Transfering my DB pension to a SIPP

bowlhead99

username12345678 wrote: »

The LTA isn't a function of contributions - it is calculated through size of fund?

Could someone on a DC scheme theoretically invest £50,000 in Company A, see the share price go up 20 times in 6 months (I know), and then find that's it for their LTA?

Yes, the concept of a lifetime allowance is, not how much did you pay for it, but how big a pile of assets do you have wrapped up in your tax protected wrapper when you're going to take benefits from it. It is separate from the annual contributions allowance concept.

If I invest 250k today and it goes up by 7% a year then it will be 500k after a decade and £1m after two. Of course, most people don't have £250k to invest all at once and you can't put as much as £250k in on one day (because of annual allowance) but you are right on the gist of the basic concept.

And if that's the case why is the Annual Allowance structured the way it is?

The Annual allowance helps stop people with massive salaries or redundancy payoffs sticking them entirely into a pension to defer their tax bill for years and years. Providing for your retirement rather than being a burden on the state is a good thing which they encourage with a tax break, but there is a somewhat arbitrary limit set for for much of your salary is reasonable to stuff away every year (used to be a higher limit but now lower and reducing further for high earners who society probably thinks don't need it).

By contrast the Lifetime allowance is more along the lines of hmrc saying: if you have over a million of value in your pension pot (which is enough to pay a pretty high amount of income each year compared to the average household income of normal working families), you probably don't need the incentive of government tax relief to make further contributions to it. And in fact you haven't paid tax on any of this money (being effectively received from your employment gross of tax), so if you are building up a massive pot we will tax some of that pot, over our arbitrary lifetime limit. If we change the limits on you, you can "lock in" your entitlement and have a specific allowable pot of money grow, subject to restrictions.

I think most of us taxpayers recognise that the measures make some sort of sense in terms of a periodic contribution limit on DC schemes (where the annual contributions are visible but you can't know what you'll end up with) and a "total value" limit on DB schemes (where the amount 'going in' during a particular year is difficult to measure because its the benefits that are defined and not the contributions).

What we mostly think is silly is trying to legislate for an annual contribution limit on DB schemes and a lifetime limit on DC schemes. The vast majority of people don't hit either limit but it is something pretty messy to deal with if you do, and further reform would be made if the government listened to this forum!

AnotherJoe

I think with that much of an income and a multiple of around 25x you'd be barking to transfer it unless you have very poor health or are desperate to leave a lump sum to dependents.
I suspect you'll also have any hard job even finding anyone who will take on your case at these sort of figures let alone recommend you transfer, because the penalties for them even if you transfer against their advice, can be huge.

hugheskevi

One thing which may be worth noting for future planning is that the LTA is calculated as 20 times the amount put into payment.

So you could have a pension of £80,000 p/a with a normal pension age of 65, take it at age 55 with an actuarial reduction of, say, 45% and have a pension of £44,000 p/a from age 55 paid. Whereas the pension would be valued at £1.6m if drawn at age 65 and be well above the LTA, if drawn at age 55 it would be valued at £880,000 and not have any LTA charge.

username12345678

AnotherJoe wrote: »

I think with that much of an income and a multiple of around 25x you'd be barking to transfer it unless you have very poor health or are desperate to leave a lump sum to dependents.
I suspect you'll also have any hard job even finding anyone who will take on your case at these sort of figures let alone recommend you transfer, because the penalties for them even if you transfer against their advice, can be huge.

What sort of CETV would start to make it a marginal call? And a no-brainer?

hugheskevi wrote: »

One thing which may be worth noting for future planning is that the LTA is calculated as 20 times the amount put into payment.

So you could have a pension of £80,000 p/a with a normal pension age of 65, take it at age 55 with an actuarial reduction of, say, 45% and have a pension of £44,000 p/a from age 55 paid. Whereas the pension would be valued at £1.6m if drawn at age 65 and be well above the LTA, if drawn at age 55 it would be valued at £880,000 and not have any LTA charge.

I was originally planning on leaving at 55 and using my ISA's to bridge the income gap until my pension kicked in at 60 which is the normal retirement date.

This prevents me bringing payments forward and mitigating the LTA charge.

So as it stands £50,000pa is the magic cut-off figure after the commuted portion?

AnotherJoe

username12345678 wrote: »

What sort of CETV would start to make it a marginal call? And a no-brainer?

It's hard to say, there are several factors in play here some of which are subjective.
First of all, you have to offset certainty of a known figure, vs what you might get but with the risk you'll get less.
Next is tax, suppose you could get £75k from your astute investing vs their £55k (which would be a big ask)
Although that's £20k difference, now you have to take tax off. At 40% you are getting £12k more. And that's not inflation adjusted whereas your DB likely is. So after a few years there might not be too much difference.
Then there's the size of the sum. £55k is pretty decent income. Would your lifestyle be much different if it was £67? So is it worth the risk for the extra (decreasing each year) £12k?
Then there is the hassle. You can either take the decent income and be done with it, or spend a fair bit of time and energy managing investments, income and tax and so on for the rest of your life instead of doing something more interesting.
So for me, there would need to be a substantial difference. I know I'll get less than 4% annuity on my DC funds when I retire next year, so drawdown which can give around that and still preserve the capital sum is a no brainer. If I could get say 8% (which I can from one small portion, and will) then I wouldn't bother with drawdown,

In your case I think I'd maximise what I could put into ISAs over the next ten years and then drawdown from that until the pension kicked in at 60 (unless the reduction for taking early was reasonable)

username12345678

Thanks Joe.

