What to do with Final Salary pensions?

room_101

Hi,

I've got 2 final salary pensions. Pension 1 has a transfer value of £84k. Pension 2 has a transfer value of £79k.

I'm 38 years old and currently do not have a pension that I'm paying into. I'm working as a contractor (got my own ltd company) and will need soon to setup a pension for myself.

To setup my new pension, should I take out a personal pension or get my company to setup one. My understanding is that it is more tax efficient for my company to do this - correct?

Also, what should I do with the two final salary pensions - should they be left in place or cashed in?

Pension 2 will increase by 7% or RPI (whichever is lower). This means it is more likely to be RPI - therefore does this mean that the best thing to do is to transfer it out and put it into a pension that I would get an IFA to set up for me?

I see advantages by not combining them as I can draw down one early and not affect the others. Is this a correct approach.

All input appreciated. I'm going to an IFA in the next week and want to understand what the plusses and minuses are of this are so that I don't get caught cold in the meeting


Thanks.

dunstonh

To setup my new pension, should I take out a personal pension or get my company to setup one.

Do you need to comply with auto-enrolment rules or not? If not, a personal one with company contributions will suffice.

Also, what should I do with the two final salary pensions - should they be left in place or cashed in?

They cant be cashed in.

Pension 2 will increase by 7% or RPI (whichever is lower). This means it is more likely to be RPI - therefore does this mean that the best thing to do is to transfer it out and put it into a pension that I would get an IFA to set up for me?

Insufficient detail to even hazard a guess. Historically, transferring final salary schemes was wrong 9 times out of 10. However, gilt pricing is making transfer values higher. So, the critical yields have been coming down and making some transfers more viable.

kidmugsy

At 38 you could simply continue to defer both FS pensions, and expect to live off them and a DC pension in old age. The diversification across two sorts of pension might be a good thing.

What are the Normal Retirement Ages for the two FS pensions? What is the inflation-protection on Pension #1? Are both schemes financially secure?

sandsy

The transfer values suggest reasonably good incomes from the final salary pensions for someone of your age.

Probably best to leave them and top up your pension provision elsewhere. Final salary schemes are best left until normal retirement age as they suffer reductions if taken early. Personal pensions are better for fulfilling early retirement needs before the final salary ones kick in.

Kynthia

Usually final salary pensions are incredibly good value compared to what you paid into them. They are risk free, as are not reliant on investments to grow, and have a guaranteed amount they pay out until your death which helps your financial planning. They often come with spouse and children benefits, perhaps paying a 50% pension to your partner should you pass away and sone to your children until they are no longer of dependant age. Usually it's best to leave them deferred and claim them when you're at the scheme age.

What is their scheme age and have you had an update on the annual salary they will pay you at retirement?

kidmugsy

Kynthia wrote: »

Usually final salary pensions are incredibly good value compared to what you paid into them.

Yes, but if you've stopped paying into them that's irrelevant. Now they are a bunch of promises, however little was paid into them.

I agree that those promises are often good value to keep hold of, but not always, especially if you think there's a non-negligible chance they won't be honoured. Or if the inflation-protection is poor. Or your life expectancy is poor. Or if you don't expect to have a spouse to get the widow's pension.

mgdavid

kidmugsy wrote: »

Yes, but if you've stopped paying into them that's irrelevant. Now they are a bunch of promises, however little was paid into them.

I agree that those promises are often good value to keep hold of, but not always, especially if you think there's a non-negligible chance they won't be honoured. Or if the inflation-protection is poor. Or your life expectancy is poor. Or if you don't expect to have a spouse to get the widow's pension.

In the grand scheme of things all relatively unusual occurrences which is why K correctly said 'usually' not 'always'.

As somebody else said recently, diversity is as important in pensions as it is in investing. Some DB alongside DC is better than all one or the other.

Kynthia

Yes we are all guessing, especially the OP, until they find out more details about their schemes. All we know is the transfer value and that the second increases with RPI up to 7%, which is pretty good. The OP needs to know the expected annual payment, any lump sum, if there's a spouse or child pension, what pension 1 increases by, the normal retirement age of both etc.

We also don't know if the other benefits will be of benefit to the OP as we don't know much about their circumstances. However at 38, even if they didn't have a spouse or children, their situation can change a lot.

The OP didn't seem to be aware that DB pensions are generally considered valuable with additional benefits and are growth risk free compared to private pensions. However the good thing is they're seeing an IFA who will be able to examine these schemes and know the OP's circumstances, so it's likely any decisions made will be informed ones.

room_101

I've only got details for one currently.
Value: 79085
Member contribution: 5555
Service: 8y 3m
Basic pension preserved in scheme at date of leaving: 2808pa
Widows pension on death before retirement: 1404
Lymph sum on death before retirement if single: 11110

Pension increases: the pension based on service completed increases at 7% per year or by the rise in the retail prices index if less.

END


does the increases mean that now or would be better to move it out somewhere that better gains can be obtained over the coming years up to retirement?

I assume that the transfer value incorporates any withdrawal penalties (or incentive)?

Kynthia

So it was worth a guaranteed £2808 a year when you left and will increase by RPI capped at 7%. What is the normal retirement age and when did you leave?

At the moment it's guaranteed and risk free whereas you investing the cetv yourself isn't. A lot could happen in the next 20 years that would leave you worse off whereas you'd still have the option to transfer nearer your retirement age should your circumstances determine its the best option. I'd personally keep these deferred for now so that they were the low risk parts of my pension planning and I could start a private pension with a slightly higher risk portfolio. However I don't know much about investments so others could give you a better answer depending on your responses.

bigadaj

You may be able to do better than the quoted rate on the db pension, but I'd personally leave that alone as it could form a good stable basis in the future.

It could also be used to allow you to invest in higher risk and so return investments within your other pensions, isas and unwrapped investments.