'Attractive' Enhanced transfer value from former DB scheme

Flora99

Sorry if this is recurring theme, but I have just been contacted by a former employer with an enhanced CETV from an old DB scheme.

I was in the scheme from 1990 to 2010. It was private sector, initially non contributory, always contracted-in, complicated structure of offsets etc, but basically worked out as 80ths.

Accrued pension (revalued to 2017) is £9750 payable at 65. I am 49, nearly 50. The CETV is £301k, with enhancement to £323k. Increases at RPI/max 5% before and after retirement, with 50% to dependant. Paid for financial advice is available via IFA appointed by former employer.

The amount of CETV seems astonishing. I've been in DC since and my fund is small. It seems terribly tempting.......but what do I need to think about?

My other half has much better pension entitlement than I, both past and present. My former employer is now subsumed into a US company, but the this DB scheme is no longer in deficit, so PPF is unlikely.

Thanks!

Drp8713

Flora99 wrote: »

but what do I need to think about?

If you stay in the scheme, nothing.

If you transfer out:

Investment Returns
Asset Allocation
Stock Market Crashes
Safe Withdrawl Rates
Running Out of Money
Fees & Charges
Tax Efficient Withdrawls
Life Expectancy (which is 89 for you with a 1 in 4 chance of making 97).

33x the Pension wouldnt be anywhere near high enough for me to take the risk.

RPI is 3.9% right now, there is no guarantee the stock markets will beat that.

kidmugsy

1) How much is the actuarial reduction if you kept the DB pension but drew it early? For example is it 5% for each year early, or 2%?

I ask because a low actuarial reduction makes the DB pension pretty flexible but a high one means that you might feel that you must hang on to 65 before you start to draw it.

2) What type(s) of pensions does your OH have?

Malthusian

How much income will you need in retirement? If you don't know, how much do you live on now?

The CETV definitely isn't astonishing. If you proceed you need to be prepared for the possibility that we have a market crash and your CETV drops to 16x the guaranteed annual pension (even if it never happens) - will it still feel like a good idea?

Is the adviser paid for by the employer definitely an independent financial adviser? The term is protected and it should be clear from their website (or failing that phoning them up).

If they are not independent but restricted, avoid and pay for your own independent advice.

If they are independent, you still need to bear in mind that they are being paid by the employer and the employer wants to get rid of your liability (hence the enhancement). This does not mean that the adviser's advice will be biased or wrong, it just means there is a reason for you to take extra care.

goRt

Drp8713 wrote: »

If you stay in the scheme, nothing.

If you transfer out:

Investment Returns
Asset Allocation
Stock Market Crashes
Safe Withdrawl Rates
Running Out of Money
Fees & Charges
Tax Efficient Withdrawls
Life Expectancy (which is 89 for you with a 1 in 4 chance of making 97).

33x the Pension wouldnt be anywhere near high enough for me to take the risk.

RPI is 3.9% right now, there is no guarantee the stock markets will beat that.

For balance - if you stay in the DB scheme there's always the risk that your former employer gets into financial difficulty and pushes you into the PPF where you will lose 10% of the pension and other enhanced increments, etc.

Flora99

kidmugsy wrote: »

1) How much is the actuarial reduction if you kept the DB pension but drew it early? For example is it 5% for each year early, or 2%?

I ask because a low actuarial reduction makes the DB pension pretty flexible but a high one means that you might feel that you must hang on to 65 before you start to draw it.

2) What type(s) of pensions does your OH have?

Hello kidmugsy

The ERF is, as I understand it 6% a year, but not a simple rate, but compounded somehow. age 64 is 94%, but age 63 is not 88%, but a bigger reduction. I'll find out more.

My OH has a deferred pension from 25 years British Airways. It has an NRD of 65, but most of it has NRA of 55, with some at 60 and a little bit at 65. The earlier NRA bits are enhanced if taken later, but they all have to be taken at same time. Current OH pension is good, a DB scheme with Railways and there are AVCs with both.

Flora99

Malthusian wrote: »

How much income will you need in retirement? If you don't know, how much do you live on now?

The CETV definitely isn't astonishing. If you proceed you need to be prepared for the possibility that we have a market crash and your CETV drops to 16x the guaranteed annual pension (even if it never happens) - will it still feel like a good idea?

Is the adviser paid for by the employer definitely an independent financial adviser? The term is protected and it should be clear from their website (or failing that phoning them up).

If they are not independent but restricted, avoid and pay for your own independent advice.

If they are independent, you still need to bear in mind that they are being paid by the employer and the employer wants to get rid of your liability (hence the enhancement). This does not mean that the adviser's advice will be biased or wrong, it just means there is a reason for you to take extra care.

I really appreciate your comments and take them all on board.

The reason I was so astonished is that until a few years ago, they used to include a transfer value on the annual benefit statement and it was usually something like 4x accrued pension. Given that there are still 15 years to go, I wasn't expecting it to have jumped to 33x, so that came as quite a surprise!

Flora99

Thanks for all your replies everyone.

I know the general rule is don't do anything with DB, and it is probably right.

The slight niggle to me that £9.7k pa (+revals at 65) might be a less flexible offer to me than (323k 'now' + gains , or losses whenever I start to take it) if I develop Alzheimers in my late 60s as was the case with my parents, but who knows!

bigadaj

Flora99 wrote: »

I really appreciate your comments and take them all on board.

The reason I was so astonished is that until a few years ago, they used to include a transfer value on the annual benefit statement and it was usually something like 4x accrued pension. Given that there are still 15 years to go, I wasn't expecting it to have jumped to 33x, so that came as quite a surprise!

That's doesn't seem likely, the traditional typical cetv was somewhere around 20, or a bit higher.

With low interest rates and other constraints on pension funds then that has increased significantly.

Fermion

For balance - if you stay in the DB scheme there's always the risk that your former employer gets into financial difficulty and pushes you into the PPF where you will lose 10% of the pension and other enhanced increments, etc.

In addition to the above PROs raised by goRt if you transfer into a SIPP and later go into drawdown taking only a natural yield then:
1. You can start drawdown at an earlier age 55+ (May be advantageous if suffer future ill health)
2. A surviving spouse as a beneficiary gets 100% of drawdown pension pot (full pot size if you only take the National yield)
3. You can nominate children as beneficiaries who will again get 100% of the residual drawdown pot, although they will pay tax at their HMRC tax rate on any income taken from the beneficial pot.

I agree that there are potential risks as stated and also the problem of managing the drawdown funds, but for people like myself I feel that the benefits outway the CONS. In my case I transferred of couple of DB pensions into my SIPP many years ago - the rationale at the time was that one DB fund was underfunded and the PLC guarantor was in financial difficulties. I was quite happy to manage my own SIPP and drawdown funds.

Malthusian

Flora99 wrote: »

The slight niggle to me that £9.7k pa (+revals at 65) might be a less flexible offer to me than (323k 'now' + gains , or losses whenever I start to take it) if I develop Alzheimers in my late 60s as was the case with my parents, but who knows!

Unless you won't need ~£18k per annum to live on in retirement (DB pension + State Pension), it's having guaranteed income that gives you flexibility - flexibility to do what you want with your other pensions and savings. E.g. flexibility to retire early and spend your savings from age 60 or earlier, knowing that the DB pension will kick in at 65, or to invest your DC pensions more aggressively and grow the fund for luxuries, knowing that you don't have to worry about the effect a market crash will have on your income.

The family history of Alzheimers is not something you can do a lot about. Certainly it would be foolish to retire in your 50s and spend all your pension money in 10 years on the assumption that you'll get Alzheimers in your late 60s. It might never happen.