Conversation with IFA about DB transfer

bostonerimus

dunstonh wrote: »

We also need to remember that laws/rules are put in place to cover the long term. The current inflated CETVs are a short term issue. For most of the last 30 years (and probably most of the next 30) it would not be financially best in most peoples interest to transfer out. We just happen to be in a short term window at present where it can be.

How are the UK transfer out rates calculated? The rates seem to be ridiculoulsy low in the UK As a comparison a transfer out from a US DB plan must conform to the IRS segmented rates and use the IRS life expectancy tables which are a lot more pessimistic than in the UK.....maybe because healthcare is on average worse in the US........another good discussion. Anyway for those interested here are the US tables mentioned above

https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates
https://www.irs.gov/publications/p590b/

sandsy

bostonerimus wrote: »

I like that you will be taking other advice. I have a question abut your pension values. Do you know the discount rate used in the calculation......a present value of 900k and a pension of 23k implies a very low discount rate. Also what life expectancy is being used, is it index linked and what are the death benefits? Do you have those numbers?

There is no requirement to disclose how the CETV is calculated, except if a reduction has been applied to the TV in reaching the CETV, due in the scheme being underfunded.

Discount rates will be based on the assets held by the scheme in line with the investment strategy which will vary based on the average membership, and whether the scheme is open or closed to new accrual. The indexation applying to the benefits will also influence the investment strategy. Whilst there are standard mortality tables for DB schemes, it would not be unusual to vary these for schemes based in different sectors or geographic areas.

It is also a requirement to use assumptions which result in a CETV which is fair to both potential leavers and remaining members. So, for example, if it was observed that leavers have features which result in selection against the scheme, assumptions could be varied to counter the effect of selection in order for fairer outcomes for remainers.

bostonerimus

dunstonh wrote: »

So, it may be frustrating for the small minority that do actually know what they are doing. It may be frustrating for the small minority that think they know what they are doing (but dont). However, it is protecting the majority.

I have a problem with the whole idea of transferring out of a DB plan....even though I did it myself, I don't let moral hazard get in the way of dollars and cents.

I also believe that if it is generally offered then people should receive guidance as part of the legislation....and that it should be free of charge to the transferee. There should be no charge associated with the transfer and if people feel they need advice they should seek it out. Allowing an adviser to hold a transfer hostage is one of the worst parts of the reforms.

Given some simple guidance people can do this themselves. There is an unfortunate dogma in the UK reinforced by both the customer and the financial services companies that this stuff is difficult, it really isn't and it could be made easy if there was a desire to do so, but there are too many vested interests.

bostonerimus

sandsy wrote: »

There is no requirement to disclose how the CETV is calculated, except if a reduction has been applied to the TV in reaching the CETV, due in the scheme being underfunded.

Discount rates will be based on the assets held by the scheme in line with the investment strategy which will vary based on the average membership, and whether the scheme is open or closed to new accrual. The indexation applying to the benefits will also influence the investment strategy. Whilst there are standard mortality tables for DB schemes, it would not be unusual to vary these for schemes based in different sectors or geographic areas.

It is also a requirement to use assumptions which result in a CETV which is fair to both potential leavers and remaining members. So, for example, if it was observed that leavers have features which result in selection against the scheme, assumptions could be varied to counter the effect of selection in order for fairer outcomes for remainers.

I've seen some payouts and pension on here that imply discount rates below 1%.....that's silly. Do the present value calculation for the OPs pension and see what you get.

bigadaj

bostonerimus wrote: »

I have a problem with the whole idea of transferring out of a DB plan....even though I did it myself, I don't let moral hazard get in the way of dollars and cents.

I also believe that if it is generally offered then people should receive guidance as part of the legislation....and that it should be free of charge to the transferee. There should be no charge associated with the transfer and if people feel they need advice they should seek it out. Allowing an adviser to hold a transfer hostage is one of the worst parts of the reforms.

Given some simple guidance people can do this themselves. There is an unfortunate dogma in the UK reinforced by both the customer and the financial services companies that this stuff is difficult, it really isn't and it could be made easy if there was a desire to do so, but there are too many vested interests.

So who pays for the guidance, and who accepts the liability and to whom?

