Final Salary Pension Cash Transfer and IFA charges

westport

I saw one message say why would you leave a DB scheme for a DC one. Everyone's situation is different but here are a few reasons.
Many companies now how poor death benefit conditions for spouses, so you need to check this when you get an annual statement, especially if you have a big pot. A rough idea of the value of your pot is to multiply the forecasted annual pension by 20 and that should give a rough idea of your pot value, though with low gilt yields, your transfer value may be much higher, as much as 35 -40 times higher. What you may find in the past a company may have paid out 4 or 8 times base salary to a spouse on death and a decent spouse pension, now these tend to be far less generous. If your pension is forecasted to be £ 25,000 and the transfer value is calculated at 25 times that, so £ 625,000, that's a lot of money lost to your spouse if you were to pass away.

Another reason to transfer out is if you feel your transfer value is enough at your age to retire, then you can access it through a flexi draw down facility and still have access to the 25% lump sum option from age 55, then if you can afford it, only draw down the personal tax allowance each you, so you pay no income tax. If you retire early say at 55 under a DB plan they hit you with a 3-5% penalty of your predicted annual pension for each year, so if you retirement date is 65 and you take it at 55, you could take a 50% hit on your pension.

Another reason is your DC pot does not form as part of your estate when you pass away.

Another reason is if you retired under a DB pot with a good pension say £25k, you will pay tax on this, nearly £3k, whether you like it or not, where as if under a DC plan you draw the tax free lump sum at the start then do flexi draw down within your personal allowance each year for as long as possible then you live tax free for a number of years, and you have reduced your risk in the markets by 25% by taking the lump sum, though inflation will eat into it over time.

Now for the downside of transferring out.

Your money is no longer guaranteed and is at risk to the markets in whatever it is invested. Any good IFA should give you a questionaire to assess what level of risk you are willing to take with your investments and then advise you on this. Age is a big factor, as you may wish to reduce your risks as you get older to secure your funds, like in Government bonds, though I think some risk is still needed to increase your percentage of growth. When calculating your figures, if you have an IFA looking after it for you, I would say your growth per annum would need to be 1% IFA annual management, 0.50% annual Fund/platform charges then whatever inflation is, currently 3%, so 4.5% growth minimum for the current year to break even on your fund. Some IFA's will give you growth figures of 10-12% per annum, if they do, I would walk away and go to someone who is realistic. The thing is not to panic when you see a drop in the markets. Over time they pick up again, but do review your funds yourself every 3 or 4 months. Trustnet is a very good site for this.

As for IFA transfer charges, I wouldn't pay more than 1% of the pot value. £6,250 on a £625k pot for example is a lot, but just a small movement in the markets gets that back.

If your pot is worth over £30k you have to by law take advice.

I hope this is of some help to some of you. Just to let you know, I am not an IFA, I have just built up some knowledge on the subject over time. So if you end up living on a beach tax free because of my advice, you know where to send the cheque

dunstonh

As for IFA transfer charges, I wouldn't pay more than 1% of the pot value. £6,250 on a £625k pot for example is a lot, but just a small movement in the markets gets that back.

What if the value is £80,000. That would make the fee just £800. Unlikely to get advice for that amount.