Questions to ask an IFA re pensions

enthusiasticsaver

My OH takes early retirement this October at the age of 58. He has a very good but complicated pension scheme and based on the company scheme estimate they sent us in April we felt that was enough for him to retire on this year subsidised by my part time income as I am only 56 and not planning on retiring for at least a year and our savings.

We have overpaid into my OHs pension since he was 25 so the pension is very good but complicated with 4 separate pots - DC pot (current scheme), a DB pot (protected with 25 years membership), an AVC pot and another protected rights pot due to the scheme being contracted out of SERPS for a few years. We engaged the services of an IFA who has had a devil of a job apparently getting the information out of the company pension scheme administrators that he needs to advise us fully. He has said he now knows how all the pots relate to each other and what can be done with them and has made an appointment next week for us to come in and discuss.

So far we have had some forms from my OHs pension providers asking us to make various choices from 4 options on each pot by the end of next month. All these options assume us leaving the pension with the current scheme. I am wondering if the IFA will suggest us moving the whole pension to another company or is this not how it works? How do we know if the IFA is advising correctly and are there any particular questions we should be asking him? This is not something we have done before so I just want to be prepared.

We have filled out attitude to risk questionnaires the IFA sent us. We both came out cautious but I do invest in stocks and shares so I know a little about this. I am not sure if this is relevant but we both get our state pensions at 66, OH has his estimated at £165 per week and me at £155. I also have a GMP with Barclays which the IFA also has information on apparently and a LGPS with my current employer.

AnotherJoe

It's extremely unlikely he'll recommend doing anything with the DB pension portion other than deciding when to take it.

tacpot12

The advisor might suggest moving the money purchase pensions to a single new provider. You need to make sure you understand the reason(s) for the recommendation to do so, and that the arguments stack up. e.g. if the argument is to reduce costs, make sure the new scheme really does have lower costs than the old scheme.

The advisor might suggest paying them for a discretionary management service, i.e. where you pay them to manage the funds and the pay the pension via a drawdown arrangement. If they do this, you really need to ask them to find the best discretionary wealth management service in the market. It they come back and say it is them, I'd want to see the analysis in every detail! Self Management of the funds is the other option and will usually be the cheapest option, but carries more risk. Beware of high charges for discretionary management. An annuity is one way to buy discretionary wealth management services; if the provider mismanages the funds you give them, they have to make up the loss from their own resource, but annuities make a heavy charge for covering this risk. Paying for a discretionary management service is more transparent, and you will get performance reports to say how they are doing against a specific index.

Hope your hubby enjoys his retirement. Don't leave it too long before joining him!

atush

How much will your OH DB pension be reduced if he takes it at 58? What is the scheme age (ie 60 or 65?).

It is usually reduced for each year taken early- so leaving that one for a few years and living off the DC pots could be a preferable course of action?

jamesd

enthusiasticsaver wrote: »

So far we have had some forms from my OHs pension providers asking us to make various choices from 4 options on each pot by the end of next month. All these options assume us leaving the pension with the current scheme.

Use extreme care with such forms! They usually contain options that involve buying an annuity at a ridiculously low income level for the amount of money beings spent. Waiting until state pension age then deferring the state pension will pay about twice as much as an annuity would pay for the same amount of money. Annuities are often described using words like "guaranteed income for life" or "open market option" so be extremely cautious about any choice that mentions those phrases. An annuity would be a great way to blow half of the value of a pension pot.

However, there are some valuable annuities out there that have guaranteed annuity rates or guaranteed minimum pensions. The income from those can be a good deal. A GAR or GMP might pay an income in the 7-10% for the pension pot transfer value. A standard annuity might pay more like 2-4% so those percentages might give some idea of what the deal is. You'd also need to know if the deal is level (doesn't increase with inflation) or CPI or RPI linked and if there is any spousal pension. Each of those potions pays less at the start. If there is a GAR or GMP it's usually best to take that and not take any tax free lump sum at all.

If in doubt when doing such a form, take the option of transferring all of the money unless you see the expression CETV. Ask for help if you see that.

enthusiasticsaver wrote: »

I am wondering if the IFA will suggest us moving the whole pension to another company

For the defined contribution pension pots that is likely to be a good idea. For defined benefit pots it depends greatly on the transfer value offered and the benefits available. Some are offering very good transfer deals that are worth taking at the moment, others aren't.

