Final Salary pension scheme closing

Ghostgirll

C_Mababejive wrote: »

I think its always useful to have an idea of what your transfer out value might be.

That doesnt mean its a good idea to transfer out of course. That is down to individual circumstance.

The thing is, if you dont tranfer out,,well all the assets and liabilities rest with the pension trustees/company. If you do transfer out,,well it all rests with you.

Im no expert,,there are plenty on here who know far more than I but isnt it the case that if you tx a DB pension to a sipp, you can take an income from 55 and still carry on working?

Yes I think that's right, although I can also do that from age 50 in my DB scheme, Mababejive, I don't need to transfer out. As a Deferred member there's no consent requirement, it's the reduction factors that hit you hard though if you do that. For me at my current age of 52 it would amount to a reduction of around 46%

As to the transfer value, although I personally haven't requested it, there are others with the same salary, age and years of service who have requested a value, it's somewhere in the region of £400,000

jamesd

Ghostgirll wrote: »

Neither of us has any real savings to speak of, although that's partly because for the past 4 years we've been doubling our mortgage payments every single month instead of saving much beyond what we use for holidays, Christmas, etc. Hence that's come down from £66,000 3 and a half years ago to just over £20,000 today.

Good grief, that looks like poor financial planning! You could pay into a personal pension and at age 55 take out 25% as a tax free lump sum. you can leave the rest until you want to retire, or take it. If you take even a penny of the taxable 75% your allowance for pension contributions each year is reduced from £40,000 to £10,000 and can't carry forward unused allowance from the past three years.

It gets better. He can take the tax free lump sum paid into a bank account of his then he can transfer it to an account of yours to give it to you and you can then use it to make pension contributions in your own name. There are limits on how much of this can be done but they do not apply if done as I've described. Which means he gets tax relief, takes it out tax free, gives it to you and you get tax relief again on the same money. Essentially you have thrown away a lot of money by not waiting until age 55 and using pension money to do the mortgage clearing.

Your work pension probably doesn't offer the ability to take the money while remaining an employee but it is worth checking. Do pay in the maximum your employer will match. And later on, once closer to taking money from the defined benefit pension, the ability to take the whole of the personal part as the tax free lump sum from the whole plan value is a superb deal that you should try to maximise. Money in, get the tax relief, then get it all out tax free, great deal. That would be another good move for mortgage clearing, so you don't blow the potential tax relief you can get that would help with the plan.

jamesd

Ghostgirll wrote: »

All the advice i find on the web says not to consider taking money out of a DB scheme though, is that not always the case?

There are two different ways so I'll cover both. In both cases the usual recommendation is don't but there are exceptions.

1. tax free lump sum, up to 25% of the nominal value. For a defined benefit pension a "commutation rate" is used to calculate how much lump sum is paid per Pound of pension income given up. This is usually a poor rate. I've seen as low as 8:1 (£8 lump sum per Pound of pension given up), most government schemes use 12:1 and a true neutral value that I've seen used can be about 28:1. So maximum income, minimum lump sum is usually best in this situation.

But you are one of the exceptions. Your plan allows you to pay into the defined contribution part and use that as the tax free lump sum for the combined value. This is a superb deal: tax relief on the way in, tax free on the way out. Hard to beat. Exploit it as much as you can, it's a very efficient way of eventually getting rid of your mortgage and/or retiring as early as you might like.

2. transferring out. Again usually a bad move but again there are exceptions. Because of low interest rates the transfer values used by many schemes are now so high that taking the transfer option can be the best way to go. It depends on the specifics like how much you'd get.

One potentially interesting option would be for one of you to transfer out to provide an income by drawing on the money at a high and unsustainable rate to support you until the other one's pension and your state pensions have started. the transfer value still has to make sense, though, and you have that option 1 of paying into the defined contribution scheme and taking it all as a tax free lump sum that is probably going to be the better move if you can retire as soon as you'd like by doing it.

Ghostgirll wrote: »

Should we look into it maybe? I know at least one bloke is taking his entire pot out and going for a lump sum and Drawdown. Not that i really know much about that either, I just know what he's told everyone.

Yes, it's worth asking for a transfer value. when the values are appropriate it can be a great deal. When not, it can be a lousy one.

jamesd

Ghostgirll wrote: »

As to the transfer value, although I personally haven't requested it, there are others with the same salary, age and years of service who have requested a value, it's somewhere in the region of £400,000

One of the general rules of thumb for taking income via drawdown is that about 4% of the capital value can be taken safely, without ever having run out in even the worse periods for investments in history. Modern rules can increase that but more years of life expectancy than the 30 that assumes decrease it and you're quite young so I'll just go with 4%.

That £400,000 could the be expected to pay about £16,000 a year for life and anything left at time of death would be available for inheritance. Since 25% can be taken as a tax free lump sum and reinvested in an ISA about a quarter of that would be tax free, in addition to the income tax personal allowance.

What you might find useful is having a look at Drawdown: safe withdrawal rates and scroll down to the cfiresim mention. Then you can treat your combined finances as one and see how things look if you were to have one of you take a transfer. To get a true picture you must add in your combined state pensions when they start (as social security entries) and your defined benefit pension for the other. Or for both if you want to see what you'd have to save to get to an early retirement target. Then you can ask it to work out what a likely safe income level is if you go today or for any future years. That might give you a pleasant surprise about how viable it is - maybe you wouldn't have to go looking for another job if this one ended.

Taking a transfer out of a defined benefit scheme takes careful thought but it can work out well to help with people's plans if the values and circumstances are OK.

Ghostgirll

@ jamesd

I don't know how to thank you, James, you've just given a whole host of things to think about, and put a lot of work into these replies, I'm extremely grateful to you.

It's a lot to take in, but I'm particularly interested in your comments about why we might be going down totally the wrong route in paying our mortgage off in the manner we've chosen, rather than paying all that cash into a personal pension, that's something we would never have thought to do, but now that you say it, it all makes perfect sense.

Also interesting are your thoughts on one of us transferring out to provide an income while the other leaves their pension in the DB scheme. Obviously that's another angle that my partner and I need to have a long chat about.

You've given me such a lot of detail, so I'll need to read your posts a few times, to be sure I've understood it all correctly, but honestly, when I wrote my opening post I really did NOT expect such a wonderfully helpful response from everyone, not least of all yourself, so thank you very much. I will perhaps have more questions after I've digested all this information. Really appreciate the time you've taken!

gnash101

Think you will find your combined transfers will now be close to £1million.
If transferred to alternative pension arrangements, that would allow access to approx £250k combined tax free lump sum from age 55. That's a nice starter before even having to access your combined pension funds of around £700k.
Wouldn't make any recommendations on which way to proceed (each situation is unique), but the figures make it worth considering.