Thinking seriously of cashing in final salary pension

rudebhoy

I've got a BG pension which is due to kick in in 4 years time. Just shy of 20 years service there, and will pay 17k pa, index linked. i jacked in work 2 years ago at 54, with a small pension from my last employer, and a very decent VR package, and don't plan on working again.

I first asked for a TV 2 years ago, and was quoted 540k. Very tempting, but decided to leave it for the time being. i've had another 2 quotes since, the first was 470k, the second 490k six months ago. i just got the latest one thru the post this morning - 613k!

Apparently the tv is driven by how many gilts they would need to buy to cover your pension, and gilt yields are at an all-time low currently.

I've done some quick calculations, based on me surviving to 85 and the missus to 90 (she is 9 years younger than me, and would get 2/3rds pension from BG when i snuff it). Assuming an average RPI of 2.5% and getting the same amount of growth on the invested cash, there would still be 300k cash left if we take the same amount of income as the BG pension would pay.

Obviously if we both live longer, then that would diminish, but how much income do you really need when you are in your 90s?

i appreciate there is an element of risk here, but have to say i am very tempted to take their offer.

Am seeing my IFA later this week. When I got the first quote of 540k, his advice was to cash in then, but I decided not to, figuring why take a risk when I didn't need to.

I know he will be pushing me to cash in. Am more tempted to do so now, given the 613k.

I'm also guessing i can pay a lot less tax over the years as well by going down that route. If I just take the BG pension, i will be paying PAYE on more than half of my income, and have calculated the tax paid overall at 110k by the time I am 85.

Any thoughts?

Linton

That size of transfer value does indeed look very tempting and I could well see an IFA advising that it was in your best interests to take the money and invest it. For much of your retirement you could be living off the investment gains or income rather than reducing the pot. Do you have the experience/skills to manage a £600K investment portfolio? If not you may decide it's safest to pay someone else to manage it for you.

Why will you be paying a lot less tax? The cash value will be transferred to a DC pension and any drawdown beyond the 25% tax free allowance will be subject to tax under the same rules as pension income or wages.

rudebhoy

Linton wrote: »

That size of transfer value does indeed look very tempting and I could well see an IFA advising that it was in your best interests to take the money and invest it. For much of your retirement you could be living off the investment gains or income rather than reducing the pot. Do you have the experience/skills to manage a £600K investment portfolio? If not you may decide it's safest to pay someone else to manage it for you.

Why will you be paying a lot less tax? The cash value will be transferred to a DC pension and any drawdown beyond the 25% tax free allowance will be subject to tax under the same rules as pension income or wages.

I don't have any experience of managing that kind of portfolio so would most likely look to my IFA to do that.

On the pension - As you say, the initial 25% can be drawn down tax free, and my other income (small pension from another employer, and, eventually, state pension) will be more or less on the threshold.

My assumption is that while the above is going on, i can move the maximum each year into ISAs for me and the wife, and when the initial 25% is exhausted, start withdrawing from them tax-free.

dunstonh

On the pension - As you say, the initial 25% can be drawn down tax free, and my other income (small pension from another employer, and, eventually, state pension) will be more or less on the threshold.

Or alternatively, don't draw the 25% up front but use phased flexi-access drawdown instead to allow a greater income to be paid without increasing the tax.

My assumption is that while the above is going on, i can move the maximum each year into ISAs for me and the wife, and when the initial 25% is exhausted, start withdrawing from them tax-free.

So phasing would make more sense if you are going to do that or phased crystallisations at least.

Linton

You can withdraw the 25% to put into ISAs, but why would you bother? You could just as well keep the money within the pension as anything you can invest in with an S&S ISA can also be invested in from a pension. If you dont use the 25% now you can use it to cover 25% of all future drawdowns increasing the amount you can drawdown without incurring HRT.

I suggest keeping 3 years (or possibly more) drawdown requirement in cash, perhaps in higher rate current accounts. This will enable you to avoid selling pension investments when prices are low such as during a market crash.

rudebhoy

dunstonh wrote: »

Or alternatively, don't draw the 25% up front but use phased flexi-access drawdown instead to allow a greater income to be paid without increasing the tax.


