IFA recommending I take transfer value for DB pension and invest elsewhere

rudebhoy

I took early retirement last year at age 54 and started drawing my pension from my then employer.

I also have another pension pot with a different ex-employer, which I was going to start drawing when I hit 55 later this year.

Separately, I have approx 250k currently invested in a number of funds.

I met the IFA who set up those investments a couple of months ago to do an annual review of their performance. We also discussed my pension planning, and he suggested I ask the ex-employer for a transfer value.

They wrote back advising it was £480k. At 55, this will pay me an index-linked pension of 10k. I could also take it at 60, and get a pension then of 15k, but did some sums, and in all the scenarios I ran, I would get more taking it at 55.

If I die before my wife, it will pay her 2/3rds pension based on what my pension would have been had I left it till 60, so it's a pretty decent scheme.

My IFA is recommending I take the transfer value, 25% of which would be tax free, and invest it in a number of funds, one of which would have the 25% tax free lump sum in it.

His rationale is that the pension would be paying me just over 2% of the 480k pot, and he says he should be able to beat that return comfortably by investing the 480k, particularly as 25% of my income would be tax free. This iwould also leave a substantial lump for my wife if I die before her which is likely as i am 9 years older than her.

Does this seem like good advice? I appreciate there is an element of risk involved in his strategy, but his view is the risks are low, and the rewards make it the right option.

Would appreciate some advice as I am struggling to decide which is the best course of action.

jamesd

rudebhoy wrote: »

They wrote back advising it was £480k. At 55, this will pay me an index-linked pension of 10k. I could also take it at 60, and get a pension then of 15k, but did some sums, and in all the scenarios I ran, I would get more taking it at 55.

How did you get that result? Ignoring inflation linking the £10k for five extra years takes just 10k*5/5k = 10 years to break even and after that you're ahead by waiting.

However, even using the 4% of lump sum as income increasing with inflation value, the £480k could pay you £19,200 a year. If you follow Guyton or Guyton and Klinger safeguards you could probably increase that to 6.5%, raising the income to £31,200 a year. You do need to be prepared to reduce the inflation increases if you use those rules.

Those rules are really for a 30 year period so it would be prudent to drop that by 0.5 to 1% to deal with the extra years you may live in retirement from an age 55 start.

rudebhoy wrote: »

If I die before my wife, it will pay her 2/3rds pension based on what my pension would have been had I left it till 60, so it's a pretty decent scheme.

Pretty decent but the drawdown option pays a 100% spousal pension.

rudebhoy wrote: »

My IFA is recommending I take the transfer value, 25% of which would be tax free, and invest it in a number of funds, one of which would have the 25% tax free lump sum in it.

I agree with your IFA.

rudebhoy wrote: »

His rationale is that the pension would be paying me just over 2% of the 480k pot, and he says he should be able to beat that return comfortably by investing the 480k, particularly as 25% of my income would be tax free. This iwould also leave a substantial lump for my wife if I die before her which is likely as i am 9 years older than her.

Yes, while there are not guarantees the IFA is right and you should both be considerably better off. Ask the IFA about the Guyton and Klinger rules, there's a fair chance he's never heard of them. My post contains some links for more reading , including eventually to the relevant research paper.

rudebhoy wrote: »

Does this seem like good advice? I appreciate there is an element of risk involved in his strategy, but his view is the risks are low, and the rewards make it the right option.

Yes, it looks like good advice. What's happened is that the rules for calculating transfer values are producing high transfer values for some schemes and for those it makes sense to take the money while it's available.

rudebhoy

Thanks for the detailed response.

The decision to take the pension early was arrived at using a spreadsheet the IFA gave me last year.

The 10k figure I quoted at 55 was wrong - it is actually £12,350 at 55, or £15,554 at 60. However when I look at the s/s, I can see that, while he is allowing for 2.5% inflation each year, he has applied that on the £12,350 from age 55, meaning that by the time I reach 60, it will be paying £14,317, however he has not allowed for the index-linking on the £15.554 pension between now and when it kicked in at 60, when it would pay £18,301.

By the time I reach 85, deferring the pension till 60 would have paid out £697k in total compared to £617k if I take it at 55.

So you are right about being better off leaving it till 60, thanks for pointing that out.

In terms of taking the 478k, he has come up with 2 options -

Option 1
The 120k tax free lump sum in Aegon Secure Income Bond, paying £340 per month tax free.
210k PruFund Flexi Drawdown, paying £350 per month after tax
150k in an annuity paying £200 per month after tax, with a guaranteed fund value of 150k after 10 years, by which time my wife will be 56, and we can reinvest that sum in a joint annuity

Option 2
The 120k tax free lump sum in Aegon Secure Income Bond, paying £340 per month tax free.
100k PruFund Flexi Drawdown, paying £133 per month after tax
260k in an annuity paying £420 per month after tax, with a guaranteed fund value of 270k after 10 years, by which time my wife will be 56, and we can reinvest that sum in a joint annuity

he has assumed a net return of 4% pa on the PruFund DD, and 5% on the Aegon Bond, which would leave me with around £525k in 10 years time under Option 1 or £505k under Option 2.

Does this seem a reasonable investment strategy? He is trying to a cautious approach hence the annuities, but given how low annuity rates are, is there a better way to invest and still have more or less the same level of caution / low risk?

kidmugsy

rudebhoy wrote: »

Option 1
The 120k tax free lump sum in Aegon Secure Income Bond, paying £340 per month tax free.

