VERY small DB pension

MyOnlyPost

Hi

My wife worked for a couple of years as a lunchtime supervisor at out local school. From this she has a tiny DB pension, just uner £100 pa. She currently has no other pensions but I will be funding a SIPP for her before April this year and annually then on.

Is there any point leaving such a small amount in a DB and should I just transfer it to the SIPP? I know the financial cost will be minimal as there's not a lot in the first place, but I don't know what other benefits may be attached to the DB?

Silvertabby

Is this the LGPS, how long ago did she work there, and how old is she now? The reason I ask is that if she is near to her scheme retirement age, she may be able to take this pension as a one-off lump sum under triviality rules. You could always compare the proceeds from that against a transfer value before making a decision.

MyOnlyPost

Thanks for your reply

Yes it's the Local Gov scheme. She hasn't worked there for two years now and she is 40 so will be 17 years before she can take it as a lump sum.

The only reason I even thought of it was we realised it would be more tax efficient to have two SIPP's than all in mine so whilst thinking about setting up her SIPP I considered her curent pension for transfer. Obviously if the pension had a decent value I wouldn't consider transferring out of a DB but for the small amount involved I figured it makes it easier to administer later on if all in one pot

Silvertabby

If you leave it where it is, it will increase with CPI inflation - but who knows what the trivial commutation rules will be in 17 years time!

Have you asked for a transfer value?

MyOnlyPost

She has just written off for a transfer value today. If I transferred it and invested it in funds along with new money I would hope over 17 years to beat CPI, but again who knows?

Under todays rules I suppose at 57 she could take the lump sum and then add it to her SIPP and gain the tax relief as it would probably be under the limit for recycling.

PensionTech

If I transferred it and invested it in funds along with new money I would hope over 17 years to beat CPI, but again who knows?

Transfer values do not increase in line with CPI. They are the best estimate of the fund that the scheme needs to hold at any given point in time to fund the pension promise later on. Scheme funds are invested, just as individuals' DC funds are invested. So if a scheme offers a transfer value of, say, £10,000 today, but there are still 20 years to go until retirement, it means that an invested fund of £10,000 is expected to increase in line with investment returns such that it will be able to support the corresponding pension throughout retirement. Those investment returns are not CPI. They are whatever the scheme expects its chosen investment strategy to yield over the long term. You should not compare CPI against investment returns in a DC scheme. This is one of the most fundamental mistakes people make. A DB pension is a promise to pay a given amount during retirement, and the link to inflation in deferment just ensures that the value of that promise doesn't erode over time. But the money to fund the promise is not sitting there fully-formed just increasing in line with inflation, and you cannot "beat" a DB scheme simply by investing the CETV in something that you expect to yield above-inflation returns.

jamesd

If you're both basic rate tax payers contributions for her probably do make sense. Exceptions can be if you're in a salary sacrifice scheme or self-employed and of course for income above basic rate. In those cases paying into your scheme then something like giving her the tax free lump sum when you reach age 55 can be better due to the extra savings you get.

MyOnlyPost

PensionTech wrote: »

Transfer values do not increase in line with CPI. They are the best estimate of the fund that the scheme needs to hold at any given point in time to fund the pension promise later on. Scheme funds are invested, just as individuals' DC funds are invested. So if a scheme offers a transfer value of, say, £10,000 today, but there are still 20 years to go until retirement, it means that an invested fund of £10,000 is expected to increase in line with investment returns such that it will be able to support the corresponding pension throughout retirement. Those investment returns are not CPI. They are whatever the scheme expects its chosen investment strategy to yield over the long term. You should not compare CPI against investment returns in a DC scheme. This is one of the most fundamental mistakes people make. A DB pension is a promise to pay a given amount during retirement, and the link to inflation in deferment just ensures that the value of that promise doesn't erode over time. But the money to fund the promise is not sitting there fully-formed just increasing in line with inflation, and you cannot "beat" a DB scheme simply by investing the CETV in something that you expect to yield above-inflation returns.

Thank you for your response, I didn't know this and was only responding to an earlier answer regarding CPI

I would appreciate some advice as to whether it is worth keeping open. I appreciate that generally it would be hard to beat DB schemes but when the promise to pay equates to less than £2 a week the loss in changing that to a SIPP has to be financially negligible and it makes things easier to manage in the future if all funds are together. My wife doesn't grasp the finaces very well so simplification for her if I die first was my main concern. As I have always had DC pensions, I don't know if a DB offers any extra benefits that we should be wary of losing?

jamesd wrote: »

If you're both basic rate tax payers contributions for her probably do make sense. Exceptions can be if you're in a salary sacrifice scheme or self-employed and of course for income above basic rate. In those cases paying into your scheme then something like giving her the tax free lump sum when you reach age 55 can be better due to the extra savings you get.

I am a basic rate taxpayer I have a disabled daughter so my main job (in terms of hours) is caring for her and I receive carers allowance. The rest of my my income is derived from poperty rental which for tax purposes HMRC do not consider to be a business, so I am not technicallly self employed. Therefore I am only allowed to put £3,600 gross into a pension which will come from cash savings. My wife has very recently started her own business and hasn't declared her first year yet, but she will be below the tax threshold for the immediate future whilst she grows her business.

I am 42, she is 40. I worked up until I was 38 before leaving to care for my daughter. I have always worked in small companies in a niche industry, the type of small business that don't offer a pension scheme, so I have only ever had a self funded DC pension and I only ever paid into it when it was tax advantageous, so it's only currently £25k. I currently have a poorly balanced portfolio 50/50 cash/property but we have very small debt, less than £750 pa on 1 btl mortgage. We have no personal debt, our home is paid for. It had been my intention to move my cash ISA (£64k @ 2.25% fixed until May) into an S&S ISA leaving slightly more cash than that in high interest current accounts and regular savers. It then occurred I should move some of that cash into a SIPP each as I think I will be a net beneficiary on the tax relief when I come to retire. My wife's only pension is the small DB in the title of this thread.

Sorry for the long winded post but hopefully that clarifies my current position and reasoning

jamesd

That seems sensible.