So phasing would make more sense if you are going to do that or phased crystallisations at least.

sorry, i didn't mean I would take the 25% upfront, my plan would be to take what I needed from that for the first 7-8 years (say 20k pa), while at the same time using our full ISA allowances to build up more tax free cash for later years.

Finst

rudebhoy wrote: »

I've done some quick calculations, based on me surviving to 85 and the missus to 90 (she is 9 years younger than me, and would get 2/3rds pension from BG when i snuff it). Assuming an average RPI of 2.5% and getting the same amount of growth on the invested cash, there would still be 300k cash left if we take the same amount of income as the BG pension would pay.

Check your numbers. I've tried to replicate them and can get nowhere near them - under the scenario and assumptions you've stated I reckon there would be nothing left.


An important point you didn't state is whether the £17k is what you'll get at 60, or whether you'll £17k plus inflation for the next 4 years.


I don't think the deal is nearly as good as you think it is.

rudebhoy

Finst wrote: »

Check your numbers. I've tried to replicate them and can get nowhere near them - under the scenario and assumptions you've stated I reckon there would be nothing left.


An important point you didn't state is whether the £17k is what you'll get at 60, or whether you'll £17k plus inflation for the next 4 years.


I don't think the deal is nearly as good as you think it is.

here's my calc -

age income value of pot
56 £17,360 £613,000
57 £17,794 £610,965
58 £18,239 £608,445
59 £18,695 £605,417
60 £19,162 £601,858
61 £19,641 £597,742
62 £20,132 £593,045
63 £20,636 £587,738
64 £21,151 £581,796
65 £21,680 £575,190
66 £14,722 £567,889
67 £15,090 £567,364
68 £15,468 £566,458
69 £15,854 £565,152
70 £16,251 £563,426
71 £16,657 £561,261
72 £17,073 £558,636
73 £17,500 £555,529
74 £17,938 £551,917
75 £18,386 £547,777
76 £18,846 £543,085
77 £19,317 £537,817
78 £19,800 £531,945
79 £20,295 £525,444
80 £20,802 £518,285
81 £21,322 £510,440
82 £21,855 £501,879
83 £22,402 £492,571
84 £22,962 £482,483
85 £23,536 £471,584
77 £16,163 £459,837
78 £16,567 £455,170
79 £16,981 £449,982
80 £17,406 £444,250
81 £17,841 £437,951
82 £18,287 £431,058
83 £18,744 £423,548
84 £19,213 £415,392
85 £19,693 £406,564
86 £20,186 £397,035
87 £20,690 £386,775
88 £21,207 £375,754
89 £21,738 £363,940
90 £22,281 £351,301

assumptions
1. i live till 85
2. my wife lives to 90
3. she takes 2/3rds of the income I was taking (which is what the BG pension would pay her)
4. investments grow by 2.5% per annum, less the income taken by me

rudebhoy

should have added, the BG pension is currently worth £17307 at 60, plus any RPI increases between now and then.

however the BG pension has a "bridge the gap" option where i can take it at 56, and front load it, then it reduces once state pension kicks in. this would give me the figures quoted above.

Finst

OK, I do broadly agree with your 300k based on how you've said the bridge pension option works.


But, ignoring your bridging pension option for a minute:

17.3k at 56 becomes 19.1k when you draw it at 60
That should grow to about 35.4k when you are 85
Your wife would get 24.2k, rising to 33.3k when she is 90 (and you would have been 99)


Try those numbers, and you should get a leftover sum of c5k (or 2k in today's money)


If you agree those figures, then what that would say is:
- the bridging pension option is ridiculously bad value (not usually true), or
- the bridging pension option doesn't work as you think it does


If that 14.7k is in today's money and needs to be increased by inflation to around 19k), that gets me back to a broadly equivalent value to the non-bridged pension. Could that be the answer?

joujou

Well if he increases his payments pay inflation then he ought to also increase his return because his assumption of pension growth is net of inflation (and is reasonably pessimistic at 2.4%), so it would cancel out.