Transferring deferred pension

John_Munro

53 this year and retirement at 65. I have a option to transfer 140k value into a private pension from a deferred final salary one. It was projecting £10,725 per year at 65. I am thinking of taking it out and investing into a private pension with a view to draw down from it at 65. All in all I should have over £200,000 in the pot by then. Is this the right thing to do?

maximumgardener

In your shoes I would leave it where it is.

It is seldom a good idea to transfer a DB scheme into a DC scheme

Linton

John_Munro wrote: »

53 this year and retirement at 65. I have a option to transfer 140k value into a private pension from a deferred final salary one. It was projecting £10,725 per year at 65. I am thinking of taking it out and investing into a private pension with a view to draw down from it at 65. All in all I should have over £200,000 in the pot by then. Is this the right thing to do?

In my view a reasonably safe drawdown with a hope of matching inflation is around 3.5%. Doesnt look a good deal to lose a £10725 guaranteed pension for. If you needed the cash pot for something more valuable - eg paying off an expensive debt, saving for a dependent's inheritance because you didnt need the income or providing income now because you had a shortened life expectancy perhaps a financial case could be made.

Employers usually arent over-generous with lump sum options.

FatherAbraham

John_Munro wrote: »

53 this year and retirement at 65. I have a option to transfer 140k value into a private pension from a deferred final salary one. It was projecting £10,725 per year at 65. I am thinking of taking it out and investing into a private pension with a view to draw down from it at 65. All in all I should have over £200,000 in the pot by then. Is this the right thing to do?

I would rather have a guaranteed £10,725 a year than £140,000 capital in a pension fund.

At 65, it would cost about £350,000 to buy a lifelong index-linked, joint-life annuity (pension) on the open market.

Warmest regards,
FA

John_Munro

I also have a stakeholder pension with my employer which me and my employer are paying into. That will run also for the next 13 years. There is about 35,000 in that just now. The benefits of transferring as far as I can see is access to my pot for my wife and my children.

FatherAbraham

John_Munro wrote: »

I also have a stakeholder pension with my employer which me and my employer are paying into. That will run also for the next 13 years. There is about 35,000 in that just now. The benefits of transferring as far as I can see is access to my pot for my wife and my children.

And what are the downsides accompanying those benefits?

Warmest regards
FA

agarnett

Access is the key word!

The promise of a private sector DB pension of £10,725 plus a year used to be a wonderful thing. Perhaps on balance it still is ... but we have to look much closer now to see how exactly that promise might be kept.

Is the sponsoring employer one that will survive the next 10 years without becoming insolvent e.g. because its DB pension liabilities now dwarf the business itself. Many organisations have effectively become enormous pension scheme funds which happen to run a business selling their same old same old widgets on the side. The sponsoring employers of the biggest private sector DB funds have long since realised that, a bit like Maxwell, they really can manipulate those funds to assist their own shareholders' agendas, and against the interests of deferred members, as opposed to the other way round! Maxwell wasn't very subtle. Modern day senior managements are something else.

If the sponsoring employer's business fails, then you are reliant on the Pension Protection Fund (eventually) picking up the pieces and stepping in to pay you maybe £9,000 a year instead of £10,725 - but who knows if the PPF is even big enough to bail out all the DB schemes that will fail if there is another crisis? Certainly not if more demands on outgo are made than income can support. That's an easy equation to understand. Even if they are big enough, if they take over your fund before you retire then you'll have a rotten period of uncertainty to face where you'll no longer be able to get a CETV and for a long time you won't be sure that you'll even get their 90% "protection".

Even if the country survives another financial crisis to continue making its own decisions about these things, it's a bit like asking whether the Icelandic government was big enough to bail out investors in Islandic banks, or whether the Irish Government was as good as everyone was arguing in early 2009 as a guarantor of investments in Irish Banks, or if the Cyprus government could avoid suddenly confiscating 20% of savers deposits in 2012/13 ... and so on. We know the answers to those. Why should UK be any more resilient or immune? Because we are "UK"? That's looking more and more like a dangerous and naive gamble. As a country, we've been swashbuckling like Jack Sparrow out there on a wing and a prayer for a number of years now, but our survival if you dare even call it that now, will be wed with agendas of the likes of Davy Jones and giant corporate Octopii who have for at least two decades now been manipulating western economies with their tentacles.

We just don't know how it will pan out.

We can no longer trust anyone involved in keeping a private sector DB promise. There are too many excuses for them now to deflect the original commitment.

The first sign of that for the OP is that the trustees of the OP's scheme appear to have seriously undervalued the Cash Equivalent Transfer Value they have offered him i.e. they haven't attempted to "value" it at all - they are barefacedly hoping it's enough as a "bribe" to tempt the OP to walk away from the DB promise.

Thousands of us still "lucky" enough to have an old deferred membership of a private sector DB scheme kicking around have found that as you get closer to it, threats we never dreamed of threaten to prise its value from our grasp - events such as the 2007/8 financial crisis are used as the excuse (and we seem to have another almost imminent) and environments which support fraudulent behaviour by trustees and sponsoring companies, and their arms length actuarial mercenary advisors and outsourced administrations.

One of the biggest of those even uses a name that belies how they unashamedly sell their expertise in measuring private sector DB scheme liabilities to match the numbers the sponsors require.

And, because the country is broke, we have the government constantly undermining their part of the ongoing private sector DB scheme promise to inflation protect the £10,725 plus per year after we retire on it.

