Final Salary Transfer?

Jetmarmite

Hello All

My husband is 52 and I am 48. Recently had an ETV value of his final salary pension (6150 p.a index linked from age of 60, spouse gets 50% on death) of £261,000. In 2011 we were offered £128,000 for this same pension, so quite an increase and we think unlikely to be offered higher at a later date due to the value of gilts at the moment.

We have always been of the opinion that final salary should never be transferred but with this latest valuation and changes to pensions meaning we don’t have to buy an annuity, we think that actually it may be better for us to transfer out so we can be flexible about our retirement

For clarification we have other pensions and savings as follows;
80k savings in stocks and cash,
In 2028 at 65 DC pension pot forecast to be £538,000
In 2030 at 67 husband’s State pension
In 2034 at 67 my state pension (may be reduced slightly)
In 2032 at 65 personal pension for myself which has a pot currently worth £145000 (no further contributions planned) which I can probably take any time from 55 but would probably leave until 60 or 65
In 2032 at 65 my old final salary pension forecast to be 7K p.a

Our house will be paid for when my husband is 61 currently worth about £700k, which if our investments don’t go to plan or we run out of money, we would look to sell and downsize.

My husband would not be able to retire at 60 on £6150 and he would be taxed 40% on the income from it. Therefore we are thinking it would be better to take the transfer and take 25% tax free at 60 instead. We could take tax free amounts from the other pension pots at various times between 60-65 and leave the rest of the pensions in drawdown to provide an income for us. This then may enable him to gradually retire or retire comfortably before 65.

We don’t have any debts other than the mortgage so would be looking to use tax free amounts to invest mainly in ISA’s so hopefully still growing the money but also to spend a little, or use to top up income when we drawdown. We may well have to help our children through university which will be when he is 58 – 64.

Many thanks for any guidance or thoughts on the leaving my husband’s final salary pension in place or take the £261,000 and reinvest?

We will be taking financial advice provided by advisors paid for by the company, but if we had followed the advice we last received in 2011 to come out of the final salary pension we would be considerably worse off!

ratechaser

I can't answer this directly, but I've also just received a surprisingly high (to me) transfer valuation for an old final salary scheme that I was part of for all of 18 months when I first started work. It's basically telling me that I could either get a ~£2k annual pension, or transfer out a value of £88k!


Now I know that DB pension schemes are extremely valuable, but I thought HMRCs own guidance for working out the lifetime allowance they used up was to go with 20x the annual pension plus any lump sum. Rather like the OP here, this seems to be a disproportionately high valuation.


So very interested in any insight that anyone can share here. I'd have to pay for my own financial advice before I could transfer anything anyway, so won't be a simple process.


RC

Loughton_Monkey

My personal opinion is that you should throw the concept of transferring right out of the window. I retired at 56 and was in the habit of getting annual ETV's, but only with the purpose of 'valuing' my assets and projected income. I would never have transferred. My actual value at 60 was double what it was 8 years previously. I would have achieved nothing like that had I chosen to invest the ETV somewhere else.

A FS has no 'pot' and no fund with your husband's name on. So if you wish to transfer, the pension fund's actuary calculates (using many assumptions) his 'rightful share' and gives you the figure. These assumptions could be 'generous/optimistic' or they could be 'cautious/pessimistic' from the fund's viewpoint.

If you acted for the company (pension fund), just ask yourself on what side you would go. Ask yourself what is the true value of a 4 year old VW Polo with 30,000 miles. If you are selling, it's £4,500. If you are buying, it's £5,500. It's human nature.

My own FS scheme gave me a very respectable income for life, indexed linked (up to 5%). It gave me a 25% tax free lump sum and an ongoing 50% spouse pension if I die (that's 50% of 'full' pension, and not the reduced one after the TFLS). To me, that's a valuable "rock" for future income albeit nowhere near what I need to live on. But it provides a solid base for future planning and allows me to manipulate all my other assets flexibly around a solid base.

You say he could not retire at 60 on £6K income. Fair enough. But if you think he will pay 40% tax on that, he must have a massive income from elswhere that you have not disclosed.

Between you, it seems you have very reasonable retirement income possibilities. Also, with another 8 years to go, your husband has every possible opportunity to throw his future cash into appropriate pensions/isa's in a way that will bridge tha gap between 60 and 67 (when state pension kicks in). The new freedoms to take your DC pensions provide excellent flexibility.

Armed with a template on exactly what family expenditure, per year, you wish to 'draw', managing all the assets you mention to 'smooth' everything out (and be tax efficient) is not difficult at all, provided all the expenditure aspirations are 'reasonable'.

Pensioners with a 'healthy' mixture of FS pensions, DC pensions, [some being paid out, some being contributed to!], large ISA balances, state pensions, with ability to defer, have never had it so good. Were I to be still at work, and spend what I do to support my current lifestyle, I would be way over the 40% tax bracket on earnings. But I have engineered things so that I stay under the 40% bracket.

Put very simplistically, good retirement planning gives you a 'reward' when you spend your working life earning (say) £50K but only spending (say) £35K - so then you can retire on (say) £42K taxable income, but spend (say) £80K a year.

But on the main point, take the ETV if you want, and if you can get an IFA to sign to say that it is in your interest (unlikely) but My personal opinion is that your husband will be on this forum in 8 years time giving everybody a tale of woe about the mistake of having transferred an FS scheme...

Al.

Jetmarmite,

The default setting should always be to retain a Final Salary pension where it is. But, that's not to say the principle of a transfer couldn't be considered with an open mind. There are far too many pros and cons for anyone to suggest a course of action here, either way.

It's as much as anything about your other assets, needs, wishes and feelings, how you want to access the money and spend it, the flexibility that you want, the enhanced estate planning options that a DC pension offers, your inclination for risk, capacity for loss etc.

But, as you'll know, regardless of the variables in performance and increases of pension in payment, you'll be surrendering a guarantee. As you get older, certainty and peace of mind can be more important than any of the tangible benefits that transferring out can bring you.

ajbell

Just done a quick calculation and even if the £261000 did not grow at all it could pay £6150 increasing by 2.5% per year for almost 30 years.
I would take that.

ajbell

Just done another calculation and if it grew by 3% each year you could take your £6150 each year indexed by 5% for 37 years and still have money left.
What am I missing?.

HappyHarry

Just done a quick calculation and even if the £261000 did not grow at all it could pay £6150 increasing by 2.5% per year for almost 30 years.
I would take that.

Just done another calculation and if it grew by 3% each year you could take your £6150 each year indexed by 5% for 37 years and still have money left.
What am I missing?.

Your sums are roughly correct, though I think on your second calculation the funds run out after around 32/33 years.

There are a number of things to consider:

1. The chances of at least one of the OP or spouse reaching age 90 is just over 40% (using 2010/2012 mortality tables)

2. What happens if the investments were to fall in value for the first few years, before recovering? Will the OP still aim to take the same income? An early fall in value has a massive impact on how long the OP's funds will last, and is something regularly overlooked. See 'Sequence of Return Risk'.

3. What happens if inflation were to spike in the next 30 or so years? Inflation has been fairly volatile over the past 30 years, aside from the last 6.

4. Then OP says that there is a pension of £6,150 available. Is there also a tax-free lump sum paid in addition to the pension?

Transfer values are incredibly good at present, and a lot of commentators think that such values are unlikely to be repeated in our lifetimes. Transferring away from a DB scheme at present is more likely to beneficial than it was even one year ago, but still requires very careful consideration. By taking the transfer value, the OP would be quite literally gambling with a lifetime income.

ajbell

I agree with you but it may be worth the risk if you have other pension provision.
Certainly not something to be dismissed as a bad idea automatically as it was in the past.

xylophone

He would need advice from an IFA who is a pension transfer specialist - this would not be cheap and a recommendation to transfer might not be forthcoming.

Presumably he could retire at 60 with both his DB and DC pensions- he seems already to have a substantial DC pot?

He could take all of his pension income tax free up to the annual allowance when he retires - he could choose only to work as many hours as would keep him within the basic rate band?

Could he defer taking his DB pension if he wished? How would it revalue?

Jetmarmite

Hi All

Thank you very much for your replies, thoughts and advice. It is really helpful to get all the different views.

Loughton Monkey well done on retiring at 56. Your mention that your FS salary doubled in the last 8 years is interesting. Was it a pension you were still contributing to? In our case the pension has not been contributed to for many years and so far the annual increases have been exceptionally small (less than £100 a year) so I can’t see how ours would increase greatly before 60 unless there is something we are missing? I will investigate the projected increases in the future.

Regarding the 40% tax at 60, my husband would still be taking his salary so if we take the FS salary pension at 60 which is when it is available with no reduction, then it would be treated as extra income and be taxed at the higher rate as he’s already over the 40% barrier. Whenever he actually retires then it hopefully wouldn’t be taxed as greatly.

Xylophone – hadn’t thought of deferring it, so will definitely ask that question, my only worry is that in a way we would be missing 5 years of pension, if we both popped our clogs early then it would seem to have been a poor return. Although I take the point that if we are dead and gone we won’t be any the wiser and we will have paid for a peace of mind guarantee – I am aware we are trying to have our cake and eat it! As regards the tax, my thoughts were for us to take the full tax free amounts and save them and then use them to top up our income, keeping the drawdown to below the 40% barrier if possible as you say. It would also mean that if we had any excess when we were gone it could be passed onto our kids.

AJBell your thoughts were exactly what we had been thinking. Also if the FS pension was 15K or 20K a year it would be too much of a gamble to even consider transferring it out but £6150 didn’t feel like a make or break figure and therefore we felt more willing to take the gamble that we may increase our pension pot, especially as we were not going to buy an annuity with it. In the past we would have had to buy an annuity and that would be much more expensive for us so it would have been a no brainer to stay in the FS.

Happy Harry you have given us lots to consider. I think we can take an tax free amount from the FS salary but it would greatly reduce the £6150 p.a eg. There is no tax free amount in addition to the £6150 but we will ask the question about the exact figures. My thinking was that if our investments didn’t perform or we were getting through too much money, we both get small part time jobs for a few hours a week to top up but also we have equity in the house and our thinking was that at maybe 80 the house may be too much to manage and we would probably want somewhere smaller so we could release equity by downsizing.

As for talking with an IFA, I’m keen to do this but I have to say I have been given wrong advice from financial services several times (pension mis-sold, advice to transfer out of FS 4 years ago which we ignored) so we like to investigate all avenues before we talk to an IFA
AL I think you have hit the nail on the head, we need to think about how we access the money and I think that may be what was drawing us to transferring out, was the feeling that we were more in control of the money and pass on in our estate.


Thanks

Al.

For many clients, the value of something isn't the same as the price of it. Good luck, and take your time - this plan has been fifty years in the making and has another thirty to go. It's not a race.

I posted earlier this morning about Sequential Risk, be careful not get sucked into relying on linear rates of accumulation and decumulation. I only have a couple of dozen posts, so it won't be hard to find! But many retirees do overlook its importance.

Edit: Here it is.

https://forums.moneysavingexpert.com/discussion/comment/68993379#Comment_68993379