Defined benefit pension vs drawdown?

LeCoop

Hi
I have posted previously on this topic and wondered whether attitudes have changed in the light of George Osborne's recent pension reforms. Previous advice was to take the DB every time and do not transfer out.
I am due to retire this year, age 60 and I have a deferred DB pension that is worth £29kpa or £125k lump sum & £19kpa (I believe that the commutation rate is poor). My spouse is g'teed around £14kpa. Half of my pension was earned pre-1997 and will not be index-linked.
On the other hand, I have been given a CETV of £600k which appears to be loosely based upon pension accrued at the time I left the Company multiplied by expected longevity (£23k x 26yrs).
I have friends who have already gone for drawdown invested on a 'cautious' basis and seen returns of +4% in recent years; this would give me a comfortable income in excess of £20kpa and I have other savings that would allow me to endure several lean years without drawing funds.
Given that I am not absolutely dependent upon the monthly income that my DB pension would bring, would a transfer out give me a better chance of leaving more money to my family?

LHW99

If you only need around 20k, and the DB can pay £29k (no 25% TFLS, as you wouldn't get that if you take the £600k to invest for income), surely its better to have the guaranteed income, which would have some type of index linking presumably?
The surplus funds could be invested, plus the State pension if that's not needed for spending to give a pot for passing on or other purposes - and no need for lean years.

kidmugsy

If you want to leave money, you could take the DB full pension and buy whole-of-life insurance with the surplus income. Ensure that it's a policy with a fixed fee, not one where the fee can be increased at the insurer's discretion. Arrange that the policy pay out directly to your beneficiaries rather than entering your estate.

It's at least worth comparing this strategy with the alternative of taking the CETV (which doesn't seem to be particularly generous).

Landslide_Victory

To be honest the CETV does not seem that generous at 20x guaranteed income of 29K pa. I've recently received a transfer value of 29x admittedly on a much smaller annual income. However I did decide to take the transfer as I am well covered with 2 larger DB pensions. Transfer values are supposed to be at their highest ever level so this seems a little stingy.
One plus point though is that you can leave your fund to your children as well as your spouse.
You will find though that a lot of IFA's are not trained to advise on DB to DC transfers. Only 1 in 4 can handle this transaction.
A tough decision though. Good luck with it.

LeCoop

LHW99 wrote: »

If you only need around 20k, and the DB can pay £29k (no 25% TFLS, as you wouldn't get that if you take the £600k to invest for income), surely its better to have the guaranteed income, which would have some type of index linking presumably?
The surplus funds could be invested, plus the State pension if that's not needed for spending to give a pot for passing on or other purposes - and no need for lean years.

I looked at the pros & cons of taking the full £29k but because most of my time served was pre-1997, around half my pension will not be index linked. If instead I take £125k tax free and £18k instead, I will be 75 before the former overtakes the latter and I'll also have a much larger sum invested for longer.
On the 25% TFLS point, even if I invested the whole £600k for income, I believe I still have the option to take £150k of that income tax free.

jamesd

LeCoop wrote: »

I am due to retire this year, age 60 and I have a deferred DB pension that is worth £29kpa or £125k lump sum & £19kpa (I believe that the commutation rate is poor).

Yes, that's poor, near the bottom of the normal non-exceptional range.

LeCoop wrote: »

I have been given a CETV of £600k which appears to be loosely based upon pension accrued at the time I left the Company multiplied by expected longevity (£23k x 26yrs).

That's equivalent to an annuity paying 4.83%, less than that in drawdown because drawdown would also be paying out of capital. 4.83% is uncomfortably close to the long term growth of the UK stock market, a hair over 5% plus inflation before fees.

Firecalc estimates that 95% success would be achieved with a spending level of £23,851 and 100% with £21,466, all inflation-linked. Based on their US investments. Less than the DB but fully inflation-linked and 100% spousal pension.