Sounds like a very socialist approach to things I'd have said.

bigadaj

bostonerimus wrote: »

I've seen some payouts and pension on here that imply discount rates below 1%.....that's silly. Do the present value calculation for the OPs pension and see what you get.

The rush to 'take advantage' of pensions freedoms with respect to db schemes indicates the generosity of the cetv calculations, at least to many.

Offer £100k in cash to many people of £10k a year and many would take the former, that's why provision is in pace for advice and protection.

Historic multipliers might have been running at 12 to 20 times, and where it's possible to transfer from oublic sector schemes then these are still ball park figures.

The dwindling and now largely closed private sector schemes are the one suffering spectacular figures, often 30 to 40 times and sometimes more which indicates the perceived value of safe investments. Many people would realise they could do better with a transfer on those terms but many people would also manage to also make a complete mess of it even with those huge sums.

Linton

bostonerimus wrote: »

......
Given some simple guidance people can do this themselves. There is an unfortunate dogma in the UK reinforced by both the customer and the financial services companies that this stuff is difficult, it really isn't and it could be made easy if there was a desire to do so, but there are too many vested interests.

How much guidance other than "dont do it" can be given in a sensible time frame to people the majority of whom wouldnt understand a compound interest calculation?

If you are talking about managing the finances of perhaps 30 years of retirement, "this stuff" is difficult. To give people "simple guidance" and then leave them on their own with £100Ks when previously they would regard £1K as a lot of money would be grossly irresponsible. There is a lot more to real life financial management than simply deciding which which VLSxx to buy.

bostonerimus

Linton wrote: »

How much guidance other than "dont do it" can be given in a sensible time frame to people the majority of whom wouldnt understand a compound interest calculation?

If you are talking about managing the finances of perhaps 30 years of retirement, "this stuff" is difficult. To give people "simple guidance" and then leave them on their own with £100Ks when previously they would regard £1K as a lot of money would be grossly irresponsible. There is a lot more to real life financial management than simply deciding which which VLSxx to buy.

For most people the required financial management knowledge can fit of the back of an index card. People are smart if things are explained well and can make their own decisions. This is surely the idea behind the pension reforms......or were they just a way for the finance industry to get at the DB pots of people that they want to keep dumb and discourage from taking responsibility for their own money.

bostonerimus

bigadaj wrote: »

So who pays for the guidance, and who accepts the liability and to whom?

Sounds like a very socialist approach to things I'd have said.

The person getting the payout takes the responsibility. The guidance could be paid by the employer, the pension plan or from Government funds and would be a general education on the transfer, how to assess it's value and the options available to invest it for a lifetime income. Peoplewould be required to take the course before the transfer could go ahead....that's a mandate I can support. If people then wanted more advice they could pay for it. It's the opposite of socialist as it puts the individual in the driving seat and makes them responsible, a government dictate requiring someone pay a financial advisor to sign off on the DB to DC transfer sounds like socialism, or at least a very nice perk, for the financial advisor industry. They get to hold the transfer hostage for a couple of percent and also the opportunity to sell their services at a percent or so a year too. That's a nice little earner.

There might be one off services and advice that are worth paying for, but the ongoing annual service fee is a constant drain on the portfolio....much like a vampire draining blood......and much like the victims in the old Hammer House of Horror films the clients seem to go willingly......

Sincerely

Van Helsing

dunstonh

This is surely the idea behind the pension reforms......or were they just a way for the finance industry to get at the DB pots of people that they want to keep dumb and discourage from taking responsibility for their own money.

There have been no reforms on DB schemes related to the finance industry.

The pension freedom adjustments (as they were really only tweaks to what already existed to make them used more widely than before) were focused on DC schemes.

The guidance could be paid by the employer, the pension plan or from Government funds and would be a general education on the transfer, how to assess it's value and the options available to invest it for a lifetime income.

Govt doesnt have the budget to pay for it. Employer will pass costs on to consumers. Taking it from the pension is an option that already exists and the one that most use when paying for advice.

peoplewould be required to take the course before the transfer could go ahead....that's a mandate I can support.

That is a massive cost and comes back to who would you get to pay for it. One of your options was the consumer via their pension. Well, that already exists with regulated advice.

a government dictate requiring someone pay a financial advisor to sign off on the DB to DC transfer sounds like socialism

Being forced to go on a course for about a week (as that it what it would take for a low level amount of knowledge required to a consumer level) is the same.