Nearly 55, Unemployed, sitting on potential large pension pot

GSP

Hi,
Really appreciate any advice or thoughts you may have.

I worked in London for a well known bank for 37.5 years starting straight from school aged 16 as you did in those days.
I was made redundant a year ago and the redundancy money has nearly run out with no other income or investment to call upon.

I will be 55 in July which is only four months away now and my mind is in turmoil on surviving short term, as well as the future.

After commuting to London all those years, I was looking for a job close to home with a complete change of career. My role was very unique in London and the skills I have learned are not transferable to other roles.
I have had a number of interviews, got a job with Argos that lasted for seven days before my back gave way, and though not disabled in anyway am very limited to what I can do now.

As above I intended to carry on working for a few more years, but am now coming round to the fact retirement options are close by and with no employment feel this could be it in terms of me working again.

My bank pension looks reasonable, but normal retirement date is 60 and I would see this severely reduced if I took it shortly.

I have been made aware transferring my pension outside by total cash value went up after the referendum. I have a website I can access where my pension is stored which provides calculations and information. Having starting to look at pensions in more detail, the amount of instruments and decisions needed to be made are very worrying for a novice.

I was surprised though very pleased to see my total transfer value is currently c£780,000. I put this figure into the Pensionwise adjustable income calculator which showed a tax free sum of £195,000. From there you can run various age scenarios showing monthly income alongside which made for comfortable reading into my eighties and nineties where I would not be too active.

This is just one instrument and calculator and as most of the informed people on here know there are many many others around.

We all have different circumstances and look at the future with different aspirations.

For those that can make sense, here are my current numbers. I have 31.5 years of Defined benefit, and 6 years of Defined contributions. I put half of my redundancy into my DC pot. I am aware there are barriers by IFA’s and the FCA for those with db pensions transferring out into cash value because of “risks”. I have a mixture of both types of pension.

Total Transfer Value £781,000.
Scheme pension built up before 6 April 1997
Transfer Value of guaranteed minimum pension (GMP) £61,091.
Other rights £329,955.04.

Scheme pension built up after 5 April 1997
Contracted out salary-related rights £306,744.

Afterwork (DC)
Credit account value (including reduction for early payment) £46,568
Non guaranteed transfer value as at 8 March 2017
Credit account value from employer units (this was £34,000 from my redundancy) £37,367.

Again, I would appreciate any advice or observations. Does contracted out salary rights mean my state would be reduced? If so, If I transferred out would I then be able to receive full state pension as I have worked over 35 years.

Been thinking do I use the DC part of my pension now, and leave the DB until 60. Know there is caution, but at £780,000 the transfer out seems very attractive and at some tipping point this must be better than receiving a db pension.
There are so many scenarios and questions, but have to start somewhere.

Thank you

xylophone

You can take independent advice concerning your personal situation - if you want to transfer out you will require the advice of an IFA with pension transfer permissions.

https://www.finalsalarytransfer.com/s/26/download-our-free-guides

https://www.royallondon.com/Global/documents/GoodWithYourMoney/COMPANY-PENSIONS-FIVE-REASONS-TO-TRANSFER-OUT-AND-FIVE-REASONS-NOT-TO.pdf

https://www.moneyadviceservice.org.uk/en/articles/transferring-out-of-a-defined-benefit-pension-scheme

With regard to your state pension, you can obtain your "starting amount" here

https://www.gov.uk/check-state-pension

If, as is likely, because you were contracted out for so many years, it is below £155.65, you can make voluntary contributions to bring it up to this level.

If you are unable to work owing to ill health, have you explored the possibility of accessing your deferred occupational pension on ill health terms?

Have you looked into state benefits? Are you entitled to ESA?

