can't help thinking that there is now another dimension to this.

OK -so I'm 53 - currently building a DC pot with about 70K in my current job - probably aiming for 62 as a nominal sit in the sun age -current combined employer / employee contributions of 20 % - (16% mine - current gross salary £44k (and paying the 20% by salary sacrifice).

Now, I have a previous DB currently worth £11k - RPI, 5yr guarantee, joint pension 50% -payable at 60. I used the Telegraph "how much is it worth" calculator just for fun , and it came out at £325k

So - with all of these pension reforms and the ability to leverage failing guilt yields and high CETVs - is there ever likely to be a case for taking a CETV (assuming it's not way off whack...) - taking the 25% tax free LS and going into draw down? (to be taken at a later date..)

Wife has a modest final salary arrangement (now CARE) and we will both have full state pensions...

My thinking is that it might be a tax efficient way of managing the 62-67 years before the SSP kicks in?

atush

the best case for taking it into a DC pension would be- if you had no spouse (you do) and if you aren't likely to make old bones (got any health issues?) and if you have a comfortable retirement income from other DB pensions (how much will your wife's be?) and want to leave money to heirs who are non dependent (do you have any?). Of course on this last one you can leave your 75% of DC pension untouched for them?

How many of these can you say apply to you?

jamesd

The most critical question for a person in normal good health is what is the transfer value and whether it is high enough to make transferring look like a good deal. It's not possible to offer a decent opinion without knowing the transfer value.

For a person with a spouse a transfer out can offer significant benefits. A DB pension may provide no or 50% spousal pension after your death. A defined contribution or personal pension provides 100% spousal benefit when drawdown is used. Alternatively, deferring the state pension can be used to generate guaranteed income for life but this is not inheritable for those retiring after the flat rate comes in.

Taking the 25% tax free lump sum once you reach 55 would be useful if the money is reinvested. Taking any of the 75% would probably be unwise because if you take even a penny of it your pension money purchase annual allowance is reduced from £40k to £10k a year.

This taking of the 25% also applies to the existing defined contribution pension. You can take the 25% and use it to fund increased pension contributions, getting both income tax and NI relief on the money. But two cautions on this because there are rules relating to pension lump sum recycling into new contributions:

1. £7500 of lump sum taken in each twelve month period can be recycled. This is not tax years, it's twelve months. This is froma all pensions combined.

2. If the lump sum is much larger, another rule that allows an increase of up to 30% of the lump sum over the year it's taken and the two years before and after it is taken can be used. These are tax years. Say the contributions went up by 5k two years ago. Over the five years that's an extra £25k of contributions. Provided the lump sum was at least £83,334 this would be within 30% of the lump sum and not trigger the recycling penalty.

As you can tell from those descriptions time is your friend when it comes to recycling contributions. Be patient and you can do a lot of it and be within the limits.

taktikback

No health issues -wife's pensions at 62 would be around £13K with the full state pension additionally at 67.

We could both go on past 62 to enhance the totals, but it seemed sensible to set a target and take it from there.

Kids are at various stages of university and as financially independent as kids can be these days - Max student loans, and we give them a monthly contribution to their maintenance grants which aren't big enough to survive on after means testing - not complaining - just part of the maths for the next 2-3 years.

We have standard wills so the survivor, then the kids get what's left when we pop it.

SJG1

It might be an idea to request a transfer value from your pension administrators first before planning to much. Mine was a lot lower than I hoped for. It looks like the Telegraph calculator uses 30 times the annual pension. My administrator (Railway Pension Scheme) used 12 times.

xylophone

failing guilt yields

:eek: Government no longer has a conscience?

taktikback

oops..super typo...falling gilt yields...

but you still may have a point.....

bigadaj

xylophone wrote: »

:eek: Government no longer has a conscience?

Did it ever?

taktikback

Thanks for the info people - food for thought!

One further question for Jamesd - you mention using the lump sum for additional contributions. If I did as you say, and take the maximum lump sum at 55 from all pension arrangements - and then went on to increase my contributions from salary by say another 20k per year - is that counted as recycling even though the contributions didn't come directly from the lump sum?

kidmugsy

taktikback wrote: »

is that counted as recycling even though the contributions didn't come directly from the lump sum?

Of course; the tax man is well aware that money is fungible.

kidmugsy

The case for buying annuities - which is the same case as for keeping that pension - is made here.
http://www.fa-mag.com/news/substituting-income-annuities-for-bond-funds-in-retirement-21923.html?section=47&page=3

It would need a very large CETV to persuade me - were I married and healthy - to give up an RPI-linked final salary pension. Except, maybe, if the scheme's finances looked ropey.

In your case, I don't see why the DC pension isn't the natural tool for bridging the gap 62 - 67. Or even borrowing, if it stays as unusually cheap as it is at the moment.