One feature of some defined benefit (final or average salary types) is the ability to use an AVC pot to pay the 25% tax free lump sum from the whole pension pot, including the defined benefit portion. One of these might let him take 100% of the AVC as a tax free lump sum. If offered this facility is almost always worth taking because tax free is good and it's a far better deal usually than taking a lump sum in exchange for reduced pension.

Taking tax free lump sums from defined benefits otherwise is usually a bad deal but not always. The commutation rate, the amount of lump sum per Pound of income given up, is the key figure. I've seen rates as horrendously bad as 8:1, 12:1 is a standard bad deal in public sector schemes and around 28: is what the Pension protection Fund has used in some schemes transferred to it, as an actuarially neutral value. Usually taking the lump sum in this case (not using the AVCs) will make the company accountant smile because the deal is great for their financing obligation towards the pension scheme and poor for the person taking it.

Defined benefit pensions normally have a "normal retirement age" or "scheme retirement age", the same thing. Often 65 or 60 these days, some older ones or special ones can be 55 or even 50. There is normally a penalty called an "actuarial reduction" for taking the pension before the NRA. Usually it is a bad idea to take such a pension before NRA because using savings to live on or borrowing, say on 0% credit cards, to get closer is a better financial deal. But not always. Some schemes do have fair or even good actuarial reduction levels.

One thing that defined benefit pensions do not do is make any allowance for reduced life expectancy. If someone has a medical condition that substantially reduces their life expectancy, even something as straightforward as smoking, a transfer out to a money purchase pension can be a good deal. Then the pot of money could be used to buy an enhanced annuity that does allow for this, or can be used for income drawdown.

enthusiasticsaver wrote: »

How do we know if the IFA is advising correctly and are there any particular questions we should be asking him?

One good option is describing the pensions and offers here so we can comment on them first, then we can all comment on what the IFA suggests.

One key question for the defined benefit pensions is "is it better to use savings, 25% tax free lump sum or other drawing from defined contribution pensions, 0% credit card deals or other borrowing and delay taking the pension until normal retirement age?"

An IFA might not be comfortable suggesting even dirt cheap and very profitable borrowing options and you need to know this so you can allow for it when interpreting their advice. Others will, recognising that it can often be an excellent financial move.

One key question if any annuity is suggested is "State pension deferral pays a 5.8% increase in state pension per year of deferral. If you did not include that as an option instead of annuity purchase please explain why and show what the numbers would be if that option was taken instead of using an annuity."

enthusiasticsaver wrote: »

We have filled out attitude to risk questionnaires the IFA sent us. We both came out cautious but I do invest in stocks and shares so I know a little about this.

Those questions can sadly result in poor choices, particularly where cautious is the result. That can be used to justify really poor options like buying normal annuities on the grounds that investment is perceived as too risky. You can help to avoid mistakes like that by describing the investments and savings that each of you has used before and saying if you were comfortable with them.

For an example of what might happen sometimes, there's a question asked sometimes about taking some money now or taking a 10% higher amount a year later. Someone who takes the money now is supposed to have low willingness to invest and/or low risk tolerance. I'd take it now because I can make 12% or more on the money - it means exactly the opposite of what the answer is taken to mean in that case.

Or it might discuss investments in terms of gains and losses rather than ups and downs. So instead of saying about the stock market "an investment that on average goes up by about 5% plus inflation but sometimes drops by 20% or 40% then recovers over a few years" the question might say "would you be comfortable with an investment that could lose you 40% of your money in exchange for on average paying you 5% a year?" Same investment, just one presented in a way that is likely to lead to a very different answer from the other.

enthusiasticsaver wrote: »

I am not sure if this is relevant but we both get our state pensions at 66, OH has his estimated at £165 per week and me at £155. I also have a GMP with Barclays which the IFA also has information on apparently and a LGPS with my current employer.

It's relevant and so is the potential income from the defined benefit pensions. Those can be compared to three income levels: minimum needed, OK for normal living and nice to have. That in turn can feed into decisions about how to invest the money. If the OK for normal living target is met by those guaranteed income types it's easy to decide to invest lots of the money in various ways. If not, then things like doing some state pension deferring to at least get above the minimum is likely to be a good move, maybe even over the OK level.

LGPS matters not just for the defined benefit pension but because it is one of the types that allows use of the AVCs to pay for the 25% tax free lump sum on the whole pension. Also, as a funded public sector scheme, transfers out are allowed and that might be a good deal. As a public sector scheme it'll use the usual bad 12:1 commutation ratio for any lump sum beyond this to reduce income.

You in part just have a timing problem:

1. Final years, some capital needed to possibly buy immediate needs annuities or helpers if care is needed.
2. Steady state. All the pensions being paid and income taken from investments. Plan for perhaps 30-40 years of this unless there is a reason to expect low life expectancy.
3. Defined benefit work pensions being paid, not state pension yet, so draw on lump sums and savings or borrowing to get to your target level sustainable income temporarily.
4. Defined benefit pensions not being paid, drawing heavily on lump sums, defined contribution non-lump sums, savings and borrowing to provide the long term level income for a while.

As you can see from those there's a completely normal need to draw at an unsustainable rate in the early years, before all of the guaranteed pensions are being paid. So don't be alarmed by it, in fact, insist on a plan like this because that's what you need.

One thing annuities can do besides being poor value for money if in normal good health at normal ages, is really mess up such a plan by spending on lifetime income when what's needed is income for stages 3 and 4 coming from drawing on capital.

Given your existing guaranteed income types it's quite likely that you'd be suitable for income drawdown, which just means investing and taking an income from the investments. If you're not familiar with this please read much of Drawdown: safe withdrawal rates and do a cfiresim analysis of your situation. Ask for help if you don't know how to put in the various amounts for your pensions and I or someone else will tell you how. It's just added "social security" income for any work defined benefit pension that has the usual inflation linking. The state pensions are also "social security".

To put incomes into some context, the Office for National Statistics reports that the current median average household income for retired households is £21,100 a year.

jamesd

A lot of reading and homework there but it's not as bad as it might seem, just a fair bit of reading and experimenting to do as you learn more.

One thing you should come out with near the end of the process of working through that is a cfiresim calculation that has a floor set to your minimum income, the average monthly income it gives as an OK level or more and the results if you don't experience the worst case historic investment performance as your nice to have level of income. All but the worst cases do end up paying more and/or leaving a large inheritance.

Then you can use that sort of thing as the basis for discussion of options, in particular what to do if the floor can't be made as high as your minimum income need. More likely it can and the question will instead be how high should the normal monthly income be and what drawdown rules should be used?

Or alternatively you might decide it's too much hassle and that you'll both defer your state pensions for five to ten years to spend most of the money and buy annuities with the rest, resulting in an easy to manage set of investments, none, but also no up side or inheritance. Annuities can have a role there, particularly if you decide to buy at around 80-85 years old or if in ill health when they can provide good or excellent value for money, unlike younger ages and good health.

Overall it looks to me that you've both done a pretty good job of preparing financially and you might be very pleasantly surprised by the cfiresim results.

dunstonh

How do we know if the IFA is advising correctly and are there any particular questions we should be asking him?

It should be very easy to tell. Just apply common sense and listen to what is being said. The adviser is there to find out about your situation and recommend what is suitable for your situation. For the vast majority of the public that means using mainstream options. Nothing silly and stupid like biofuels, cape verde property, forestry, student accommodation etc.

The adviser should explain what and why and how it fits. If that is being skipped or you find your questions are not being answered then then consider walking away.

Don't skip things. This is often a once in a lifetime decision that you need to get right. So, don't brush over things you dont understand. Ask questions and actually listen to the answers. Do the answers sound right and thought out or deflected.

The good news is that most IFAs are fine. They have low complaints stats and do the job as required. So, the odds are in your favour. As long as you apply common sense.

jamesd

Good advice there from dunstoh, I particularly like the bits about understanding and asking questions and as he observed, I've no doubt at all that most IFAs do a good job. One of the key skills for public-facing IFAs is being able to explain things.

There's also no hurry to decide about at least most of it so you can take your time. Easy enough to buy time by transferring defined contribution pensions (unless they have a GAR or GMP, taking those is usually an easy call if the rates are good).

enthusiasticsaver

atush wrote: »

How much will your OH DB pension be reduced if he takes it at 58? What is the scheme age (ie 60 or 65?).

