Small DB transfer (that old chestnut)...

Temrael

Hi all,

Sorry long post, I thought I'd try and include all the info in one go to save you having to tease it out of me bit by bit.

Overall my retirement planning is looking on track, I have a few pensions which in combination look set to do what I need them to.

One of my pensions is a small DB one, and I am weighing up the pros and cons of transferring it into my main personal pension. My interest was piqued by recent increases in CETVs, but also there is a shortfall in the scheme (but apparently a plan to resolve it is being drawn up) and the company I earned it under are struggling (several successive rounds of redundancies, lost major customers etc.).

The DB pension is set to payout £1k per annum or £777 per annum plus a £6k lump sum from age 59 (which I am somewhat pessimistically expecting to be the pension access age by the time I get there in 2034).

The pension rises by "5% per year or the rise cost of living in the UK if less", so in other words CPI capped at 5% (not an amazing increase).

It will also pay out a surviving widow's pension of 50% (i.e. £500pa) and also the balance of what would have been paid out over the first 5 years if I die within the first 5 years of retirement. i.e. if I die 2 years after retirement it would pay a lump sum of £3k.

I also have a larger DB pension of £4kpa which I am happy to leave where it is (I couldn't move it even if I wanted to as it's public sector) and am forecast to get the full state pension.

My wife and I are planning on accessing our main personal pension pots flexibly - as we don't have particularly great family histories/genes in regards to life expectancy.

We are looking to retire in our early 50s though, living off savings and ISAs while we wait to access these pensions (and State Pension at, I am assuming by then, 69).

The CETV for this small DB pension is £22k (so below the £30k that requires an IFA). My thinking is that if I take that £22k and move it join the rest of my personal pension, I should easily be able to grow it by 2% above inflation pa (resulting in around £30k in today's money by the time I reach 59).

If this remained invested more cautiously with the rest of my personal pension and growing at say 1% over inflation (sat in my flexibly accessed pension) I would have to live into my 90s for that £30k "pot" to run dry (if I drew it at the same £1k pa it was due to pay out anyway).

And if I die in my 70s or 80s as is much more likely, the remaining balance could just pass to my wife (with tax paid at the marginal rate).

As far as I can see, for me to lose out by transferring this small DB pension, I would need to live far longer than I am expecting to, and my wife would need to live longer still. And even then she would only benefit to the tune of about £10pw.

It seems a bit of a gamble (I could be better off I could be worse off). But on balance there seems to be more potential upside (benefiting from an additional £30k in my main pension drawdown pot) than we risk to lose in the happy event we live to a ripe old age.

What do you guys think?

Thanks very much for any constructive thoughts.

OldBeanz

You have not stated how much you want as a retirement income. You are forgetting the increase in this pension each year with inflation post claiming. You have not stated the pension the survivor will have when one of you dies. Are you certain you can claim the pension without penalty 10 years before state pension age.
My father's father died at 54, my father at 96 so you may live a long time.

Temrael

Thanks for that OB.

I just need this to pay out what it was going to really (£1k pa) as it's only a small part of my overall provision. Between my wife and my various pensions we are aiming for about £26k pa in today's money (more drawdown early on then more SP of course).

I figured that by keeping it invested cautiously I should still be able to increase the amount I drawdown form it in line with inflation without it eating heavily into the pot, as its investment growth should be in excess of inflation (but not as much as the drawdown rate of course). Is that wrong do you think?

I could access it at 55 as things stand but as I say I am expecting SP and pension access age to move up by then and there is talk of tying the pension access age to SP age -10 years. Let me know if that seems overly optimistic/pessimistic though.

And yep, I get what you mean about living longer. It would be a nice problem to have I guess but this £1k pa probably wouldn't make a huge difference.

There is a bit of me that thinks "just leave it where it is" but I and/or my wife have to live quite a long time for that to have been the better option. And as I say, there are some concerns about the scheme overall.

OldBeanz

If you are using cautious investments and remember there could be a 30% stock market crash the day after you draw the money down then you should judge whether you can do better than an annuity. Annuities live in the real world where they have to guarantee an inflation proof income while also using up the capital. Run some of your figures through an annuity calculator. Personally, I would be thinking that we now have £8k + £8k state pensions plus £4K + £1k (inflation proofed) - how am I going to fund the other £5k. Bird in the hand.

Thrugelmir

Temrael wrote: »

I figured that by keeping it invested cautiously I should still be able to increase the amount I drawdown form it in line with inflation without it eating heavily into the pot, as its investment growth should be in excess of inflation (but not as much as the drawdown rate of course). Is that wrong do you think?

Taking recent history. Around 60% of investment returns is derived from reinvesting the income. Not sure there's any correlation between inflation and investment returns. Far better indicator is GDP.

Temrael

Thanks for that, I was basing it having read/heard that historically a 100% equities portfolio has seen on average 4 - 5% growth over inflation. So I figured that for something more balanced it might only be a couple of % over (averaged out of course, still lots of ups and downs).

I must admit though, I wasn't really sure why this would be a constant given the wide variance/local factors of inflation and the fact that one's portfolio would contain assets from all over the world. I assumed it was based on averages of growth and averages of inflation (i.e. that whilst there's lots of factors and dependencies, there's nothing hard and fast causally locking global stock returns to local inflation).

Temrael

Bump - Any more thoughts/opinions on this?

It seems too trivial a pension (£20 a week while I'm alive/£10 a week as a widow's pension) to consider an important part of my planning. And as it only rises with CPI capped at 5%, it can't really be considered bombproof in the event of runaway inflation anyway.

Am I kidding myself that (if I transferred this out) I could grow this £22k pot by 2% p.a. in real terms between now and when I want to access it at 59 (resulting in a £30k pot)?

And if I did, could I not reasonably expect an average 1% real terms growth on the residue of that £30k pot when I started to drawdown from it at £1k pa from 59?

I'm not looking to meddle for the sake of it, but (given the problems in the scheme, our life expectancy etc.) there just seem more scenarios where I/my estate would be better off if this £22k was added to my overall drawdown pot. As there will most likely be a fair amount left over for wife/kids when I die.

And if I, or my wife, did end up living much longer than we expect then we/she would only risk losing out to the tune of £20/£10 per week (and in our 90s).

kidmugsy

Temrael wrote: »

... by keeping it invested cautiously I should still be able to increase the amount I drawdown form it in line with inflation without it eating heavily into the pot

I do worry when people say that a risk investment "should" return such and such. The whole point of taking the risk is the hope of a high return. "Hope" not "should".

Temrael

kidmugsy wrote: »

I do worry when people say that a risk investment "should" return such and such. The whole point of taking the risk is the hope of a high return. "Hope" not "should".

Thanks for that, though it's perhaps getting into semantics a bit.

"Should" is a word which here meant "Growth is not guaranteed but is statistically likely over the long term (based on hundreds years of equity history)".

Presumably if an above inflation return were only a "maybe/fingers crossed" type outcome, few people would bother investing, as it would be little more than gambling?

If the use of the word "should" in regards to investing concerns you, you must hate the phrase "expected returns".

kidmugsy

Temrael wrote: »

Growth is not guaranteed but is statistically likely over the long term (based on hundreds years of equity history

Based largely on the stockmarket history of the USA from some point in the 19th century, and on the UK's since about 1900.

And you have to pray that the future bears some resemblance to the past in spite of all the changes to the economies and societies of those two countries. If our future happens to be more like (for example) Italy's past then not remotely "statistically likely".