Final Salary Pension - transfer out

jamesd

Dox wrote: »

If she transfers out and takes a 25% lump sum from her new (DC) arrangement, that leaves under £200,000. That's not going to buy a £6K a year pension at 55 with RPI increases to a maximum of 5% + spouse pension.

That's right. Instead it buys a non-guaranteed £10,000 initial income that normally increases with uncapped inflation, has 100% spousal income and something to inherit.

This is the UK initial safe withdrawal rate for a 40 year retirement with 1.5% costs and 60:40 equity:bonds mixture if the Guyton-Klinger drawdown rules are used. Those wouldn't have failed at that income level in any of the past 125+ years of actual UK investment performance. Income normally increases with inflation but this will be skipped in bad years. In bad investment performance periods there may be cuts and in average or better, increases. Dropping below the defined benefit pension level is unlikely but possible.

jamesd

Thrugelmir wrote: »

If you are basing a decision on an unprecendented era that's drawing to a close. You need to give matters more consideration.

Learning what safe withdrawal rates are based on and how merely mediocre current conditions are would be a good thing to consider.

tacpot12

You should be able to find good independent advice for your wife for much less that 4%. I paid a flat fee of less than 1% for pension transfer advice from a local IFA on two DB schemes.

To me, the decision in my cases both seemed to be no-brainers to transfer, but when the full analysis had been done, in both cases the recommendation was to remain with the DB schemes. I took this advice, but also had three DC pots that are now consolidated into one SIPP. I've had to learn about all the aspects of managing a pension and an investment portfolio in order to drawdown an income that should both grow with inflation and last a lifetime.

Here's what I've learned:

1. It is difficult to construct a balanced portfolio that produces income with an acceptable degree of volatility, but will also grow that income with inflation. You need the right mixture of assets and some cash reserves. You are very much at the mercy of market conditions in the first 10 years as to how this portfolio will last.
2. The portfolio requires rebalancing on a regular basis (I review mine every half year), and this incures transaction costs (if rebalancing is required) that are a further drag on performance.
3. You have to figure out the safe withdrawal rate based on market conditions. This is nerve-wracking as you don't want to take out more than the porfolio can withstand, but neither do you want to miss out on income that can safely be spent. You have to err on the side of caution. (I review the safe withdrawal rate every half year using CAPE - the cyclically adjusted price-to-earnings ratio - as the indicator of market conditions. I currently consider the safe withdrawal rate to be around 4.25% based on a CAPE ratio in the UK that is currently around 16.7)
4. You need to factor in your state pension entitlement and any other income into the calculation on safe withdrawal rate.

Unless the income produced by a transfer far exceeds the income available from the DB scheme, I would imagine you will find retirement more relaxing if she remained in the DB scheme as this removes all the worry. If you push her towards transferring and anything goes wrong, you might find that she blames you for the problems.

One final thought; if you do ask TPI to provide your wife with advice, you must ensure that they agree (before you given them the go ahead to contact the DB scheme) that they will sign any forms required by the scheme to say that you have had advice regardless of what their advice is. Without this you are potentially wasting the fee for advice as your wife won't be able to use it to transfer out of the DB scheme.

roddy.mcaskill

tacpot12 wrote: »

One final thought; if you do ask TPI to provide your wife with advice, you must ensure that they agree (before you given them the go ahead to contact the DB scheme) that they will sign any forms required by the scheme to say that you have had advice regardless of what their advice is. Without this you are potentially wasting the fee for advice as your wife won't be able to use it to transfer out of the DB scheme.

Excellent suggestion not considered - thank you. I wonder how they will respond. Interestingly the fee is only payable if we decide to go ahead with transferring out. So, at this point, this is a no cost investigation.

MK62

Dox wrote: »

If she transfers out and takes a 25% lump sum from her new (DC) arrangement, that leaves under £200,000. That's not going to buy a £6K a year pension at 55 with RPI increases to a maximum of 5% + spouse pension.

To be fair, the lump sum from the OP's DB pension was £40000 for a reduced income of £6000pa.
So for comparison purposes, the remaining drawdown pot would be £220000 (though in practice some of the income would probably come from the £25000 extra TFLS).

However, on the face of it at least, at 55 the OP's wife would be ill-advised to swap £9000pa index-linked for £6000pa index-linked and a £40000 lump sum.

So, for me, the question becomes whether, at 55yo, a drawdown pot of £260000, (or rather the lump sums and income obtained from it) would trump a guaranteed and index-linked £9000pa.
You could argue that either way, but for me I think the CETV would have to be more like £300k+ for the potential rewards to outweigh the risks - but that's just me.

Dox

roddy.mcaskill wrote: »

Why do you assume an annuity would be purchased? it it not more likely she would opt for drawdown from a portfolio optimised for income

The 'assumption' is surely based on what you said: 'a lump sum and monthly pension', not 'a lump sum and monthly drawdown'

Marcon

roddy.mcaskill wrote: »

True potential investments seem to offer the best value 'advice service' - £500 - albeit with the expectation that you invest in their selection of funds with an annual combined charge of around 1.2%. though it seems possible to move away from them if we're not happy with the fund performance for a closing fee of £50.

Assuming their advice is to transfer out - to me, it looks like a no-brainer ( except for the increased risk of investing, worth it given the difference in both lump sum and monthly pension ( assuming conservative growth) that Mrs M would receive - along with the option to leave the kids an inheritance!!

Just because something is the cheapest around doesn't make it 'best value'. You are looking at your future financial security - why are you so reluctant to ensure the advice you get is best quality, not just shopping for bargain basement?

Maybe the advice TPI give is excellent - I've never used them so I don't know, but I'd certainly be asking what I'd get for my money. Is a full Transfer Value Analysis/fact find included, for example?

If such a transfer is a 'no brainer', why do so few financial advisers operate in the area of transfer advice - and why do so few transfers go ahead?

You could be right that it would be in your wife's interest, but all you've written so far indicates someone who has swallowed a marketing line and made a decision based on (possibly misleading) headlines without really thinking it through...but it's a free world and if your wife's scheme is satisfied with the qualifications and sign off of whoever your wife appoints to advise her, she is entitled to go right ahead. But please stop and think - the one thing a transfer from a DB to a DC scheme isn't is a no brainer!

Brynsam

jamesd wrote: »

That's right. Instead it buys a non-guaranteed £10,000 initial income that normally increases with uncapped inflation, has 100% spousal income and something to inherit.

Flexibly accessing a pension means any future contributions will be limited to £4,000 a year - rather a low ceiling for someone aged 55 if they later decide they need to pay more into a pension.

atush

Dox wrote: »

If she transfers out and takes a 25% lump sum from her new (DC) arrangement, that leaves under £200,000. That's not going to buy a £6K a year pension at 55 with RPI increases to a maximum of 5% + spouse pension.

not to mention

£9K is she takes it at 55 no lump sum. £6K with a lump sum of £40K

We need to know what it pays at Scheme age, not early/reduced?

roddy.mcaskill

At 60 it will pay £12,731
or £61K Lump sum with residual pen of £9145