Don't cash in your final salary pension

macca1974

Surely it depends on the level of the transfer value. I've just requested a CETV for my only DB Pension scheme (for a company I was at for 2 years and paid about £1K in contributions). For my £1,468 per annum pension at age 60 (19 years time) the transfer value is £56,708.

Seems like a no brainer to me to be honest (even with the £1,500 IFA charge I've been quoted).

Malthusian

Triumph13 wrote: »

That depends how good your marketing department is!

Although it isn't directly relevant to the question posed by John Ralfe, the other problem with the Guaranteed Lock-In Bond is that I very much doubt it would be permitted under the UK regulatory regime. One FOS adjudicator deciding that I have no reason at all to deny my investors the right to receive the cash-in value of their investment - and they'd be right - is all it would take to sink me.

The assets are liquid, there is no cost to me in realising the investment. The only reason I can cite for refusing to release the money to the investor is that the investor himself asked me not to let him have it if certain conditions are not met (i.e. the markets are up) when he took out the investment. However, the investor has now obviously changed his mind, and the wishes of Mr Smith(t-2) cannot trump the wishes of Mr Smith(t).

However the ease with which anyone can design a product that delivers exactly what John Ralfe wants - guaranteed growth over the long term without eye-watering charges, provided that they actually grok what is meant by the long term, shows how distorted his worldview is.

A shame he didn't post on the MSE forums before he cost the Boots pension scheme millions of pounds and ruined his career.

kidmugsy

Has anyone mentioned so far one compelling argument against some people swapping DB into DC, namely that the first time their capital sinks substantially they'll panic, sell, and lock in the loss? That's a commonly seen pattern of behaviour by private investors, isn't it? Those likeliest to panic might be (I guess) those who blithely told themselves that you can't really lose in equities.

No wonder IFAs are reluctant to recommend transferring out of DBs. They can foresee armies of disgruntled mug punters trying like mad to sue anyone within reach while disclaiming all responsibility for their own folly.

"I was missold" they will screech, armed with the sanctimonious stupidity and ignorance that tend to flourish in such cases. jamesd had better be careful to preserve his anonymity or they'll be after him for compensation.

If I had two large DB pensions awaiting me, a loonily high offered payout might very well tempt me to transfer out of one of them, but not both. In Old Age, especially old Old Age, there's a lot to be said for a steady inflow of inflation-protected income that needs no management.

Nual

We are dealing with this dilemma at the moment. I have retired and have a DB pension of 14k plus 190k in various places part of which will be used for upsizing ( area not number of rooms). Partner is about to retire with a DB pension of 31 k with a quoted transfer value of 900k and a second DB of 8k and a transfer value of just less than 200k. State pensions will need a bit of topping up because of contracting out but are due in 5 years.

The temptation to have around £1 million playing money over the next decade and then slowly sink into older age with a joint income of 38k plus whatever was left is pretty strong. Depending on who goes first, the survivor would still have 26k/ 22k inflation proofed income.

We are a bit like rabbits caught in the headlights....

kidmugsy

Nual wrote: »

We are dealing with this dilemma at the moment. I have retired and have a DB pension of 14k plus 190k in various places part of which will be used for upsizing ( area not number of rooms). Partner is about to retire with a DB pension of 31 k with a quoted transfer value of 900k and a second DB of 8k and a transfer value of just less than 200k.

In your shoes I might be tempted to make my base case (i) you are drawing your DB pension (ii) your partner expects to draw her larger DB pension, while (iii) he/she/it transfers the smaller DB pension.

Then I'd compare other options with that base case e.g. starting by considering reversing the plan for your partner's two DB pensions (with a consequent effect of the LTA?).

Mind you, I've made the sweeping assumption that your partner's two DB schemes offer broadly similar terms on, for example, widow's pension, index-linking, financial security of the pension scheme funding, and anything else relevant. Plus I've assumed that you would be reasonably expert at, and unstressed by, managing a pile of capital that might seem be modest in light of your DB pensions; and that you will both live for a good while longer; and, and, and .....

But you have to start somewhere and I'd find that a tempting starting point. The first obvious objection is that it might be awfully tempting to transfer the pension with the larger ratio of CETV to annual pension forgone, and to take the LTA consequences on the chin: it doesn't look as if they will be heavy. And after all, a stockmarket decline might let you avoid those consequences entirely.

BobQ

macca1974 wrote: »

Surely it depends on the level of the transfer value. I've just requested a CETV for my only DB Pension scheme (for a company I was at for 2 years and paid about £1K in contributions). For my £1,468 per annum pension at age 60 (19 years time) the transfer value is £56,708.

Seems like a no brainer to me to be honest (even with the £1,500 IFA charge I've been quoted).

Yes I agree it is a non-brainer in that case.

But if it is your only pension and is worth a transfer value of say 500K its a big decision. If you have a family to leave the surplus to you might think it is worth the risks to manage the situation.

The risk with a DB pension is usually much simpler, will I live long enough to benefit more than its transfer value.

But whichever you choose turning it into cash will complicate your life, particularly as you get older if your mental faculties start to fail, or if you are a born worrier, or cannot resist the temptation of spending it too quickly, or have family who want you to "help out" with their new car. Of course you can just leave it to an IFA and then you just have to worry if you have the right IFA, if the IFA can be trusted etc. Some people will not mind the uncertainty, others will wish to live their life stress free.

zagfles

kidmugsy wrote: »

But even if you put that aside, what's your clinching argument against Ralfe's "acid test" i.e.

If holding equities for the long-term really does mean you will always “win”, with little risk, why don’t investment firms offer funds with guaranteed equity outperformance, and charge a modest fee to reflect the (supposedly) modest risk?

Because there obviously is a risk, however small, and if the worst happened then they'd need to pay out to everyone, where are they supposed to get the money from?

It's not like insurance, where the insurance company can be pretty safe in the knowledge that only a tiny minority will claim (they usually have exclusions for war, armageddon etc). So they can use the premiums of those who don't claim to pay those who do.

With this either everyone claims or no-one does. What sort of money would they need to set aside in case everyone claims?

zagfles

kidmugsy wrote: »

If I had two large DB pensions awaiting me, a loonily high offered payout might very well tempt me to transfer out of one of them, but not both. In Old Age, especially old Old Age, there's a lot to be said for a steady inflow of inflation-protected income that needs no management.

Yes, I've got a DB scheme with a stupidly high CETV and a DC scheme, but no way I'd transfer out of the DB scheme however good the CETV is. I want a guaranteed part (DB & state pension) and then have the freedom to do what I want with the DC part safe in the knowledge that if the stockmarket crashes 40% tomorrow, I won't be screwed.

kidmugsy

zagfles wrote: »

Because there obviously is a risk, however small, and if the worst happened then they'd need to pay out to everyone, where are they supposed to get the money from?

It's not like insurance, where the insurance company can be pretty safe in the knowledge that only a tiny minority will claim (they usually have exclusions for war, armageddon etc). So they can use the premiums of those who don't claim to pay those who do.

With this either everyone claims or no-one does. What sort of money would they need to set aside in case everyone claims?

They could behave like bookies i.e. limit the number of bets they'd take, balance bets in one direction against bets in another, and lay off any surplus risks with other firms. But instead nobody offers the service. Very rum.

zagfles

kidmugsy wrote: »

They could behave like bookies i.e. limit the number of bets they'd take, balance bets in one direction against bets in another, and lay off any surplus risks with other firms. But instead nobody offers the service. Very rum.

Well there are guaranteed equity bonds, which are sort of what you're talking about. https://moneyfacts.co.uk/guides/investments/guaranteed-equity-bonds/