Converting a Defined Benefit scheme

northernsoul

I am 56 years old. I have got a £105K pot in a Defined Contribution pension, and a Defined Benefit pension, which, 2 years ago, on enquiry, had a transfer value of £130K.
I stopped working (hence contributing) in the company providing the DB pension 13 years ago.
I stopped working 3 years ago due to health issues hence stopping DC contributions.
My savings have nearly run out and I receive no money at all from the government. I have let 1 room to lodgers (friends) providing an income of £70 a week.
I recently saw a financial adviser who advised a drawdown ( as I thought he would ) taking out 25% as a tax free lump sum. I can take out up to 7.5% of the remaining fund out each year. I intend to survive on the 26K lump sum for 2 years so hopefully the fund will grow a bit by then, when I will take out the 7.5%.
It is about to be transferred out of Scottish Widows (fund growth average over 5 years - 8% , 1% charges) to the advises recommended fund (average growth since start 3 years ago - 11% growth average , 1.25% charges). I will see the advisor at least once a year whereas Scottish Widows has been only over the internet.
The FSA advised leaving alone my DB scheme.
The next 2 years I will try to survive on £13K per year. I have no mortgage.
At age of 60 I can draw on my DB pension with no penalties or reduction of value. It is worth £6.5K per year at current rate, guaranteed, and increasing each year by some official rate (RPI or something else – can find out if need be).
So in 4 years time, at age 60, I can receive approx 13K a year (DB pension + 7.5% of Draw Down fund).
My problem is not at age 60, but in 2 years, at age 58 and 59, when the only income I will have is 7.5% of my Draw Down fund. It may be (assuming 8% growth hopefully) worth about £91k and therefore generate an income of approx. £7K a year. Obviously this is not enough for when I am 68 and 59.
As I have no partner or children I guess I do not need all the guarantees of the Defined Benefit Pension (not sure exactly what they are).
Simplistically, I can see some sense in transferring/converting my DB pension and taking a lump sum and income from it, and forgoing the benefits (money to partner if you die etc).
This would give me an another income of approx £7k (taking out same 7.5% of the fund) and a lump sum of £32k.
So a total lump sum of £25K (DC scheme draw down) + £32K (from transfer of DB scheme = £57K lump sum, and a yearly income of £7K (DC scheme drawdown) + £7K (from transfer of DB scheme) = £14K annual income. Of course I have my state pension of £150 per week (what I have been told by letter) at 66 years old.
Finally, my question is, ‘ Am I missing anything ? ‘. I cannot survive on just my drawdown income of £7K per year when I am 58 and 59, but I cannot see any problem with converting my DB pension, apart, of course, that both funds are linked to the stock market.
Have I got it wrong and the advisor right?
Sorry for such a long letter. I thought the more explanation the better.
Thanks for your advice.

lonestar1

Have you looked into the possibilty of getting government support ? If you are elligible then please don't be too proud to claim you have paid into the system after all.

You quote a figure of 6.5k the pension will pay out from 60 but is this what it will pay after youve done the drawdowns or the current figure before any drawdowns ?

northernsoul

Unfortunately my health is such that some of the time I am okay and sometimes not. My doctors don't seem bothered, telling me its not serious, and the government only recognise when I am ok and expect me to work. I cant work some times and cannot find an employer who would accept me off work for a third of the time. Been in engineering all my life. Can only see working for myself the solution but struggling to find something.
The Defined Benefit pension at 60 will pay out £6.5K (or whatever it may increase up to in 4 years) if I do not touch it. This increases with inflation or RPI (cant remember which) up to a maximum of 5%.
I am fairly certain all I can do is transfer it out or wait until 60. I cannot draw down and take the pension at 60.
So it is a choice of 'cashing' the DB question turning it into a 'stock market risk' or waiting until 60 for a guaranteed pension (with benefits I probably don't need)

kidmugsy

northernsoul wrote: »

I am 56 years old. I have got a £105K pot in a Defined Contribution pension ...
My savings have nearly run out and I receive no money at all from the government. I have let 1 room to lodgers (friends) providing an income of £70 a week. I recently saw a financial adviser who advised a drawdown ( as I thought he would ) taking out 25% as a tax free lump sum. I can take out up to 7.5% of the remaining fund out each year.

... My problem is not at age 60, but in 2 years, at age 58 and 59, when the only income I will have is 7.5% of my Draw Down fund.

I'm baffled. Why are you limited to 7.5% drawdown? As I see it you could act as follows.

(i) Pay no tax on the rent, by using the rent-a-room allowance.