It is usually reduced for each year taken early- so leaving that one for a few years and living off the DC pots could be a preferable course of action?

The amount he will get on this part of his pension is £17825 per annum and if he takes it at age 60 it would be £18917 per annum or £20885 if he waits until his normal retirement age of 65. We took the view that having the pension for the extra years meant there was no point in waiting. Working it out it seems there is a reduction of 2.4% per annum approximately. The offer from the company pension scheme is that a tax free lump sum of approx. £140k is given which is the whole of the DC pot . It is this amount we are considering letting the IFA invest and we think we will live on this £17825 plus the pots from his AVC pension and protected rights pot. We need around £20k net per annum.

enthusiasticsaver

jamesd wrote: »

Use extreme care with such forms! They usually contain options that involve buying an annuity at a ridiculously low income level for the amount of money beings spent. Waiting until state pension age then deferring the state pension will pay about twice as much as an annuity would pay for the same amount of money. Annuities are often described using words like "guaranteed income for life" or "open market option" so be extremely cautious about any choice that mentions those phrases. An annuity would be a great way to blow half of the value of a pension pot.

However, there are some valuable annuities out there that have guaranteed annuity rates or guaranteed minimum pensions. The income from those can be a good deal. A GAR or GMP might pay an income in the 7-10% for the pension pot transfer value. A standard annuity might pay more like 2-4% so those percentages might give some idea of what the deal is. You'd also need to know if the deal is level (doesn't increase with inflation) or CPI or RPI linked and if there is any spousal pension. Each of those potions pays less at the start. If there is a GAR or GMP it's usually best to take that and not take any tax free lump sum at all.

If in doubt when doing such a form, take the option of transferring all of the money unless you see the expression CETV. Ask for help if you see that.

There was very little information on the option choices form and I think this is one of the reasons our IFA has had length, protracted conversations with the pension provider to get more information. No mention of annuity rates but I daresay when we see him this week we will get more information. What is CETV?
For the defined contribution pension pots that is likely to be a good idea. For defined benefit pots it depends greatly on the transfer value offered and the benefits available. Some are offering very good transfer deals that are worth taking at the moment, others aren't.

One feature of some defined benefit (final or average salary types) is the ability to use an AVC pot to pay the 25% tax free lump sum from the whole pension pot, including the defined benefit portion. One of these might let him take 100% of the AVC as a tax free lump sum. If offered this facility is almost always worth taking because tax free is good and it's a far better deal usually than taking a lump sum in exchange for reduced pension.

The options form says the lump sum comes entirely from the DC pot. My guess is though the options form is limited as it says constantly if you want another option ask for further quotes.

Taking tax free lump sums from defined benefits otherwise is usually a bad deal but not always. The commutation rate, the amount of lump sum per Pound of income given up, is the key figure. I've seen rates as horrendously bad as 8:1, 12:1 is a standard bad deal in public sector schemes and around 28: is what the Pension protection Fund has used in some schemes transferred to it, as an actuarially neutral value. Usually taking the lump sum in this case (not using the AVCs) will make the company accountant smile because the deal is great for their financing obligation towards the pension scheme and poor for the person taking it.

Defined benefit pensions normally have a "normal retirement age" or "scheme retirement age", the same thing. Often 65 or 60 these days, some older ones or special ones can be 55 or even 50. There is normally a penalty called an "actuarial reduction" for taking the pension before the NRA. Usually it is a bad idea to take such a pension before NRA because using savings to live on or borrowing, say on 0% credit cards, to get closer is a better financial deal. But not always. Some schemes do have fair or even good actuarial reduction levels.

The rate seems to be less than 2.5% per annum for going early.

One thing that defined benefit pensions do not do is make any allowance for reduced life expectancy. If someone has a medical condition that substantially reduces their life expectancy, even something as straightforward as smoking, a transfer out to a money purchase pension can be a good deal. Then the pot of money could be used to buy an enhanced annuity that does allow for this, or can be used for income drawdown.

No medical issues at present luckily.

One good option is describing the pensions and offers here so we can comment on them first, then we can all comment on what the IFA suggests.

One key question for the defined benefit pensions is "is it better to use savings, 25% tax free lump sum or other drawing from defined contribution pensions, 0% credit card deals or other borrowing and delay taking the pension until normal retirement age?"

