High CETV for deferred DB transfer at age 45

gibbo888

Hi
Is it wise/logical to take the currently high deferred DB pension CETV 15 years before potential retirement and move it to a sipp, over a regular DB payout at 60?

details.

45yold, married (45y), 2 kids, no mortgage.
wife has 2 very small pensions.
100k in s&s isa's currently.
current DC is 65k(fund value) paying in 1000 pm including avc, nrd @62
2x full SP @67 Currently at 29 years

CETV. 750k (32xMultiplier)
deferred DB @ 60y. 23k (60% spousal benefit)

the DB is currently set to increase at 2.5% yearly and this has already been factored into the final 23k figure at 60.
at 60 it increases by RPI upto 7%

My thinking is to grab the cetv now and invest it in a sipp for a minimum 10-15 years, and then draw down approx 35k from DC and sipp, until SP kicks in.

i know i need to pay an ifa for the transfer and there will also be yearly fees going forward on the sipp,

is this a wise decision or am i missing something obvious, my reasoning is that over 10-15 years i "should" have a pot which will increase in value, and allows me a lot more flexibility, once drawing?

kidmugsy

gibbo888 wrote: »

my reasoning is that over 10-15 years i should have a pot which at least keeps up with inflation

There's no "should" about it. Nobody has any right to a positive return, never mind a particular positive return. The stockmarket is a pitiless creature, quite indifferent to our desires and hopes.

All might go well if you do the transfer, but there's no "should" about it.

gibbo888 wrote: »

wife has 2 very small pensions.
100k in s&s isa's currently.

That's an odd combination. What's your reasoning?

gibbo888 wrote: »

the DB is currently set to increase at 2.5% yearly and this has already been factored into the final 23k figure at 60. at 60 it increases by RPI upto 7%

By modern standards the 7% is rather good; the 2.5% I'd find rather poor.

gibbo888

I agree on the "should" maybe i should have put "hopefully"

i dont understand what you mean on point 2?
it was 2 separate lines, wife has 2 very small pensions, and we also have 100k in s&s isas. i am just including as much info as i can.

i have no choice on the plan, it is what i have have to live with, once it was deferred, which is why i am asking, with a high 32x multiplier is it something to consider or am i missing something obvious.

Linton

When you say the DB pension is "currently set" to rise at 2.5% do you mean that it may increase by some other amount at some other time or is the 2.5% fixed until you retire by the scheme rules?

To take up Kidmugsy's point on your wife's pension, is she working? Can she put more into her pension? Can you use some of your income to increase her pension? One reason to do that is to optimise use of her tax allowance. It would be a pity for you to be paying tax in the period before you get your SP whilst she had unused allowance.

Personally, with a 32X multiplier, which isn't that high by current standards, I probably wouldn't take the cash. Better in my view to diversify your income sources and focus on increasing your and your wife's DC pensions and your S&S ISAs. With the security of the DB pension you could be happier about taking higher risk than would otherwise be the case. On the other hand, if the 2.5% is fixed serious inflation could be a worry.

ukdw

A CETV multiplier of 32 sounds pretty good to me - but not sure what the convention is for CETV multipliers and whether they are really a good indication of the value of the pension transfer.

But if you are comparing a today's value CETV figure of £750k, then should it be not be compared to a today's value pension figure? - rather than a pension value with 15 years worth of future inflation (if it averages 2.5%).

If your today's value pension figure (minus 15 years of 2.5%) is something like £16k - Then would this would give a CETV multiplier of >46x

One other point to consider is the lifetime allowance - £16k or £23k are both well away from the current £1m LTA based on the DB 20x multiplier - but £750k with even 10 years growth @5% would be well above the current LTA and may be close to or above a future inflation increased LTA if future inflation averages say 2.5%.

Not necessarily a bad problem to have from the DB pension point of view on its own - but if you also consider your DC pot, which could have hit £200k by age 55 or £300k by age 60 if you continue at the current £1000pm contribution rate and with some growth this pot could be heavily hit by LTA tax penalties negating most if not all of the tax relief advantages.

So if you do transfer the DB pension your IFA may advise you to reconsider your current planned DC contribution level too.

jamesd

Your general concept seems fine but you should think more about the lifetime allowance, currently a million Pounds. If all the £750,000 did was exceed the planned inflation increases by three percent you'd be over the LTA in ten years even ignoring your current DC pot and contributions. Historic UK stock market average is about inflation plus five percent and BoE inflation target two percent.

That constraint implies that you could use quite a cautious investment mixture.

DB is valued at twenty times income for the LTA. £23,400 of income being £468,000. Much easier to stay under the LTA and still make pension contributions with that valuation.

Using modern drawdown rules you could take perhaps five to six percent of the pot a year, normally increasing with inflation for life. Assuming you get the growth to a million in real value by age 55 that's £50-60,000 a year, ignoring the state pensions.

Lifetime allowance considerations would mean stopping pension contributions in your name except where they get employer matching and perhaps substituting VCT buying which pays 30% relief capped at tax payable, has to be repaid if you sell within five years. You can potentially get that relief twice before 55 with a sell and rebuy after five years approach.

