DB Pension Query and GMP

fcandmp

One of my deferred DB pensions which is set to pay £6400 per annum in 2022 is significantly affected by GMP element such that I cannot take it early or take a 25% PCLS. Could members of the board assist in a discussion of the potential benefits of transferring to a SIPP? What level of CETV , I required for this to be remotel worthwhile?

For context I am currently 55 and expect expect apply for fixed protection 2016 as close to being overfunded.

PensionTech

Taking it early or taking a 25% PCLS in a DB scheme are not generally cost-neutral for you. They tend to be poor value conversions. So the loss of the ability to do so does not make a stronger case to transfer it into a SIPP. You will also need to pay for financial advice in order to transfer. However, the value of the pot is probably quite high in comparison to the cost of the advice, and you may be taking advice anyway if your pension savings are that high, so you may see this as an acceptable expense.

ischofie1

With regards to the CETV.
I'd work out what it's worth now. There must be % factor increases to get to £6400 in 2022 hence you just need to reverse these or ask them the current value.
I'd the be looking at minimum commutation factor of 25 before even considering the transfer in detail.
Note - Commutation factor is the Ration of the CETV to the annual pension as it is worth at the time of transfer.
As a caveat to this, there are many other factors that need to be considered so treat this as only a "rough ballpark" guide.

Money_talks_3

Early exit penalties are commonplace within DB schemes, regardless of GMP. As I understand it, the fact you cannot take PCLS suggests the scheme is underfunded - meaning the underlying value is needed to provide the obligatory GMP, with nothing remaining to offer the PCLS.


Transferring to a SIPP would certainly allow you to benefit from the full range of flexible retirement options, including taking the 25% PCLS, though in doing so you would sacrifice the DB scheme benefits and GMP.


Whether or not this is financially viable (or beneficially) will depend on your circumstances and need to access the money, with the severity of the exit penalties probably determining whether a transfer is worth doing before 2022 (assuming 2022 is the plans NRD).

Finst

Firstly, I have some minor issues with the comments you've already received:

PensionsTech - DB early retirement factors (from deferred status) are required under preservation legislation to maintain equivalent value. Obviously there is some wiggle room but it would be very unusual (and illegal) to find early retirement factors that don't represent broadly fair value. Fair point on the PCLS factors, although this can be offset by the tax advantage.

Money_talks - Not being able to take PCLS has nothing to do with the funding status of the scheme. The restriction is because the early retirement pension (with assumed inflationary increases) is expected to be below the GMP, which is a statutory minimum from 65 (60 for women). The scheme isn't prepared to let someone take the pension early, and then have to fund an uplift on top, but it has nothing to do with the scheme's funding level.

fcandmp - what are you planning to achieve by transferring this pension into a SIPP? If you want the flexibility to take it early or take a tax-free lump sum, then transferring it would allow you to do so. On the other hand, this appears to be only a small part of your retirement savings so can you afford to leave it till 65?

I suspect that by transferring to a SIPP you'll lose expected value (but if you request a transfer value, this will give you some idea), but gain flexibility over the payment format (age, pension vs cash). Which of these is more important to you?

PensionTech

DB early retirement factors (from deferred status) are required under preservation legislation to maintain equivalent value. Obviously there is some wiggle room but it would be very unusual (and illegal) to find early retirement factors that don't represent broadly fair value.

Edited.

Originally I responded to this to say that you were right in theory, but in practice it seemed that ERFs often err on the side of poor value for members. However on reflection I think this is down to perspective and it is certainly true that the equivalence principle is used when setting factors, so it would be unreasonable of me to put any other message across. So, thank you for setting this straight.

However, it is a bit of a side issue. The point still stands that not being able to take early retirement or a PCLS does not represent a poor value benefit. Your points about the pros/cons of a transfer are spot on.

Money_talks_3

Finst wrote: »

Not being able to take PCLS has nothing to do with the funding status of the scheme. The restriction is because the early retirement pension (with assumed inflationary increases) is expected to be below the GMP, which is a statutory minimum from 65 (60 for women). The scheme isn't prepared to let someone take the pension early, and then have to fund an uplift on top, but it has nothing to do with the scheme's funding level.

Fair point, I was talking in too broad a term. DB funding is a sensitive topic after all!


Point being, if the GMP element cannot be satisfied (as appears to be the case here once early retirement penalties are taken into account) there would be no scope for PCLS to be paid as a result.

sandsy

You've posted previously about your LTA issues, eg.

https://forums.moneysavingexpert.com/discussion/5335592

This seems to be deferred pension (d) from the previous thread.
From an LTA perspective, surely it is only worth transferring if the CETV is less than 20 times the projected pension at NRD?

I'm not convinced it will be but the only way to find out is to ask for it.

fcandmp

Many thanks for the insights on this. There are a few factors I am weighing with this, as follows:

1. With Regards Projected LTA position I either require approaching a 20% downturn in the market with those funds left exposed to the market or position early retirement from one or more of the DB schemes to avoid over funding penalties
2. Dependent on CETV values over the next six years (and cost of additional advice, thanks for pointing that out) I might be provided additional flexibility by transferring and being able to take 25% tax free that I couldn't otherwise take from this DB scheme.
3. Whilst there are benefits for OH associated with the DB scheme this is 50% of the annual pension payments, rather than access to any residual SIPP value. OH's private pension arrangement are a fraction of my own, and such a transfer may achieve a small amount of rebalancing - not planning to go anytime soon, but still a consideration.

I am not looking to take specific action in the near term and will be monitoring combined LTA over the next 2-3 years (with supporting advice) to determine which triggers to pull to optimise the benefits and income tax outcomes likely.