Questions to ask an IFA re pensions

fcandmp

Well if that were the case, and purely from a personal perspective I am not sure what you would be looking for an IFA to advise you on. If you took that max tax free lump sum you wouldn't be moving it to a pension product, you would be moving it to wrapped ISA
Products and the best return cash saver products you could find, e.g Santander 123. You could access the cash from very low risk products and leave accessing oh's dub pension until nearer his nra and not suffering the actuarial reduction? If you didn't take the tax free lump sum from the dc pot you would probably still need to move it to a sipp platform to access it as few employers provide for a drawdown within their aligned schemes, I chose interactive investor sipp, largely due to the low cost of the platform.

enthusiasticsaver

fcandmp wrote: »

Well if that were the case, and purely from a personal perspective I am not sure what you would be looking for an IFA to advise you on. If you took that max tax free lump sum you wouldn't be moving it to a pension product, you would be moving it to wrapped ISA
Products and the best return cash saver products you could find, e.g Santander 123. You could access the cash from very low risk products and leave accessing oh's dub pension until nearer his nra and not suffering the actuarial reduction? If you didn't take the tax free lump sum from the dc pot you would probably still need to move it to a sipp platform to access it as few employers provide for a drawdown within their aligned schemes, I chose interactive investor sipp, largely due to the low cost of the platform.

We opted to engage an IFA to advise on the best option for us to take. Given that OHs company has taken a while to get back to IFA with further information I am guessing that the options we have been given are not the total picture and there are other options available. I do not know enough about pensions, SIPPS to know if we would be taking the best option.

My understanding so far from looking at the options is that the best offer the company has given is the DB pension together with temporary bridging or smoothing pension until SPA is the best for us to take as I understand rarely will an IFA suggest moving a DB pension to avoid breaking the link with salary. This would give us £22500 together with the AVC and Protected Rights pensions with spousal protection. These pots I suspect the IFA may come up with other suggestions for rather than taking them as pensions as they only produce around £4000 per annum in total. The DC pot we also need to put somewhere and given I already have around £100k (my early retirement pot) stacked away in cash (high interest current and regular savings accounts) and stocks and shares ISAs I think it quite likely that SIPPS and further ISAs may be on the cards for the DC pot and maybe the AVC and protected rights pots. Again, I know nothing about SIPPS or tax implications so would rather get somebody more knowledgeable than me to confirm we are making the right decisions. There is very little actuarial reduction (2.5% per annum) and that will more than be made up by having the pension for 7 additional years. The pension also increases in payment by either 5% or rpi whichever is lesser.

bigadaj

enthusiasticsaver wrote: »

We opted to engage an IFA to advise on the best option for us to take. Given that OHs company has taken a while to get back to IFA with further information I am guessing that the options we have been given are not the total picture and there are other options available. I do not know enough about pensions, SIPPS to know if we would be taking the best option.

My understanding so far from looking at the options is that the best offer the company has given is the DB pension together with temporary bridging or smoothing pension until SPA is the best for us to take as I understand rarely will an IFA suggest moving a DB pension to avoid breaking the link with salary. This would give us £22500 together with the AVC and Protected Rights pensions with spousal protection. These pots I suspect the IFA may come up with other suggestions for rather than taking them as pensions as they only produce around £4000 per annum in total. The DC pot we also need to put somewhere and given I already have around £100k (my early retirement pot) stacked away in cash (high interest current and regular savings accounts) and stocks and shares ISAs I think it quite likely that SIPPS and further ISAs may be on the cards for the DC pot and maybe the AVC and protected rights pots. Again, I know nothing about SIPPS or tax implications so would rather get somebody more knowledgeable than me to confirm we are making the right decisions. There is very little actuarial reduction (2.5% per annum) and that will more than be made up by having the pension for 7 additional years. The pension also increases in payment by either 5% or rpi whichever is lesser.

I'm not sure what value the ifa is adding here.

You are quite clued up on most areas of your financial information, a sipp is just a tax wrapper, like an isa. So you can hold the same investments in a sipp as you can hold in an isa, or indeed unwrapped, and you tun your own isa.

In terms of tax then you're aware that isas are taxed on the way in and are tax free in teh way out, the opposite of pensions. It might be worth you doing your own cash flow for the future and see what works best for you, many people assume retirement spending will be higher initially and reduce with increasing age.

Otherwise arranging your finances for smoothing if income and so levelling of tax is often wise.

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.

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.

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."

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.

I have digested this very helpful (what a star!!) post and I think you are right in that income drawdown would be a good place to start for the investor pot (lump sum) and I have been doing our sums on the information we have so far from the company pension scheme. Our appointment with IFA is tomorrow so he may have further information.

All suggestions I have had so far from various people and on this thread is that the IFA will certainly not suggest moving the DB part of OH pension (so not an annuity) and we have decided we would also like to take the levelling option by taking the additional temporary pension until SPA as this will help in early years when we will probably need income most. This in itself will cover our OK level of income along with my salary for now as I still work part time and intend to for the next year or so.

I think we will be asking the IFA to suggest where to put the bulk of the Investor pot (between £100-£120k) and flexible drawdown is something I am really interested in given we do not know exactly what my pension situation will be yet (a lot less than OH certainly) and we already have around £100k in savings and investments (60k invested) .

As you say I will be very wary if annuities are suggested and ask for figures to justify this is worth taking out. We have been told that the lump sum will be coming entirely from the DC pot and some from an AVC pot and the tax free amount will be around £140k which based on a recent statement appears to be about 25% of the total pot. Do you think we should look into SIPPS for that sort of amount on some sort of flexible drawdown scheme and is there any advantage in doing them in both our names rather than just my OHs? I am thinking of the tax side of things now and the fact that my pensions are no where near as good as OHs which is why I have invested heavily in stocks and shares isas.

My OHs present pension provider has said OH can continue to invest in the existing scheme but I am not sure yet if it is possible to draw the income from the DB pot which we will do given there is only a 2.5% per annum actuarial reduction but leave the investor pot (which is essentially the tax free pot) untouched. Is this common? I always understood that it is always worth taking the tax free lump sum even if you don' t need it initially.

I have been tracking our expenditure for the last few years and have been working on around £20-22k net as being OK to good level of income so that sounds like we fall into the median household. I will also certainly be thinking about deferring the state pensions for both of us as that sounds like it might be worthwhile.

Anything else I should be researching or thinking about? Sorry if this is all disjointed. Lots of things to think about.

fcandmp

In relation to your last post about lump sum's and SIPPs, you need to understand the difference between transferring oh's avc pot to a SIPP to enable drawdown, versus taking a tax free lump sum, which due to hmrc recycling rules could not be invested into a SIPP - such a sizeable amount would take a couple of years for you to invest in ISAs, some in each tax year.

Transferring the Avc pot to a sipp has a variety of benefits, including access to flexible drawdown which can be phased, but also outside of IHT and CGT for capital growth and no income tax on dividends.