The 32 times multiplier seems wrong. Looks like CETV now divided by pension income in fifteen years, so the current value multiplier is much higher.

The CETV is offering you quite dramatically life changing options including retiring around age fifty or perhaps earlier depending on income desire and other investment and asset (mortgage perhaps) use.

£35k a year is far below what is likely to be achievable at 55 or even 50. Doing some planning with cfiresim that includes your state pensions seems likely to get you to over £60,000 a year from 55 and before that constrained by how much you can accumulate outside pensions. Pay serious attention to the income floor and worst case outcomes and ensure that they are acceptable. With you thinking of £35k as acceptable and £16k coming from state pensions even without deferring, a floor of £40k might be used provided you're willing to really take a drop that large from your initial spending level. That being about what the DB and SP combined would pay.

Ten years of state pension deferral at the likely to change current 5.8% increase per year of deferral would take the guaranteed for life income from £16k to a bit over £25k, a good move IMO.

You might also consider spending £10k on a level single life annuity each year from age 55, with life insurance or life assurance to protect your wife. This would gradually shift much of your basic income need towards a guaranteed for life source without discarding too much of the likely benefit of investment growth to buy that certainty. No annuity for your wife because this buying is being done from tax advantaged money inside your pension pot and her assets will already end up being outside that via your pension tax free lump sum or inheritance of your pension pot tax free if you were to die before age 75. Level annuities don't increase with inflation, you're dealing with that risk through a combination of regular buying and the ongoing level of investments.

GSP

Hi Gibbo,
I am further along the journey than you being 55 this July, but have been quoted a similar CETV to you, so will be transferring out and taking the pension then due to a number of circumstances that far outweigh any cons.
You have more investments than me, but my wife will be 55 in five years, worked for 8 years in the nineties, been quoted a db pension now at £2k p.a., but a CETV of £146k so will be transferring out and investing also until she can draw down at 55.

From above, yes things should not be expected and its been laid out with me to allow to absorb for falls in funds, but told not to panic.
Yes there may be turbulent times through this journey, but if falls to moderate risk investments come year after year, my message is I can imagine the whole "industry" will go down.

username12345678

I transferred out of my DB scheme with a similar set of circumstances:

44, married, no mortgage
mid-30s multiple
2 x SP
1 x CS pension (wife)

I dithered for ages after many of my colleagues had jumped because my mindset was 'never give up a DB pension'.

I kept coming back to it and eventually the flexibility, LTA (nearly through), AA breaches, etc etc won out.

My plan is to use 2 x ISA allowances each year for the next 10 and use that for the initial 7-10 years before starting to draw down my SIPP. I'm hoping the intervening 20 years will have smoothed any volatility (historically the chances of being down after 20 years are very slim).

Best of luck whatever you decide.

kidmugsy

gibbo888 wrote: »

I agree on the "should" maybe i should have put "hopefully"

i dont understand what you mean on point 2?
it was 2 separate lines, wife has 2 very small pensions, and we also have 100k in s&s isas. i am just including as much info as i can.

i have no choice on the plan, it is what i have have to live with, once it was deferred, which is why i am asking, with a high 32x multiplier is it something to consider or am i missing something obvious.

I mean why not divert some of your ISA wealth into pension contributions for your wife? Then when she reaches 55 or retires she'll be able to exploit her personal allowance to draw the money out free of income tax. That way the money gets a 25% boost by tax relief on the way in and she draws it out tax-free. Yippee!

As for transferring: in your shoes I certainly would consider it, but I hope I'd be under no illusions that all the investment risk and longevity risk would thereby be shifted on to my shoulders.

gibbo888

Linton wrote: »

When you say the DB pension is "currently set" to rise at 2.5% do you mean that it may increase by some other amount at some other time or is the 2.5% fixed until you retire by the scheme rules?

.

It is a fixed increase from when i transferred in, in 2006, (12.5k) so the 23k is at 60 and includes the 2.5%. Currently using simple maths, it sits at about 16k so the 750k looks very attractive now. (45x multiplier)
The inflation erosion is my main worry, as 23k in 15 years isnt that attractive, its far from terrible though and that is my concern, bank the 23k and take more risk for the next 15y on other vehicles.

gibbo888

kidmugsy wrote: »

I mean why not divert some of your ISA wealth into pension contributions for your wife? Then when she reaches 55 or retires she'll be able to exploit her personal allowance to draw the money out free of income tax. That way the money gets a 25% boost by tax relief on the way in and she draws it out tax-free. Yippee!

As for transferring: in your shoes I certainly would consider it, but I hope I'd be under no illusions that all the investment risk and longevity risk would thereby be shifted on to my shoulders.

Thanks for that i hadn't actually considered that option, i will look into that very soon, she is non working currently.

my DC contributions are high because i am bringing my income below the threshold for child benefit, to allow us to make the most of the free government money. this will be gone in 2 years and then i have to consider university!! so my avc will probably stop, which will free up some funds for the wifes pension,