Pension transfer help

harry33

Hi, I have a final salary pension from an old job i left in 2009. It was worth £2700 when i left and is now worth £3100. The transfer value is £40,100. I'm 35 and have a new pension with a pot of £25,000. Is it worth tranfering the 40k or leaving it as the final salary? Thanks with any help

xylophone

A DB pension is normally better left deferred in the Scheme.

If an unfunded Public Sector Scheme you will not be permitted to transfer out.

Otherwise, to transfer out you would need to pay for the advice of an IFA with the necessary qualifications and permissions.

You might find it difficult to get a recommendation to transfer and if you didn't might find it hard to find a scheme that would accept the transfer.

https://www.moneyadviceservice.org.uk/en/articles/transferring-out-of-a-defined-benefit-pension-scheme

ischofie1

A transfer value of £40,100 against a pension of £3,100 gives a ratio of just under 13. Terribly low transfer value. Leave it where it is.

Regards.

harry33

Thanks...I'll leave it alone

harry33

Hi, sorry one more question...when i go on the pension prediction calculators the 40k pot increases each year with investments...will my 3100 grow at a similar rate? If not surely I'm better of taking the 40k and investing it as 3100 in 30 years even with inflation growth wouldn't be as much as 40k invested or am i missing something?

Cheers

bigadaj

harry33 wrote: »

Hi, sorry one more question...when i go on the pension prediction calculators the 40k pot increases each year with investments...will my 3100 grow at a similar rate? If not surely I'm better of taking the 40k and investing it as 3100 in 30 years even with inflation growth wouldn't be as much as 40k invested or am i missing something?

Cheers

Yes missing quite a bit.

Assuming you might be able to transfer it out then it will cost you several thousand pounds to pay an ifa to to do a review, which is likely to state that you'd be better off where it is.

You could then take this letter and arrange for the pot, if available and the scheme permits, to be transferred to a scheme of your choosing, when it may or may not pay out more money than projected currently in 30 years time or more.

The whole pensions Mis selling scandal in the nineties involved recommendations to transfer out of final salary schemes, partly driven by commission but also by far too optimistic projections of investment growth. As has been stated above, a commutation factor of around 13 means that requires over a 7% yield, not impossible but requiring investments in medium to high risk assets rather than soemthing with absolute certainty. An easy comparison is to look at what you'd have to pay for an annuity now, and this would be somewhere between 50% more to double the transfer value you've been quoted.

One way to look at this element of your pension planning is that this pension forms a reliable and steady basic core. This will pay out the equivalent of £3100 in thirty years time, which forms a firm base, which means that you could consider taking on higher risk, and so higher growth, investments in your current and future pension contributions.

mgdavid

harry33 wrote: »

Hi, sorry one more question...when i go on the pension prediction calculators the 40k pot increases each year with investments...will my 3100 grow at a similar rate?If not surely I'm better of taking the 40k and investing it as 3100 in 30 years even with inflation growth wouldn't be as much as 40k invested or am i missing something?

Cheers

it's a DB scheme - so what do the Scheme Rules say? If you don't have a copy, and they're not online, then phone up the scheme administrators and ask for a copy.
It is usual for DB pensions to increase by CPI or RPI annually. Sometimes caps are applied, it might say 'RPI or 5% whichever is the lower' for instance. Some schemes send out an annual statement, so it's important to keep them updated with your current address and contact details.

PensionTech

If not surely I'm better of taking the 40k and investing it as 3100 in 30 years even with inflation growth wouldn't be as much as 40k invested or am i missing something?

£3100 is an annual figure, £40k is a capital value. £3100 with inflation growth in 30 years almost certainly won't be as much as £40k invested, but the capital equivalent of £3100 with inflation per annum may well be higher than the capital figure of £40k with investment growth in 30 years' time. And the conversion into a capital value is essentially an annuity calculation - i.e. how much would it cost to buy an equivalent annuity guaranteed for the rest of your life, with increases in payment.

jamesd

harry33 wrote: »

Hi, I have a final salary pension from an old job i left in 2009. It was worth £2700 when i left and is now worth £3100. The transfer value is £40,100. I'm 35 and have a new pension with a pot of £25,000. Is it worth tranfering the 40k or leaving it as the final salary?

It looks as though it might worth transferring, provided you don't mind taking investment risk.

Long term returns from the UK stock market have been a bit over 5% which I'll reduce to 4.5% to allow for charges. Over 30 years that would increase the pot value to 3.745 times to £150,187 in today's money.

The proposed £3,100 pension is also in today's money and is just 1.8% of that amount. For drawdown or current open market annuities you can expect to do significantly better than that, as you could if the rate for deferring the state pension is similar to today's rate when you retire, and if it is still an option.

If you didn't use equities the expected returns would be lower, perhaps down to say 3.5% after costs for a mixture with 20% bonds. In that case the growth would be to 2.8 times the current value, to £112,552. The proposed pension payment of £3,100 is 2.75% of that. This is reasonably comparable to current annuity rates, a touch higher.

With this investment choice it is probably not the best choice to take the transfer.

Overall given the lack of investment risk and the fact that mixed investments are not likely to greatly beat the pension income unless you use drawdown you might consider whether it's really worth taking the investment risk yourself instead of leaving it with the pension fund and the employer.

Added to that you'll need to pay something between £1,000 and £2,000 for the professional advice required before you're allowed to transfer, further reducing the potential gain.

If you have a long term plan to invest a lot to retire at say age 55 it might be worth taking the transfer to increase your flexibility. Otherwise it appears that the potential gains are not likely to be worth the increased risk over the time range involved here.

The £3,100 will increase at least with CPI inflation, possibly RPI depending on your specific scheme. All numbers I've given in this post are also adjusted to take account of inflation, by using the after inflation growth rates. If your scheme increases with RPI it's even more attractive to leave it where it is.

harry33

Thanks for all the info. Looking through my paperwork it says my normal retirement date will be when i turn 60 so i guess that makes the 3100 even better to stick with. The growth is 5% or rpi which ever is lower.

Cheers

ischofie1

Growth at 5% or RPI is reasonably good, as is getting it at 60.
I think you'd be hard pressed to better this by transferring out.
I transferred a pension out a couple of years ago but this was at a ratio factor of 28:1 & even then I gave it considerable thought. Yours will be less than 13:1 when you consider the cost of the IFA. That's assuming you can find 1 that will take it on, which is a big IF.
Personally, I'd want double the transfer value they're offering before I'd give it any serious consideration.

Just my thoughts.