Excited but Nervous - Transferring Final Salary Pension

bostonerimus

Malthusian wrote: »

Money held by trustees to provide for your retirement is not your own money.

That's a prevailing attitude in the UK.....I assume the money is held in trust for the benefit of the person getting it....and that the money consists of your own contributions, the contributions of your employer (which is part of your renumeration) and investment gains. Those factors make it "your own money" in my opinion, even if it is held in a trust wrapper.

bostonerimus

jamesd wrote: »

It's more that the safe withdrawal rate limiting factor is the really nasty case where the pot is drained to nil at the end and in that case the income being taken is far more than the fee. No reason to pay the 0.8% unless it's for some service you need or want.

Poor early sequence of returns can be a killer....but obviously safe withdrawal rates take those into account.

Depends on the income rules being used. If I was using original Bengen 4% increasing with inflation, without even the 0.5% he increased it to by adding some small cap shares, I'd be suggesting less than that in the UK both in general at the current bond and equity prices.

But I wouldn't do that because I know about rules that safely allow more income to be taken, if spending can be varied, and know about Guyton's sequence of return risk reduction and other adjustments that further improve the SWR. So instead I explain those to people and ask them to consider what they really want and need and how that will change.

Unless I think that the person just can't deal with it, which is true for quite a lot of people.

Even if safe withdrawal rates (SWR) take bad years into account a sensible person will adjust spending downwards in bad years. Still for planning purposes it's best to be conservative with both life span and withdrawal rate. It's also best to keep costs down as much as possible. The OP would be well served to see if she can save some money on the initial IFA consultation and I find it depressing that some many UK retirees are ok paying 0.5% or 1% for what I believe to be continuing asset management of dubious value.

kidmugsy

bostonerimus wrote: »

I assume the money is held in trust for the benefit of the person getting it....and that the money consists of your own contributions, the contributions of your employer (which is part of your renumeration) and investment gains. Those factors make it "your own money" in my opinion, even if it is held in a trust wrapper.

It isn't "your own money": what you get in a DB scheme is a set of rights that you accrued by virtue of your contributions, both direct (your own) and indirect (your employer's). There's no pot of cash with your name on it: you have rights instead.

What is new is the possibility (for funded DB schemes) of the rights having a value assigned to them that you can then choose to transfer to a money-purchase provider.

The law requires that you pay for IFA advice for two reasons. (i) You might be a chump, and the advice might help to avoid your robbing yourself by your folly. (ii) You might be a crook, who will muck everything up and then allege it wasn't his fault - because nothing ever is - while screaming for compensation from someone else - perhaps the taxpayer, perhaps the scheme he left, perhaps .... oh, anyone really, as long as the aforesaid crook can deny all personal responsibility.

If you don't believe in the existence of such crooks, just read some of the posts on here where someone tries to claim that they were "missold" something. They didn't misbuy, mind, it's always someone else's fault.

Malthusian

bostonerimus wrote: »

That's a prevailing attitude in the UK.....I assume the money is held in trust for the benefit of the person getting it....and that the money consists of your own contributions, the contributions of your employer (which is part of your renumeration) and investment gains. Those factors make it "your own money" in my opinion, even if it is held in a trust wrapper.

Entirely the opposite, the fact that part of the trustees' fund is a) money which came from your employer which usually they wouldn't have given to you if you'd asked them to just pay it straight to you instead* b) money from the government which let you claim the tax back in the hope it would save them state benefits later** further undermines the claim that it is "your money".

It isn't your own money, and anything up to 70% of it never was. For a higher rate taxpayer who benefited from 1-for-1 matching employer contributions, 30% used to be his money, 50% was the employer's money, and 20% is tax relief. (We could even talk about an additional rate taxpayer with an employer operating 2-for-1 matching but let's keep it somewhere around the norm.)

If you wanted your money to stay your money you didn't have to put it in trust - although then you wouldn't have got the employer contributions or the tax relief.

*Let's say we are talking about an employer who pays up to 5% into a defined contribution scheme if the employee pays up to 5% as well. The employee has no right to say that he doesn't want a pension and the employer should just pay him the 5% minus tax and NI instead. Nor can he take them to a tribunal because they aren't paying him the full agreed salary. Similarly, if there is a defined benefit scheme the employee can't turn down the 12-20% contribution and ask the employer to make an equivalent net payment directly to him - indeed it would be illegal. So it is not just "part of his remuneration".

**I will ignore the "it's not tax relief but tax deferral" argument because it doesn't support my position.

The concept of pension benefits as being held in trust is still occasionally deployed to the beneficiary's advantage. For example there are victims of pension scams who are currently complaining against their SIPP trustees on the grounds that the trustees should reasonably have known it was a scam and had a duty to stop them signing their pension money over to the scammers. As yet we don't know whether this line of argument will actually win them any compensation. But someone who was investing their own money in a scam would not even have had the possibility of this line of attack. It's not a one-way street to stop the beneficiary spending their money.

atush

bostonerimus wrote: »

That's a prevailing attitude in the UK.....I assume the money is held in trust for the benefit of the person getting it....and that the money consists of your own contributions, the contributions of your employer (which is part of your renumeration) and investment gains. Those factors make it "your own money" in my opinion, even if it is held in a trust wrapper.