An IFA might not be comfortable suggesting even dirt cheap and very profitable borrowing options and you need to know this so you can allow for it when interpreting their advice. Others will, recognising that it can often be an excellent financial move.

Whilst I admit that borrowing to live may financially make sense we are strongly averse to debt so would struggle with that psychologically I think particularly in view of the fact that we have overpaid into my OHs pension for years with the intention of him going early. As long as we have sufficient to cover our needs we are not too worried if the sum is reduced as we knew that all along.

One key question if any annuity is suggested is "State pension deferral pays a 5.8% increase in state pension per year of deferral. If you did not include that as an option instead of annuity purchase please explain why and show what the numbers would be if that option was taken instead of using an annuity."

Those questions can sadly result in poor choices, particularly where cautious is the result. That can be used to justify really poor options like buying normal annuities on the grounds that investment is perceived as too risky. You can help to avoid mistakes like that by describing the investments and savings that each of you has used before and saying if you were comfortable with them.

For an example of what might happen sometimes, there's a question asked sometimes about taking some money now or taking a 10% higher amount a year later. Someone who takes the money now is supposed to have low willingness to invest and/or low risk tolerance. I'd take it now because I can make 12% or more on the money - it means exactly the opposite of what the answer is taken to mean in that case.

Or it might discuss investments in terms of gains and losses rather than ups and downs. So instead of saying about the stock market "an investment that on average goes up by about 5% plus inflation but sometimes drops by 20% or 40% then recovers over a few years" the question might say "would you be comfortable with an investment that could lose you 40% of your money in exchange for on average paying you 5% a year?" Same investment, just one presented in a way that is likely to lead to a very different answer from the other.

It's relevant and so is the potential income from the defined benefit pensions. Those can be compared to three income levels: minimum needed, OK for normal living and nice to have. That in turn can feed into decisions about how to invest the money. If the OK for normal living target is met by those guaranteed income types it's easy to decide to invest lots of the money in various ways. If not, then things like doing some state pension deferring to at least get above the minimum is likely to be a good move, maybe even over the OK level.

LGPS matters not just for the defined benefit pension but because it is one of the types that allows use of the AVCs to pay for the 25% tax free lump sum on the whole pension. Also, as a funded public sector scheme, transfers out are allowed and that might be a good deal. As a public sector scheme it'll use the usual bad 12:1 commutation ratio for any lump sum beyond this to reduce income.

You in part just have a timing problem:

1. Final years, some capital needed to possibly buy immediate needs annuities or helpers if care is needed.
2. Steady state. All the pensions being paid and income taken from investments. Plan for perhaps 30-40 years of this unless there is a reason to expect low life expectancy.
3. Defined benefit work pensions being paid, not state pension yet, so draw on lump sums and savings or borrowing to get to your target level sustainable income temporarily.
4. Defined benefit pensions not being paid, drawing heavily on lump sums, defined contribution non-lump sums, savings and borrowing to provide the long term level income for a while.

As you can see from those there's a completely normal need to draw at an unsustainable rate in the early years, before all of the guaranteed pensions are being paid. So don't be alarmed by it, in fact, insist on a plan like this because that's what you need.

One thing annuities can do besides being poor value for money if in normal good health at normal ages, is really mess up such a plan by spending on lifetime income when what's needed is income for stages 3 and 4 coming from drawing on capital.

Given your existing guaranteed income types it's quite likely that you'd be suitable for income drawdown, which just means investing and taking an income from the investments. If you're not familiar with this please read much of Drawdown: safe withdrawal rates and do a cfiresim analysis of your situation. Ask for help if you don't know how to put in the various amounts for your pensions and I or someone else will tell you how. It's just added "social security" income for any work defined benefit pension that has the usual inflation linking. The state pensions are also "social security".

To put incomes into some context, the Office for National Statistics reports that the current median average household income for retired households is £21,100 a year.

Really useful thanks and I will digest by reading several more times before our appointment on Wednesday when we will have our options explained to us hopefully and suggestions as to the way to go.

xylophone

Is there no option to leave the DB in the scheme until Scheme NRA and just take the DC/AVC/ former PR and live on that for the next seven years?

Has your husband obtained a new state pension forecast?