It is a difficult decision OP and even if you decide to forgo the pension and take the cash, getting "access" to it will still be difficult unless you can find a Pension Transfer specialist qualified IFA to put their name to sanctify your plans to Transfer. And that'll cost you. This time last year it'd still have been possible to get it done for £750, but now ... it's anyone's guess (if there are still IFAs out there who can do it and if it is still possible to go against their advice).

John_Munro

Am I correct in thinking that the £140,000 can obviously go down as well as up over the next 13 years of investment. Thanks for all the comments.

molerat

Yes, the "transfer value" can vary according to many factors. Investment return is not always a major factor in a DB transfer value..

AlanP_2

The £140k Cash Equivalent Transfer Value can go up and down over time.

When I asked for one recently it came with a validity period of about 3 months from memory, after that it would need to be recalculated to reflect current scheme and interest rate conditions etc.

Bear in mind that your Age 65 forecast is also likely to alter as time passes. As a deferred member your annual pension is revalued each year by CPI / RPI and maybe even statutory rises if there are GMP elements and the like.

The current estimates for the rate of CPI / RPI they use looking forward are likely to be contained within the estimate paperwork but let's say it is 2.5%.

If actual CPI is 0.5% in 2016/17 then your current benefit will be increased by that and then rolled forward at 2.5% until Age 65, so for 1 less year than the 2015/16 forecast.

I see this on mine with the forecast dropping by a few 10's of pounds with each subsequent forecast as CPI has been very low over the last few years.

agarnett

John_Munro wrote: »

Am I correct in thinking that the £140,000 can obviously go down as well as up over the next 13 years of investment. Thanks for all the comments.

That's a very good question, John, and I don't think it has been answered yet! Here's my twopennorth ...

Up until now, there might have been two strands to a sensible answer on this forum (and I am just an occasional interloper with no expertise in pensions beyond bitter experiences of several of my own!) so it is perhaps presumptious of me to offer them (but I will!):

First, your entitlement to a Cash Equivalent Transfer Value is not the same as having a pot of money invested in your name (that's a favourite style of "correction" to any forum suggestion by someone like you that your DB scheme pension holds a "pot" for you) ... but you haven't yet erred and used that word so that's just a warning that normal down as well as up warnings don't apply here - it's far more complex than that!

Second, if you had been requesting CETVs every year since you became a deferred member of your old DB scheme, then the CETVs could only ever have gone up (in practice!). However, right now, many of us are for the first time wondering if 2016 is going to be the first year that we see a CETV go down! Some may already have seen it. My fingers are crossed that I don't ever see it on mine, but I am not confident.

If we do start seeing it, then actually I shall be extremely worried. It'll be the thin end of yet another wedge of nasty pension surprises.

We have become very much aware that throughout the early part of 2015 at least, some of the better funded deferred private sector DB schemes (e.g. Barclays original so-called "1964 scheme" for their own staff which has been well reported on MSE) were offering astoundingly high CETVs based on a much more realistic assessment of the funds needed to satisfy their liability to fund their pension promises to individual staff. In other words they were much more transparent with their members about the say £350,000 which FatherAbraham estimates it would actually cost to buy an annuity to fund a £10,725pa pension promise like yours. Private sector DB schemes don't actually buy annuities to fund individual pensions, but it is a good test for us to look at.

So it very much looks that in the Barclays staff case, Barclays were much more upfront than most employers with their members in offering CETVs closer to the real annuity equivalent cost i.e. if you were in that scheme, they may have offered you more than twice what you've been offered through your scheme. That should be no surprise when you consider that there is an old saying in the City that it only exists to benefit those who work in it! There is a strong union and a significant proportion of the deferred members in the old Barclays scheme are still active employees, keeping their heads down and mouths zipped (letting the union do the negotiating) but very conscious of watching their own pouches getting handsomely stuffed with dosh!

In a transparent case like that, the main reason for such large amounts to be reserved by the scheme to pay individual future pension promises was said to be because gilt yields had fallen through the floor, so they would need to invest much more money to finish with a capital sum large enough to invest to produce enough income to fund a pension for life (and any dependants' pension entitlement) than they ever did during long periods when gilts were considered almost bombproof and were yielding much better returns. Another reason is the really significant increases in life expectancy after retirement we have witnessed in the last ten years perhaps. Some schemes are happy to continue to keep using out of date life expectancy data to (falsely in my view) reduce the size of their liability to fund future pensions. Conversely, those same book-cookers pounce upon any changes announced by the government which can be adapted by clever actuaries to sell to employer sponsors as wheezes to reduce
their stated pension liabilities and so on down the line to your CETV quote!

In your case, you haven't said who the sponsoring employer is, or whether deferred members are valued. The less you might be valued, or the more you might be disrespected or seen as having no collective bargaining power behind you, the more excuses you are likely to see for keeping your CETV low.

Perish the thought, but now gilt yields have eased up a bit, you may yet soon see that used as the main excuse for the CETV to even go down!

Even if that doesn't wash, there are plenty of other excuses they can use.

Many private sector pension schemes claim that they have purchased effective hedges against enhanced life expectancy and movement in gilt yields - and guess who was the prime active player in marketing such "hedge" arrangements? Google Rothesay Life and take good note of who launched them.

By paying Rothesay Life a fee, a pension scheme can hedge against the reasons you would expect your CETV to rise! But with Goldmans notoriety for allegedly creating a device to sell in the market and then when they have sold enough of it, creating another device to bet against it, who knows which way this will all go.

It is beyond casino banking - it is matched betting gone mad!