Is this an onshore Insurance Bond? if so, it's not truly tax-free: the tax is taken within the fund before you see the payout. (Or so I believe: anyone?) Therefore you might be better off as follows, depending on your circumstances.

(i) You and your wife fill S&S ISAs. That gives you just over £30k in this tax year generating dividends that are tax-free. And add again next tax year and so on until you have no more capital to shelter.
(ii) You and your wife fill high-interest current accounts in sole and joint names. (See the endless discussions on the relevant board). From April 2016 you can both receive up to £1k p.a. of interest tax-free. (£500 p.a. for a higher rate payer.)
(iii) With anything left over, one or both of you buy shares outside tax shelters. The dividends will be tax-free if neither of you pays higher rate tax. Next tax year the dividends will be tax-free up to £5k p.a. each.

Of course, if you have kept secret from us that you are a higher rate taxpayer, that may make this scheme unattractive, but for many people it would be a better bet than an insurance bond.

dunstonh

Does this seem a reasonable investment strategy?

The strategy should fit the need and be within the knowledge and understanding of the investor.

There are over 30,000 investment options. You will always get a difference of opinion. Personally, I am not a fan of these secure income products as they tend to have high charges (to cover the cost of guarantees and limited growth potential. Many have complicated structures in how they do it and it has been an area those has resulted in regulatory action being taken against firms that have used them. That said, Aegon is more reputable than some of the others that have come and gone.

My opinion is that if you are going to invest in products like that you may as well not invest at all and stay in cash. I see them as a product that gets used when investments havent been discussed to a level where the person is comfortable. Using investment bonds with no S&S ISAs is not going to be tax efficient either. These are not tax free products. Corporation tax is paid within them. They are known as tax paid. Modern investments with a cash account and withdrawal strategy can be more tax efficient.

i will repeat that my opinion is just that. Nobody here has had the benefit of lengthy discussions with you on your needs, objectives, knowledge and understanding. It is quite possible that these very niche products suit your requirements and just because I dont like them does not mean I am right.

rudebhoy

kidmugsy wrote: »

Is this an onshore Insurance Bond? if so, it's not truly tax-free: the tax is taken within the fund before you see the payout. (Or so I believe: anyone?) Therefore you might be better off as follows, depending on your circumstances.

(i) You and your wife fill S&S ISAs. That gives you just over £30k in this tax year generating dividends that are tax-free. And add again next tax year and so on until you have no more capital to shelter.
(ii) You and your wife fill high-interest current accounts in sole and joint names. (See the endless discussions on the relevant board). From April 2016 you can both receive up to £1k p.a. of interest tax-free. (£500 p.a. for a higher rate payer.)
(iii) With anything left over, one or both of you buy shares outside tax shelters. The dividends will be tax-free if neither of you pays higher rate tax. Next tax year the dividends will be tax-free up to £5k p.a. each.

Of course, if you have kept secret from us that you are a higher rate taxpayer, that may make this scheme unattractive, but for many people it would be a better bet than an insurance bond.

am not a higher rate taxpayer. Me and the wife are using the 250k we have already invested to fill up S+S ISAs. We currently have about 50k in them.

Am not sure if the bond is Onshore or not.

kidmugsy

If you are currently short of tax shelters why draw the pension? Why not spend down your unsheltered capital for a while and then draw the pensions later? What's the rush?

Specifically, why draw the TFLS out and then put it into a bond that's taxed internally, when if you'd left it where it is it would have paid no tax at all?

rudebhoy

kidmugsy wrote: »

If you are currently short of tax shelters why draw the pension? Why not spend down your unsheltered capital for a while and then draw the pensions later? What's the rush?

Specifically, why draw the TFLS out and then put it into a bond that's taxed internally, when if you'd left it where it is it would have paid no tax at all?

That's a good suggestion on spending the unsheltered capital for the next 5 years and leaving the pension till 60, will give that some serious thought.

don't understand the second bit tho - if I don't take the transfer value including the 25% tax free sum, then if I opt just to take that pension at 60, then surely I will pay tax on that 25%?

kidmugsy

No; you don't want to confuse the issue of transferring the pension, and the question of whether you should drawdown the transferred pension.

It might be that your best bet is to transfer while the terms are unusually good, but leave the money in its tax shelter for a while, living off unsheltered money in the meantime. You might also be wise to look at the benefits of sheltering some of your capital by maximising pension contributions by your wife.

Just because you have transferred, there's no need to assume that you must immediately drawdown. Don't just do something, stand there.

rudebhoy

kidmugsy wrote: »

No; you don't want to confuse the issue of transferring the pension, and the question of whether you should drawdown the transferred pension.

It might be that your best bet is to transfer while the terms are unusually good, but leave the money in its tax shelter for a while, living off unsheltered money in the meantime. You might also be wise to look at the benefits of sheltering some of your capital by maximising pension contributions by your wife.

Just because you have transferred, there's no need to assume that you must immediately drawdown. Don't just do something, stand there.

Am leaning towards leaving the pension for now, and reviewing in 4-5 years time. Will get a transfer value then, and think about withdrawing then if worthwhile.

am a bit hacked off tbh at the IFA for get something so fundamental totally wrong. I am just glad that it has come to light now - did a calc, and if I had taken the pension at 55, the overall payout by 85 would be 100k less than if I left it till 60.

dunstonh

Am leaning towards leaving the pension for now, and reviewing in 4-5 years time. Will get a transfer value then, and think about withdrawing then if worthwhile.

Just be aware that transfer values are high at the moment because of gilts. That will reverse at some point.