LeCoop wrote: »

My spouse is g'teed around £14kpa. Half of my pension was earned pre-1997 and will not be index-linked. ... I have friends who have already gone for drawdown invested on a 'cautious' basis and seen returns of +4% in recent years; this would give me a comfortable income in excess of £20kpa... Given that I am not absolutely dependent upon the monthly income that my DB pension would bring, would a transfer out give me a better chance of leaving more money to my family?

Initially it would seem that the likely answer is yes.

But lets look at an alternative. £20k of income is comfortable and the pension would pay 29k so that's 9k a year to invest over say 30 years, 4.5% inflation-linked, 4.5k not. A regular savings calculator using 4.5k a year and 4.5% growth plus 4.5k a year and 2.5% growth (assumed 2.5% inflation, 4.5% after fees equity return) gives a final pot size of £284k + £200k = £484k in today's money.

That isn't strictly fair vs Firecalc because I'm assuming normal returns and Firecalc is looking to cover worst case years, so reduces its income level.

You also have state pension and wife's work and state pensions that may provide additional income that can be invested. You'll also be well placed to defer your state pensions for say five years, to maximise likely return on that.

From those numbers I suggest that you take the maximum work pension income and invest. It's safer for you and likely to meet your inheritance objective as well. By far the way that will get you the least sleepless nights for the least work and risk.

For true maximum you could take the lump sum and hope for average or better returns. If they arrive that would leave higher inheritance. But the cost is, if those don't happen it would leave significantly less. The risk-reward tradeoff doesn't favour doing this.

You can cover the short term death risk to inheritance by purchasing term life insurance, perhaps more than one policy with different terms to allow for anticipated investment growth. The specified terms tend to make these policies cheaper than whole of life and you don't actually want the whole of life cover because investments will cover the end. You could also look into decreasing term life insurance. Really intended to pay off a repayment mortgage balance, it happens that the decreased payout is also what you need for this situation as investments gradually take over. Just look into the prices of the various options and see which offers the best deal.

coyrls

I would agree with Jamesd's analysis. One further benefit in having surplus income from your DB pension is that it gives you the option of making life-time gifts to your family, which will give you the flexibility to give them money at times when it would be most beneficial.

kidmugsy

coyrls wrote: »

One further benefit in having surplus income from your DB pension is that it gives you the option of making life-time gifts to your family, which will give you the flexibility to give them money at times when it would be most beneficial.

In addition: the OP could put as much as makes sense into a personal pension in this tax year, and more again in later tax years, on the grounds that if he never draws those pensions they could go to his widow or other beneficiaries on tax-advantaged terms. The tax advantage is especially good if he should die before 75. Since he's already past 55 the inflexibility disadvantage of pension saving is much reduced.

P.S. the lack of inflation-protection on the OP's DB pension will be ameliorated when his State Retirement Pension begins.

xylophone

Half of my pension was earned pre-1997 and will not be index-linked.

You are male?

I would have thought that your scheme would index the whole of the pension according to the Scheme rules, at least until age 65.

After that, while they would have no obligation to index link pre 88 GMP ( and under New State pension,this will no longer be index linked by the state either) they would have to index link post 88 GMP up to 3%?

Have you obtained a new state pension statement?

LeCoop

xylophone wrote: »

You are male?

I would have thought that your scheme would index the whole of the pension according to the Scheme rules, at least until age 65.

After that, while they would have no obligation to index link pre 88 GMP ( and under New State pension,this will no longer be index linked by the state either) they would have to index link post 88 GMP up to 3%?

Have you obtained a new state pension statement?

Yes I am male, yes I have an up to date statement and yes, there is a clear statement that any index-linking of pre-1997 pension earned is at the company's discretion ...and they have declined despite lobbying for the past several years because the scheme was underfunded and they are making significant contributions annually to keep it on an even keel, another reason is they have to meet other obligations to ex-public sector non-contributory pensions that they have inherited and can't touch as a condition of winning government contracts. End result is that the only pensions they can screw around with to save money are those of their longest serving employees.

greenglide

But they will still have to inflation proof the post 88 GMP up to 3%, they can't get out of that.

This isn't the Digital or the HP scheme, is it?