Cash transfer value of pension

alanrc

Hi I have a deferred pension, which was a 40/60 scheme, with ended up with national grid.
I am currently 55.5 and the pension is payable at 60 at a current rate of £11472 / year. £402,776

I asked for my figures at 55 and was given a figure of £9036/year or a tax free lump sum of £44,848 and a reduced pension of £6727/year.

I recently asked for a cash transfer value an was quite surprised to be given a figure of £402776.
It seems a no brainer to myself to take the cash into a sipp, take the 25% tax free lump sum of approx £100000 and invest the remainder which even if there was no gain would pay me £10000/year for 30 years.
My question is how much is the cash transfer value is likely to increase per year if I leave it with national grid until I am 60 or is it not likely to increase or which factors affect its value
thanks in advance alan

HappyHarry

alanrc wrote: »

I recently asked for a cash transfer value an was quite surprised to be given a figure of £402776.

It seems a no brainer to myself to take the cash into a sipp, take the 25% tax free lump sum of approx £100000 and invest the remainder which even if there was no gain would pay me £10000/year for 30 years.

You might want to consider;
(i) Growth. If you put it in a SIPP and markets fall for a few years, then the funds might not last you until you are 85.
(ii) Life expectancy. What happens in 30 years time when you are 85 and have no more income
(iii) Inflation. £10,000 per year when you are 85 might not be as valuable as £10,000 per year now. Your National Grid pension will rise with inflation.

Your cash equivalent transfer value (CETV) is more likely to go down than up in the future. This is partly because future annuity rates / long-term gilt rate are currently at an all-time low. Should they move up in the future, then the CETV will fall.

This isn't a "no brainer". From what you have posted, you are likely to be better off over the long-term with your National Grid pension.

bigadaj

Happyharry's points are pertinent and need to be considered.

On the other side of the coin is that with risk you could invest the 75% with the potential for the income to match your projected pension whilst maintaining the capital.

Also whilst it's correct that the cetv value is at near record highs, then gilt yields seem to be getting even lower. So if you apply for another value now it is very possible that the cetv may be larger than that you previously received.

HappyHarry

bigadaj wrote: »

Also whilst it's correct that the cetv value is at near record highs, then gilt yields seem to be getting even lower. So if you apply for another value now it is very possible that the cetv may be larger than that you previously received.

Which was a good point when you made the comment. Since then, S&P have downgraded the UK's credit rating, making gilts less expensive and probably reducing the CETV. :shocked:

Things are moving so quickly at present!

alanrc

Sorry if I appear ignorant but why does the price of gilts effect the cetv ?

HappyHarry

alanrc wrote: »

Sorry if I appear ignorant but why does the price of gilts effect the cetv ?

Not ignorant at all. It's a good question.

Some posters here will explain it far better than me, but I will give it a go.

The actuaries that calculate your CETV are trying to calculate how much it will cost to provide you with your pension at retirement, whilst not damaging the prospects of paying all other members their pensions. The CETV reflects that cost.

To calculate the cost, the actuaries will be doing a similar calculation to that which annuity providers do when looking at what annuity rates can be offered.

The best product to provide a guaranteed long term income has traditionally been UK government bonds - Gilts. These investments are government backed, and with what was a AAA credit rating, were almost guaranteed to be safe.

So, the actuaries are looking at how much it might cost to purchase these gilts, to provide you with a pension in retirement.

A downgrade in the UK credit rating means that these Gilts are likely to be cheaper to buy now than they were yesterday.

This means that it would cost the actuaries less to purchase Gilts to support your pension.

Therefore, the actuaries would offer you a lower CETV.

jcorbygas

We are just at the end of the process of transferring from husbands deferred BG pension - for us it worked out better to transfer out due to needing 25% lump sum straight away and due to the fact that husband still intends to work (self employed)after age 60 so no point in all of his pension being taxed. The CETV is quite high due to the other benefits in the pension ie widows/dependants pension.
In our specific position the transfer out was the best for our needs which the transfer specialist has concurred with but each persons needs are different.

alanrc

decided to take the cetv value of £402000,
Paperwork was late and the cetv had to be recalculated.
Received £451000 which is now invested in a personal pension.

Bazofts_Revenge

On the original figures if you took a natural yield of 3% you would get about £12000 a year. Your capital can then fluctuate and hopefully grow with time along with dividends.

jamesd

alanrc wrote: »

Received £451000 which is now invested in a personal pension.

Please have a read about Guyton's sequence of returns risk reduction method. At the moment it's suggesting reduced equity weights in many of the world's stock markets.

jcorbygas

alanrc - we thought we had done well getting an extra £35000 due to late paperwork! (Paperwork was late on Nat Grid's side)