Final salary transfer help

Benefriction

James I have spoken to a financial adviser and am told the £44k will incur 25% tax thus leaving £33k which will have to be moved into investments and if I wanted flexi access I would pay 25% on each withdrawal. And even if the advisor thought it was a good move for me (they dont) their fees would also eat into my pot significantly. I am even more confused now!! :-(

jamesd

The financial adviser apparently didn't consider the 25% tax free lump sum and your income and personal allowance. I did. The income tax rate in the UK is not 25% so I don't know how the adviser came up with that number.

Of the 44120, 25% is a tax free lump sum. That's 11030. The remaining 33090 if taxed at 20% would be 26472 for a total of 37502. That would be 85% so 15% loss to income tax (I'm ignoring a bit potentially being higher rate tax if you took it all out in one tax year).

But your expected income leaves personal allowance available so you can take much of it out tax free over several years. Expected pension income is 9997 and with a personal allowance next year of 11500 that allows 1503 a year to be taken out tax free. Over five years and ignoring the plan to increase the personal allowance that's another 7500 out tax free. There's a plan to increase the personal allowance to 12500 by the 2017-18 tax year.

There isn't a 25% fee for each withdrawal in flexible drawdown unless that's a fee charged by that financial adviser for arranging it. Places like Hargreaves Lansdown have no fee for such withdrawals.

You do have to allow for the fee that will have to be paid to a financial adviser to take the money via a transfer. That should be low enough to make it a good deal compared to 25% from each. Perhaps £1500 to £2000 of fee taken from the pension pot after the transfer would be the sort of fee range to expect.

Assuming £2,000 of fees the numbers look like this:

£44120 to start
£42120 after IFA fees
£31,590 after £10,530 tax free lump sum
£24,090 after £7,500 taken within the personal allowance over five years
£19,272 after £4,818 income tax at 20%

So that's an after tax lump sum value of 19272 + 7500 + 10530 = £37,302 before the effect of increased personal allowance. 37302 / ( 11497 - 9997 ) = 24.87:1 commutation rate. So after allowing for tax and fees the two options are:

Transfer one: £9997 income and £37302 after tax and fees lump sum value. effective commutation rate 24.87:1.

Tax free lump sum and income from both: £8286 income and £55136 tax free lump sum. Commutation rate 17.17:1.

The both option is still considerably less efficient even after allowing for an IFA fee and income tax.

I'm not very impressed with that financial adviser initially. Also important is to compare the effect to taking the 25% tax free lump sums from the pensions directly and they don't seem to have considered the effect of that on income.

xylophone

James I have spoken to a financial adviser and am told the £44k will incur 25% tax thus leaving £33k which will have to be moved into investments and if I wanted flexi access I would pay 25% on each withdrawal. And even if the advisor thought it was a good move for me (they dont) their fees would also eat into my pot significantly. I am even more confused now!! :-

Are you absolutely certain that you have consulted an INDEPENDENT Financial Adviser with the permissions/ qualifications detailed in my post 22?

I am mystified by the advice you say that you have been given.

Benefriction

The advisor contacted me after I went to Unbiased. He said straight off that he thought what I wanted to do was not good for me. Their fees would be approx £4k. Lots of complicated paperwork apparently. So I will try again...

Benefriction

To shimrod - i asked RBS if I was in the group mentioned in the booklet and I am not part of that scheme :-)

Benefriction

The best advice he could offer was to continue working and take pure income from the pension and save it until I had a reasonable lump sum. He suggested paying off the mortgage. He didnt consder the possibility of not having a job for whatever reason thus not being able to save.....

Benefriction

James
Where would the £33k approx be invested. How does flexi access work? What is the risk element?
I have also gone back to rbs and asked for income quotes after taking tax free lump sums and asked for projections on leaving the pension where it is for a period. Ive done this on the basis of getting all options covered. Thank you again for your help and advice

jamesd

You can choose the risk element. Can be anything from cash on deposit inside or outside the pension to a bond fund or to. I rather like Invesco Perpetual Distribution fund or Invesco Perpetual Monthly Income Plus fund as options inside a pension or stocks and shares ISA. You could also add some peer to peer investing in loans via places like Ablrate and MoneyThing with part of it. Or the lower risk and less to understand options of Zopa and RateSetter that are likely to pay a good deal less - but easier to manage if new to it.

Flexi-access can work a bit like a savings account at DIY places like Hargreaves Lansdown. You say you want to withdraw some money then in a week or so the money arrives in your bank account. Though you'd really be better served probably by telling them to set up a regular monthly payment. No charges for these withdrawals however you do it.

The advisers at Unbiased can be either IFAs or "plain" FAs provided the FAs don't have substantial restrictions on what they will advise on within the areas they cover. IFAs automatically aren't allowed those restrictions. Either should be fine in principle but each firm or individual will vary both its pricing and what it will advise.

The IFA's advice was very conservative, more about maximising long term income than retiring as early as possible on sufficient income to meet your needs and doing that as efficiently as possible. That is, the operating assumption was that you wanted higher long term income more than you wanted to retire, which isn't the case provided your income need can be met.

To get an IFA or FA from unbiased who will try to find a way to meet your objectives you might try copying them this discussion in an initial email so they can see your objectives and some options you've considered in written form. That should help to clarify that early retirement with sufficient income is your objective and that the DB transfer of one plan is being pursued as a more efficient way to do that than taking the tax free lump sums from the two of them, which is the alternative plan. That is, the transfer makes you better off while achieving your objectives than not doing the transfer.

It's very much a case of finding an adviser who you get on with and who is interested in trying to meet your objectives.

Advisers can also choose to offer risk-based pricing or pricing designed to discourage you from doing something with them if they don't want the business. Setting out your objectives and this discussion to show the logic can help them to see that it's not something unconsidered and silly. This doesn't mean that working a bit longer won't be required to meet your objectives, just that the adviser should be doing it to get you retired ASAP with your desired income level.

jamesd

I should add here that if at all possible I very strongly prefer the option of taking full income from both DB pensions and using the capital freed up from downsizing to produce the capital from which you draw an income during the first part of retirement. Assuming the amount is sufficient it's a good deal better plan than doing a transfer from the DB or taking any tax free lump sum from either or both of the DB plans.

The rest of the things I've discussed are second best to that, so getting that downsizing done is probably going to be your best route - that is, the one that gets you retired soonest with the highest resulting income.

For this reason you might want to defer more IFA contact until you have at least some idea of how much you can get from downsizing. or even discuss that here first. If the numbers work I'm going to suggest downsizing while working then retiring once you have the money from that. Depending on how long the search, agree to buy and sell takes that could mean another six months or so at work.

gnash101

A bit off topic, but has anyone used Tideway for a final salary transfer process.
At first glance they seem to be a fairly professional outfit and a transfer charge of 1% of pot seems reasonable.