GSP

Thanks Xylophone. I should not have mentioned my back as I am not disabled, just not up to it being older. Thought I would ask people on here before I see an IFA. Will have a chance to understand more and let it sink in and then be armed with some knowledge so I at least have an idea what they are talking about.

xylophone

It appears that you have no relevant earnings - you might wish to consider paying £2880 per annum into a SIPP as here -

https://forums.moneysavingexpert.com/discussion/5580163

mgdavid

xylophone wrote: »

It appears that you have no relevant earnings - you might wish to consider paying £2880 per annum into a SIPP as here -

https://forums.moneysavingexpert.com/discussion/5580163

It seems there are more immediate problems to fix;

"the redundancy money has nearly run out with no other income or investment to call upon."

GSP

Quite mgdavid. As I say I put about half my redundancy into my dc pot since the db pension ceased in 2010. I paid off my cards and mortgage and got my outgoings without food and things going wrong etc down to £4,400 p.a. which I am happy with that part.
I would invest a lump sum and the monthly income from transferring out seems reasonable to last on into my late eighties and beyond, without the state pension included. I do wonder how safe the pensions are in the big companies.

peterg1965

It sounds as if you are in a good position, although it might feel a little bit hairy at the moment if you have no income. It would appear that you have some flexibility with accessing your DC pension pot in the summer and your required minimum income requirement is actually quite modest set against your assets.

As there are such large sums at stake, and lots of complications, it strikes me that you need to seek professional advice, and, with 4 months to go until your 55th birthday, the timing is perfect to get things in place for July.

Good luck.

ermine

GSP wrote: »

Been thinking do I use the DC part of my pension now, and leave the DB until 60.

Surely you tighten your belt, run the DC pension flat over the next five years, and borrow some money, possibly from your mortgage to carry you closer to 60? You pay the loan back with your 25% PCLS on the DB pension, if necessary. Although it depends on the pension people seem to lose 5% a year for drawing a DB pension early, but it seems to be worse the earlier you draw it. Burn up your DC pension for as long as you can, consider borrowing some money to run for another year then hit the DB pension one or two years early rather than five.

From your occupation you should be a whiz with the spreadsheetery, to work out the optimum balance of income, borrowing and actuarial reductions for various scenarios but you are entitled to take you DC pension from 55 (if not transfer it to a provider who will let you draw it down). The possibility of burning up a DC pension ahead of a DB pension was one of the greatest gifts Osborne gave DB pensionholders who wanted to retire early.

The high transfer value is a chimera. It's high because bond yields are poor. Of course, if you are single, or in poor health, or have reasons to think you will die early, then perhaps transferring it or eating the actuarial reductions make sense. Or you think the pension scheme is on shaky ground and you'd be in the pension protection fund, because your DB pension is above the pension cap.

But IMO burn up that DC pension first. It's what it's for, nowadays Keep saving your £2880 into it though, for the tax-free lift, which won't be the full £720 but won't be less than £180 a year, unless you are a HRT taxpayer as a pensioner

xylophone

He should check his new state pension starting amount - it appears that he was contracted out for the whole of his working life.

https://www.royallondon.com/Global/documents/GoodWithYourMoney/TOPPING-UP-YOUR-STATE-PENSION-GUIDE.pdf

If he transferred his DC pension to a SIPP, he could take the PCLS and immediately pay £2880 into the SIPP so as to get the tax relief.

The balance of the PCLS would enable him to keep going for a year or two and make another £2880 contribution - at 60 the unreduced DB pension would be available and at 66/7 the State Pension.

The OP has not mentioned whether there is a wife or any children to be taken into consideration.

The OP appears to be in reasonable health apart from his back trouble so needs to consider that he could live into his nineties - would he wish to be managing a pension at that age if he chose to transfer out?

