CETV high? Worth cashing in?

Parking_Trouble

I have my main DB company pension which I can take at age 60 in May 2018

I have 2 other deferred DB pensions, HSBC and GlaxoSmithKline NRD for both is 65 - 2023.

My wife has a deferred Lloyds Bank DB pension NRD 60 - Jan 2023

I hear CETVs are high at the moment. The figure of 47-1 being mentioned for my company scheme.

Is it worth cashing in some of these and moving it into a drawdown?

mgdavid

Impossible to say without knowing:
- are you (both) still working?
- when do you (both) wish to stop working ?
- how much income will you need in retirement?
- what other savings & investments do you have?
- any large debts (eg mortgage)?
- what are the values of each of the pensions?
- what's your attitude and tolerance to risk?

ArchaeoNeo

I'm not far behind you and I asked the same question a couple of weeks ago. I have a deferred DB pension with Barclays with a NRA of 60, which for me is 2024. Probably, like me, you have read the press speculation regarding CETV and that "we have never had it so good", and the former pensions minister cashing in.

The way I understand it, these values are largely based on 15 year gilt yields, which are undoubtedly low at the moment, and this puts pressure on DB pension schemes to maintain their future commitments to members. To be shot of us, they are tempting us to leave with sometimes eye-watering sums. The way to go is talk to an IFA, they will consider the consequences of leaving, i.e. any protected benefits you will lose: NRD, guaranteed income, increases, etc.

This is what I did and I plan to update my thread when I have more information. My gut feel: Don't touch it. There is a reason most companies stopped offering final salary schemes and most people would give blood to have one; they are phenomenally good. Look at the difference in cost between an index-linked annuity for life and a fixed income one; that guaranteed, index-linked pension becomes serious if you intend to live for a while after retirement!

The points mgdavid make are critical, don't make the mistake I made by fantasising over cash transfer values when what I should have been looking at was my required retirement income.

jamesd

47:1 would be extraordinarily high, so high that the first thing to do would be to verify the numbers. It's not impossibly high, just above the 30s that are the highest ones commonly seen. Things like a young retirement age, 100% spousal pension, expectation of long life, a scheme mostly invested in gilts or one that buys annuities might help to produce such a high number.

With such a high CETV it'll be very hard for transferring out not to be the best approach. It's extremely easy to deliver the low returns needed to match that level, mostly it takes avoiding spending most of the money buying gilts or an annuity. Annuities use a similar basis to DB schemes to calculate their price, so are similarly offering poor value for money at the moment.

To give some idea, the main UK stock market has averaged a bit over 5% plus inflation long term, about half paid in dividends. You could beat the pension payment forever just on the dividends without ever touching the capital. Or double the income level with minimal chance of running short of capital. Or put just 25% into high-paying current P2P - circa 10% after allowing for bad debt on 12 to 14% raw rates - to match the income and do something else with the rest.

State pension deferral pays about twice as much per Pound as implied by that lump sum so would be an excellent move if your health is normally good.

For all drawdown except the state pension deferral you need to be prepared to drop the income level if you experience an exceptionally bad long period of investment performance but you'd start with so much money that it's very unlikely that your prudent income level would ever fall as low as the one offered by the DB pension. Modern drawdown rules are currently suggesting about 5.5% of pot size as income for UK investors without much chance of large income drops.

Also worth noting that drawdown inherently provides a 100% spousal pension at normal age difference levels, since the spouse just continues drawing.

Transfer values will fall to more sensible levels once interest rates get back to more normal levels from those not seen for hundreds of years. Until then there's a useful opportunity for many.

One useful approach that some people might like is to spend say 3% of the pot on an annuity each year. The likely change in interest rates, higher annuity rates as you get older and possible less good health could well match the guaranteed income quite quickly and in any case reduces the investment and longevity risk over time.

jamesd

One issue to consider if your transfer values are for large amounts is the lifetime allowance. A defined benefit pension is valued at 20 times the income level for LTA. If you transfer you'd get the transferred value instead, 47 times the DB income. That could end up subjecting some of the money to the lifetime allowance charge. Given that the sustainable income levels are something like twice as high that is not likely to be a deal breaker but it is something to consider. Seeking LTA protection if eligible could help a lot. So might transferring only the schemes offering the best transfer values.

The difference between the 20 times and 47 times values helps to illustrate how exceptionally high some transfer values can be. That 20 times wasn't intended to be so far below the values as it is today.

kidmugsy

What is your plan? Is it to supplement your company pension from 2018 until your wife's pension begins in 2023, and your two state pensions a year or two after that? But if your wife will be earning until 2023, is that a big deal? Or do you hope to be able to afford your wife retiring in 2018 too?

Parking_Trouble

My current thinking is to carrying on working for 1-3 years after May 2018.

I am ploughing large amount into AVCs via salary sacrifice. Trying to use max allowance.

I will pay off £35k mortgage with TFLS (using AVC contributions) and any other debts then start taking main pension alongside salary.

I want to have lots of disposal income for a year or three for some big holidays, car, doing up house and further saving. Trying to reduce the gap before other pensions kick in, assuming I wait for those to kick in at 65, the state pension a year later. I will accrue extra years pension if I stay on and get that when I finally leave the company.

There is an outside chance of redundancy (2 year salary) but not banking on that.

We can live on my main pension according to my income/outgoings spreadsheet but a big drop from today's gross income.

Just wondering if these CETVs are so good if I am better off cashing in to maybe smooth out the peaks.

Parking_Trouble

kidmugsy wrote: »

What is your plan? Is it to supplement your company pension from 2018 until your wife's pension begins in 2023, and your two state pensions a year or two after that? But if your wife will be earning until 2023, is that a big deal? Or do you hope to be able to afford your wife retiring in 2018 too?

I have little or no chance of keeping the wife working if I stop. Even though she is 5 years younger than me! :rotfl: