IFA needed to transfer small pension pot!!!

kidmugsy

Tom_Brine wrote: »

my pension was worth £50 a year with a cash lump sum of £125. The cash equivalent transfer value was roughly £418.

So about £300 (being £418 - £125) will generate £50 a year. That's about 17% p.a. Why on earth would you give that up? Good grief.

AnotherJoe

Tom_Brine wrote: »

dunstonh, keeping the pension there may be the best value for money. You state it is not a pot of my money and I take that with DB pensions you are buying the benefit, not accumulating a pot with which to purchase one at a later date. Hence the need for a CETV.

However, Its just such a small amount I would really rather combine it with my current, solidly performing active scheme. The information on minimum CETV's for IFA's is helpful thanks to everyone.

That would still be an idiotic financial decision. Have a nice meal once a year on that rather than it fades into your lump sum and pays you practically nothing. Maybe a MacDonalds value meal when they have a sale on ?

In effect you'd be saying "dont give me £50 a year for life give me a tenner because i cant cope with someone paying me extra money into my bank account every month".

System

kidmugsy wrote: »

So about £300 (being £418 - £125) will generate £50 a year. That's about 17% p.a. Why on earth would you give that up? Good grief.

Your calculation assumes that they would get the pension immediately. The OP is 33 so they would have to wait until they are 60 or 65 to get the pension. If they can invest and get a return higher than inflation then they might be better off transferring the £418 to their pension.

dunstonh

Economic wrote: »

Your calculation assumes that they would get the pension immediately. The OP is 33 so they would have to wait until they are 60 or 65 to get the pension. If they can invest and get a return higher than inflation then they might be better off transferring the £418 to their pension.

Its not good enough to just get a return that is higher than inflation. It needs to beat inflation and catch up with the existing scheme as the existing scheme goes up each year too. its like a car race with one being given a significant headstart.

System

dunstonh wrote: »

Its not good enough to just get a return that is higher than inflation. It needs to beat inflation and catch up with the existing scheme as the existing scheme goes up each year too. its like a car race with one being given a significant headstart.

The defined benefit pension is presumably indexed so it is not going to increase by more than inflation, by definition. Therefore, if the £418 increases by 5% (3%) above inflation for 30 years then it will be worth £1,800 (£1,000) in real terms compared to a pension of £50pa and a lump-sum of £125 in real terms. Of course it depends upon the assumptions about the actual indexation (RPI or CPI) and the real rate of return on investments.
What you cannot do is to compare £418 today with a pension of £50pa and a lump-sum of £125 in 30 years as if £1 today is the same as £1 in 30+ years!

kidmugsy

Economic wrote: »

If they can invest and get a return higher than inflation then they might be better off transferring the £418 to their pension.

OK, suppose he manages to quintuple his capital ahead of inflation; 17%/5 is still bigger than 3%p.a. which might be roughly what an index-linked annuity might buy. And how much risk would one have to take to give oneself a chance of getting a real five-fold growth of capital? It remains a bonkers notion. He should treat the FS pension as a low-risk bond-like asset and balance the investments in his current workplace pension accordingly.

System

It is far from bonkers! An often quoted figure is that the average real return on the stock market is 7% so using that figure £418 would become £3182 in real terms after 30 years. Then, after subtracting the lump sum of £125, that would give a pension of £92pa (using your figure of 3% for an index-linked annuity) so an 84% higher pension!

dunstonh

An often quoted figure is that the average real return on the stock market is 7%

May be better to use real figures and not often quoted ones that are not valid.

kidmugsy

Economic wrote: »

An often quoted figure is that the average real return on the stock market is 7% so using that figure £418 would become £3182 in real terms after 30 years. Then, after subtracting the lump sum of £125, that would give a pension of £92pa (using your figure of 3% for an index-linked annuity) so an 84% higher pension!

Over which 30 year periods have which stock markets returned 7% p.a. real? Heavens, we're approaching the 30th anniversary of the Japan NIKKEI 225 Stock Market Index reaching an all time high of 38915.87 in December 1989. And today it closed at 19,537. So it's halved in about 30 years (in nominal terms). The notion that one could reasonably rely on 7% p.a. real seems to me to be fanciful.

System

The average real return on the S&P500 between 1950 and 2009 was 7% pa: http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
In this case, transferring the pension is the best option if the real return is greater than 5% pa.
My main point is that the decision about whether or not to transfer the pension is not as clear cut as some of the simplistic analysis suggested. Some posters were giving advice without knowing the age of the OP, which obviously affects the length of time the money will be invested.