There is information and discussion in the links in my previous - the OP needs to read and inform himself and then take professional advice if required.

jamesd

Please read over Drawdown: safe withdrawal rates and explore options with cfiresim. Here is a set of tries to illustrate:

Retirement year 2017 end year 2057
Investigate none
Portfolio value 825000
Fees 0.7 to adjust for UK safe withdrawal rates
Spending plan Guyton-Klinger initial 44000 floor fixed 26400 (60%)
Pensions state pension 8000 starting 2029
Run simulation, success rate 95.3%

Investigate max initial spending, 99% success rate
Run simulation, answer 39551

Investigate max initial spending, 100% success rate
Run simulation, answer 39527
Floor fixed 24000, run simulation, answer 39527

Check life expectancy, male 55, normal is 31 years, 86; 1 in 4 is 40 years, 95, 1 in 10 is 45 years, 100. Already did 1 in 4, now try 1 in 10, change end year to 2062, run simulation, answer 39134.

Consider deferring state pension for ten years, new SP start 2039 amount 12720. Run simulation, answer 39142. Change success rate to 99%, result 40909. Change to 95%, result 43889. Still at the 1 person in 10 life expectancy.

Translating that, what it says is that even if you were to live through the worst investment results seen since 1871 in the US, corrected for UK results, you could take an initial income of £39,142 if you live to be a hundred, increasing with inflation. In exchange, if you do live through unusually bad times, you'd accept a drop to as low as £24,000. If things do even worse than history you'd accept a drop to £8,000 state pension if the money doesn't make it beyond age 67, or £12,700 if it gets to 77, the end of state pension deferral that I used. If you also live beyond a hundred in those worst times you'd accept that £12,700 for the rest of your life.

Alternatively you could start at £43,889 and have about a one in twenty chance of dropping below £24,000. The worst case was starting in 1891 which failed around 1921 if you did this. Age 85 so you'd be on £12,700 after that if you experienced this. In more normal investing times the median average results would have been £43,890 for the first third, £35,551 for the second third and £37,189 for the final third of retirement. Take that willingness to see a drop seriously, you will probably have to accept some drops eventually, as well as years with no inflation increases. If you want fewer and shallower drops, just change the income floor to a higher value and the starting income will be reduced to allow that.

You don't have to manage investments until you're a hundred, though. I already used state pension deferral by building in spending some of the money for that. Currently for those in good health annuities start to offer quite good income levels in the age eighty and up sort of range. What would usually be sensible is starting to do a bit of annuity buying around then, perhaps a bit earlier. That way you're gradually reducing both the chance of failure and the consequences - though an insurance company may also have difficulty in worst than seen since 1871 times, as might the government.

jamesd

So, moving on to a broader answer, it appears that you would have enough money to prudently take an initial income of around £40,000 a year if you were to transfer your defined benefit pension, normally increasing with inflation. It doesn't seem sensible to be restricting yourself to means tested benefit levels or £4,400 a year until you're sixty when there's no need to do that.

Using drawdown like this would normally pay more than taking the work DB early because you're taking the investment risk and also taking on a willingness to see an income reduction at times. DB doesn't get that choice, it has to pay the specified amount, so that has to be lower. State pension deferral and annuity buying, eventually, add back some relatively guaranteed income as you get older, to both reduce the potential ups and downs and protect you if you live longer than one person in ten is expected to.

Defined benefit pension schemes are very reliable. Even in failure what happens now is a ten percent income cut and reduced inflation linking as the Pension Protection Fund takes over. That's running a surplus. No need to transfer just because you're worried about the scheme failing, you'd be OK if it did.

Please get a state pension statement and tell us what it says. It'll probably be something like £120 a week at the moment.

The state pension had two pieces while you were working. The first is the basic state pension. Your work scheme being contracted out had no effect on this because it couldn't be contacted out of. Currently £119.30 a week. Then there was the earnings-related part, SERPS and more recently S2P. Your work pension was contracted out of that so you won't get much from this, though during the S2P years there was a little anyway that might take you to £125 a week or so.

As of 6 April 2016 we all got a new foundation amount of state pension. That was calculated under both the old rules and the flat rate rules and the higher of the two was used. As a person who was contracted out a lot the old rules calculation would pay you more so I'm using those here. From then on each year of paying in or getting credits increases what you get until you reach the flat rate maximum, about £155 a week at the moment. You should plan to spend £700-900 a year to buy each year until you get there.