(ii) Withdraw from the DC scheme a tax-exposed amount equal to that tax year's Personal Allowance (vs income tax): for this year that's £10600. Also withdraw the tax-free lump sum corresponding to this tax-exposed amount, namely one third of it; so this year £3533. That would give you a tax-free total of £17773 in this tax year. If you can live on that, fine. If you need more take a bit more tax-free lump sum.

Then when you reach 60 you can add the DB pension and reduce the amount you draw from the DC pension, and carry on until you receive your State Pension.


I suggest this is the case that you should treat as your Base Case for comparison e.g. for comparing with the case of transferring out of the DB. Since your health is shaky and you have no wife or dependants, transferring might be worthwhile if they pay enough. So ask for an up to date CETV.

northernsoul

So, to summarise. I can either
1/ drawdown my defined contribution, live off £25K for next 2 years, then approx. £7K when I am 58 and 59 (assuming no stock market crash) and then at 60 get my guaranteed £7K per year (approx. increasing with inflation or RPI) giving a total of approx. £14 per year until I also take my state pension
or
2/ Drawdown my DC, live off £25K next 2 years and 'cash' in my DB pension in 2 years, get approx. £36K lump sum and about £7K a year (7.5% of pot) until I get to state pension age (both at the vagaries of the stock market)
I could also take the DB pension at 58 taking a 2 years reduction penalty of 9.5% (9.5% less than what I would get at 60)

northernsoul

Lonestar1 and kidsmugsy, thanks for your replies. I realise you can have currently about £4500 on the rent a room scheme and pay no tax.
The adviser , I understood , said under their scheme I could only draw 7.5% out. Maybe I misunderstood and it was a recommendation. I know somebody who recommended him only takes out 7.5% as well. I think this is so, hopefully, the fund does not go down in value (assuming 10% ish growth).
kidmugsy - interesting way of doing it.
Another way I have thought of, due to your example. I could split the £25K tax free lump sum into 4 (to last 4 years) taking out £6250 per year + take out £7883 tax free allowance per year, ending up with the same amount as you, £17773 after including rent( this not guaranteed though if I have no lodgers).
Another way of looking at it - take out 6.25% (one quarter of my 25% tax free lump sum) = £6562 in first year leaving 93.75% in or £98437. Taking out 7.5% of £98437 is £7382. Total per year (6562+7382) £13944 + £3640 rent for the year = £17584 tax free per year. 2nd year take out another 6.25 tax free lump sum + 7.5%. 3rd and 4th year the same principle. Assuming historic growth of 11% my fund should not go down. Simplistic I know but near enough I think. Thanks for your thoughts

xylophone

https://www.gov.uk/new-state-pension

It would be worth your while getting a statement.

In your place I'd leave the DB alone - look on it as your insurance policy and use flexible access for the DC?

Rent a room scheme

https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

Tax free allowance increases to £11000 in 16-17.

northernsoul

2nd thoughts. Probably fund would go down because I am in the end taking out about £14K per year but probably only need to do this for 4 years until I draw my DB pension.
Thanks again for your guidance

northernsoul

xylophone - thanks. Yes, I noticed the increase in rent room tax free allowance in the budget. If only I could guarantee I have lodgers.
I got a statement early this year and they estimated my state pension would be £152 per week (current value), but recommended I ask for a new statement after the budget (think they said after budget).
I am feeling better about my situation thanks to the people who have contributed .
Thankyou

northernsoul

wow. Taking out quarter of my tax free lump sum a year (6.25%) and an additional 7.5% a year for 4 years to when I am 60 reduces my fund from £105K to £76K assuming 8% growth after charges !

kidmugsy

If I were you, I'd draw out as much as I can to fill the personal allowance each year. That way you exploit the tax break while your income is low: once the DB pension begins, and particularly the State Pension too, your personal allowance will shrink towards zero. Use it up soonest.

If you find that policy gives you spare money, either bung it in an ISA or contribute up to £2880 net p.a. to a new pension, so it'll get another Tax Free Lump Sum later on.

Personally I'd scoff at words to the effect of 8% or 11% growth after charges. Too optimistic by far for someone who is effectively retired already: you'd be taking too much risk. In fact I might go to the other extreme and get much of my TFLS out immediately and use it to fill the high interest current accounts available at present (Santander 123, Lloyds Club, Nationwide, TSB). I don't suppose those loss leaders will last forever, but it seems a pity to miss them while they are around.

Anyway, in your shoes I suspect my policy would be to look on the DC scheme as the way to bridge the gap until the other two pensions pay out. There's no need to preserve all the capital in DC scheme, though it's certainly wise to live frugally so that you always have some backup capital, whether that's in pension or ISA or current accounts.