Final Salary scheme massive transfer value has turned my head!

jamesd

Featherweight wrote: »

Now approaching 55, I can draw an almost undiscounted pension of £16,100, RPI linked, plus a tax-free lump of about £45k. Seems pretty good. ... And then I saw the transfer value, a whopping £580K! That's more than double the value of my house. The scheme paid for an independent IFA who thought I'd be better off transferring it into my SIPP.

£16,100 is just 3%. I agree with the IFA and I'd take the transfer route. Then there's diabetes on top, which further reduces the value of the £16,100 from the defined benefit pension by reducing the number of years for which you expect to get it. A pretty easy decision to take the transfer with your particular combination of circumstances even though generically we'd say for normal good health and past transfer values such deals usually don't turn out to be good deals. But this isn't generic, it's your specific combination of transfer value and health. And that reverses the you-specific answer to take the transfer.

Even a pretty cursory check shows that with say a 30 year life expectancy 535,000 / 30 = £17,833 not £16,100 so with investment growth only matching RPI - which means about 5% below the long term UK stock market average - you'd be ahead of what the DB scheme is offering. In addition you'd be able to take 25% of the pot as a tax free lump sum and overtime invest that in an ISA to generate tax free ongoing income vs the taxable ongoing income from the whole of the DB scheme income.

You might want to do some income drawdown learning based on what I describe at Drawdown: safe withdrawal rates.

You could probably take 5% or 6% if you in addition do things like using some of the money to defer your state pension, which increases its value by 5.8% per year of deferral under current rules. Though that may be lower by the time you get there. You could usefully put your numbers into the cfiresim examples to see what its calculations come up with.

Given the likely value of a state pension you could probably take a combined income in the £32-40,000 a year range provided you're willing to adjust that downwards according to say the Guyton and Klinger rules.

But that's assuming normal good health and you have what I presume from the life expectancy effect is type 1 diabetes. Which means you don't need say a 40 year planning horizon but could perhaps use 30 years as the main plan and an optional calculation of 40 or 50 years to check that your minimum income target looks OK. This means that your income could well be more like the £50-60,000 range provided you don't mind depleting the pot.

Now add in your other savings and investments and you may well be able to go beyond that for total income.

If you were getting ongoing assistance from the IFA you'd do things like discussing the drawdown rules choice and Guyton's sequence of return risk mitigation.

jamesd

BobQ wrote: »

Keep telling yourself that its only £580K for a reason

That reason is a combination of low investment yields that they appear to be using combined with an assumption of normal life expectancy. An opportunity to take some benefit from the unfortunate fact of the diabetes to improve the income available due to the reduced life expectancy that the scheme ignores.

So far as impaired life annuities go it's worth getting quotes but you still seem to be too young to get a really good deal. Later, though, they might well beat the state pension option. It's easy enough to buy later.

[Deleted User]

jamesd wrote: »

You might want to do some income drawdown learning based on what I describe at Drawdown: safe withdrawal rates.

Just for info, link doesn't seem to be working

jamesd

So far this is mainly about money but the transfer potentially offers you something that the DB scheme can't offer you: more years of life or better health situation.

It's entirely possible that you'll find yourself in a situation where a particular treatment is not judged to be cost-effective under the NHS but would benefit you. Having an increased amount of capital available broadens your options when considering such treatments.

A completely new US treatment would still probably not be affordable but it might be five or ten years sooner than it would be under the NHS.

jamesd

Sleazy wrote: »

Just for info, link doesn't seem to be working

Thanks, fixed now. Sometimes the forum seems to mangle those URLs and double the forum part of the URL.

jerrysimon

I am in a very simlar position a 55 year old type one diabetic.

My final salary pension is worth 20K and 60K lump sum having worked nearly 40 years. I am planning on retiring next March (56) which will reduce it to 17K and 54K lump sum. I have no plans to move mine out. Mortgage is paid off and my wife has a small 3K school pension 5K lump sum. Drawing hers early reduces it to 2K and 3K lump sum.

I have played around with the figures so much looking at higher lump sum 100k and 13K pension etc. In the end I have decided to take it all as it is. If I died my pension will be reduced to 10K for my wife, though it seems that they still pay her 10K even if I take a higher lump sum. Her share of my pension seems to be 50% of the current value no matter what I do.

I started up a SIP for my wife eary this year and should have about 11K in that by next March.. I guess we could try and survive a few more months on that to max the pensions without drawing them to early.

Jerry

jamesd

The key comparison is with the transfer value, not really with lump sums that tend to have poor commutation rates. Even a normal transfer value, let alone the uncommonly high ones sometimes available now, can make a transfer a good move with type 1 diabetes.

Usually if taking the ongoing income it's better to wait for normal retirement age of the scheme to avoid the actuarial reduction. Borrowing at low cost would normally be a good move if that helps.

kidmugsy

jerrysimon wrote: »

I am in a very simlar position a 55 year old type one diabetic.

My final salary pension ... retiring next March (56) ... 17K and 54K lump sum.

I have played around with the figures so much looking at higher lump sum 100k and 13K pension etc.

(i) Are you saying that a reduction of £4k p.a. in pension buys you an extra lump sum of £46k? No wonder you're not tempted.


(ii) Have you both got estimates of your eventual State Retirement Pensions?

BobQ

jamesd wrote: »

The key comparison is with the transfer value, not really with lump sums that tend to have poor commutation rates. Even a normal transfer value, let alone the uncommonly high ones sometimes available now, can make a transfer a good move with type diabetes.

James, you make a good case for the OP to take the option. An observation on which you might comment, noting that the OP has not indicated the type of diabetes or the seriousness of it in his case and suggests he has a life expectancy of 18-21 years.

If he follows the advice and moves £580K into a SIPP or whatever. He will either need to manage these financial investments for himself (does he feel capable of doing this?) or pay an IFA to manage it for him. Clearly you cannot judge the former but how much might he pay an IFA to manage a pot of that size and what drawdown costs might he incur to take an income of about £16-£18K a year?

My reason for asking is that with a DB pension he is guaranteed a set income linked to RPI with little effort or cost. With a transfer he is facing the costs of managing the pot or the personal hassle of doing it himself. Given his condition, if his health deteriorates affecting his ability to deal with his affairs (say eyesight deteriorates) will he really want the hassle? Will the financial costs outweigh the additional pension he might get? After the onset of a more debilitating condition would he be in a good position to choose an annuity?

MrBeans

Featherweight wrote: »

Now approaching 55, I can draw an almost undiscounted pension of £16,100, RPI linked, plus a tax-free lump of about £45k. Seems pretty good.

I'm a great fan of SIPPs. I'm in a low cost Hargreaves Lansdown SIPP in a couple of very low cost unit trusts. However...

You have £16,100 RPI linked. That is not to be traded in lightly. If the pension scheme you're in is a secure one my instinct says stay with it.

Yes, you could go into a SIPP and you might do better. But there again you might go into a SIPP and c*ck it up.

Though if you're sure you have 10 years max, cashing in and spending £50K a year having fun could be an option.