It also in many cases includes income tax relief

bostonerimus

kidmugsy wrote: »

It isn't "your own money": what you get in a DB scheme is a set of rights that you accrued by virtue of your contributions, both direct (your own) and indirect (your employer's). There's no pot of cash with your name on it: you have rights instead.

What is new is the possibility (for funded DB schemes) of the rights having a value assigned to them that you can then choose to transfer to a money-purchase provider.

Your money is indeed thrown into the DB pension fund along with everyone else's. It doesn't have you name attached to it, but your contributions and the accrual rate can easily be converted to a cash value using basic actuarial maths. The cash value is yours if you want it, or you can have the promise of a lifetime income.

The law requires that you pay for IFA advice for two reasons. (i) You might be a chump, and the advice might help to avoid your robbing yourself by your folly. (ii) You might be a crook, who will muck everything up and then allege it wasn't his fault - because nothing ever is - while screaming for compensation from someone else - perhaps the taxpayer, perhaps the scheme he left, perhaps .... oh, anyone really, as long as the aforesaid crook can deny all personal responsibility.

If you don't believe in the existence of such crooks, just read some of the posts on here where someone tries to claim that they were "missold" something. They didn't misbuy, mind, it's always someone else's fault.

I know such crooks exist and that people can be fools.....There are serious issues with allowing people to cash out DB pension schemes as it undermines the whole pooled risk structure. There is obviously a rush to eliminate DB pensions in the UK and cashing out will help that along. People should seek advice in these important transfers, and if the Government is worried about fraud they should mandate advice and provide it free of charge if the consumer wants it. Mandating that people use some of their precious pension pot to pay an IFA before cash out is the nanny state at it's worst.

bostonerimus

Malthusian wrote: »

Entirely the opposite, the fact that part of the trustees' fund is a) money which came from your employer which usually they wouldn't have given to you if you'd asked them to just pay it straight to you instead* b) money from the government which let you claim the tax back in the hope it would save them state benefits later** further undermines the claim that it is "your money".

It isn't your own money, and anything up to 70% of it never was. For a higher rate taxpayer who benefited from 1-for-1 matching employer contributions, 30% used to be his money, 50% was the employer's money, and 20% is tax relief. (We could even talk about an additional rate taxpayer with an employer operating 2-for-1 matching but let's keep it somewhere around the norm.)

Pensions be they DC or DB are part of your renumeration. The attitude that they are somehow not the employee's is why it's been so easy to gut DB plans. Personal income tax is eventually going to be paid on the pension income be it due to employee contributions, employer contributions or some discount rate.

I know I might be expressing an American view here and that it might not be thought of in this way in the UK.....which I think is a problem......but the US IRS tax authority definitely considers employee and employer contributions to UK pension plans as fully taxable as current income when they are made on behalf of a US tax payer unless they are excluded by Treaty exemption.

Cat_House

James D, Thank you for your long and helpful post and the links.

I have a bit of time yet to come to a final decision, but have decided I will still be handing my notice in on Monday x

bostonerimus

jamesd wrote: »

There's an outdated but still handy rough rule that if you were to use investments in the US for a 30 year retirement you could take 4% of the total value as income. About £22,000 a year from £550,000 on top of the £23,000, for a total of around £45,000 a year before tax.

At ages 57 and 62 you could probably start out taking that £45,000 immediately provided you're willing to be flexible and take a reduction if markets do badly, or just if you want to take less income later as part of a deliberate plan. You can do this because it's only until the state pensions start that the pot has to fund it all, and provided you really are willing to be flexible.

Needing to make withdrawals larger than the "safe withdrawl rate" at the beginning of retirement could be a sequence of returns disaster if it coincides with a few years of poor investment returns. So there should be a plan to bridge bad years in the gap until state pension starts.....that might be reduced spending, part time employment or a cash/savings buffer. I retired 3 years before the start of my pension and I had 2 years of spending in cash and a 2% saving account to reduce the chances that I'd have to sell at a loss to provide spending money.

For planning it's good to be aware that in the UK it's normal for household spending to fall by around 35% between ages 65 and 80. Natural enough, people tend not to be as sprightly at 80 as 65. What this means is that you probably don't need to plan for a level income throughout retirement but might instead plan to deliberately take more at younger ages and less later.

The expense curve is obviously important is planning retirement income. As you rightly point out some studies show people spending less as they age, but old age can also bring extra expenses.......like home care. I'd certainly start off with a conservative index linked spending assumption and then maybe adjust that as people become comfortable with their retirement cash flows. When I'd cashed my last paycheck it was initially scary to have to fund my spending from my own accounts, but if you track your spending and account balances carefully you'll be able to make adjustments before things get out of control.

atush

Needing to make withdrawals larger than the "safe withdrawl rate" at the beginning of retirement could be a sequence of returns disaster if it coincides with a few years of poor investment returns.

Which is why we recommend having 1-3 years income required in cash before starting DD, so that you dont have to draw during downturns.