I hadn't fully thought about the stress aspect and the idea that knowing you've got a steady (if possibly less) income has a value in itself.

username12345678

I've had an initial chat with an IFA and worked through the figures and the cetv is around 33x projected annual income. I've applied to leave the scheme and so the next discussion is a second talk with the IFA to discuss options.

I already know that the total ongoing fees for management of my pension would be around 1.65% pa which may, or may not, seem good value.

Whilst my first thought is to let the experts deal with it I am open minded to managing it myself using a flat-fee platform and a passive approach.I've taken a completed a couple of online questionnaires to assess my risk tolerance (moderate). I've assessed my required income and how that translates as a percentage withdrawal and then run the figures through the FIREcalc site to get some understanding of the dangers of fund depletion.

Using my estimated desired post-retirement income i've worked through the modelling of different portfolio allocations to try and find a sweet spot between minimizing volatility whilst accepting enough risk to generate the returns needed. I've also tried to get my head round swr's (not 4% in the UK it would seem), sequencing risk and volatility drag etc etc etc.

Now this doesn't make me an expert by any stretch and i'm concious of a little knowledge not only being dangerous but also extremely expensive.

But so is paying 1.65% pa for the next 40+ years!

Unless the IFA is worth that amount of money by being able to position my money to generate consistent returns above what could be a achieved with something like a Vanguard Target Retirement or VLS40 or 60.

I get that the above can be a little 'blunt' as a tool but looking at Warren Buffet's thoughts...

“My advice to the trustee could not be more simple,” he wrote earlier this year. “Put 10% of the cash in short‑term government bonds, and 90% in a very low‑cost S&P 500 index fund.”

“By periodically investing in an index fund, for example, the know‑nothing investor can actually out‑perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

“A very low‑cost index is going to beat a majority of the amateur‑managed money or professionally managed money… The gross performance [of a hedge fund] may be reasonably decent, but the fees will eat up a significant percentage of the returns. You’ll pay lots of fees to people who do well, and lots of fees to people who do not do so well.”

...it makes we wonder whether the hundreds of thousands of pounds i'd be handing over is actually money well spent.

This isn't a dig at the IFA's either, the guys on here are obviously very knowlegeable, it's just whether long-term the value is being added or taken away.

dunstonh

Unless the IFA is worth that amount of money by being able to position my money to generate consistent returns above what could be a achieved with something like a Vanguard Target Retirement or VLS40 or 60.

The VLS 40/60 will still cost you money. Plus, our portfolios have been outperforming the respective VLS. No IFA can guarantee any return will beat another one but it is certainly possible. 1.65% is not bad. It will likely be a mixture of passive and active.

I

get that the above can be a little 'blunt' as a tool but looking at Warren Buffet's thoughts...

“My advice to the trustee could not be more simple,” he wrote earlier this year. “Put 10% of the cash in short‑term government bonds, and 90% in a very low‑cost S&P 500 index fund.”

“By periodically investing in an index fund, for example, the know‑nothing investor can actually out‑perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

“A very low‑cost index is going to beat a majority of the amateur‑managed money or professionally managed money… The gross performance [of a hedge fund] may be reasonably decent, but the fees will eat up a significant percentage of the returns. You’ll pay lots of fees to people who do well, and lots of fees to people who do not do so well.”

Warren Buffet says things for his American investors. US taxation taxes funds at source. UK does not. So, in the US, it is very difficult for managed funds to outperform trackers. The UK with its better taxation also has a much better management record. Research has found that the UK bucks the trend with managed funds doing better than most other countries. UK costs have come down a lot in recent years and the UK is more efficient in costs than the US. I saw a statement recently for someone who has a US broker and the bottom line costs were double ours.

Also, American investors tend to be very inward looking. Investing 90% into the S&P500 would be classed as bad investing for European investors and also way above the typical risk profile of the average UK consumer.

Warren Buffett himself does not follow that strategy. He is a value investor. So, he says one thing to the average American but does something different himself. You have to be very careful using information on the internet that is aimed at the investing rules and taxation of different countries.

..it makes we wonder whether the hundreds of thousands of pounds i'd be handing over is actually money well spent.

When you use an IFA, you are paying for the work they do, the knowledge they have and an increased level of consumer protection. Only part of the role is the investment selection. With the fund value you have, the use of VLS would be very restrictive. It would work but I wouldnt do it. Even if you decide to DIY in the end it wouldnt be a great choice for that amount or objective.

username12345678

When you use an IFA, you are paying for the work they do, the knowledge they have and an increased level of consumer protection. Only part of the role is the investment selection. With the fund value you have, the use of VLS would be very restrictive. It would work but I wouldnt do it. Even if you decide to DIY in the end it wouldnt be a great choice for that amount or objective.

Next question asks itself.

kidmugsy

One American writer refers to DB pensions as "dementia insurance". I'm sure you see what he means.