What to do with DB Scheme

CRUISEMAN

I’ve lurked around for some time, but this is the first time I have posted anything as I’m looking for thoughts on what is going to be a major change in my life.
I am 57 years old, married to a 62 year old. After 20 years with my employee I am being made redundant in April next year. My redundancy amount is a reasonable £86k before tax. I could use this to pay off our mortgage and some debt (combined total about £30k), but I’m thinking about claiming on our MPPI.
I have following pensions:

• A DB scheme that would pay £14k year. The transfer value for this is £560k – almost exactly 40 times the current annual pension. The DB scheme is with a major UK bank and quite good in terms of increases and spouse benefits.
• I currently have £340k in a DC and will be paying in c£1.25k per month until next April.
• I have maxed out on NI contributions and will get £9k per annum (current amount) when I’m 67.

At the moment I am not sure what I will do work wise from next April. I will probably take some time off and do not really at this stage feel inclined to go back full time.
The main decision is what to do about the DB scheme. It’s a good scheme, but 40x the value is very tempting and will give me a combined “pot” of c£900k. Would I be able to take 25% of that as a tax free lump sum & place the remaining £675k in an Income Drawdown? Is that a good idea? Do I have to take the 25% in one go, or can I do it over a period of time and leave the remainder invested?
I appreciate that I will need formal advice if I want to transfer the DB scheme, but in the meantime any thoughts would be very welcome.

Dox

CRUISEMAN wrote: »

IThe main decision is what to do about the DB scheme. It’s a good scheme, but 40x the value is very tempting and will give me a combined “pot” of c£900k. Would I be able to take 25% of that as a tax free lump sum & place the remaining £675k in an Income Drawdown? Is that a good idea? Do I have to take the 25% in one go, or can I do it over a period of time and leave the remainder invested?

Cash always looks tempting - but what would you do with it? Could you get a guaranteed 'return' of what your DB pension will pay?

You could take 25% as a tax free lump sum and leave the rest invested, or take the 25% over a period.

Is it a good idea? Who knows? You've said nothing about your attitude to risk, your aspirations... As you say, you'll have to take formal financial advice from a suitably qualified adviser, so why not do that now, so that you have an opinion based on all the relevant facts, not just a few of them?

Best of luck!

kidmugsy

CRUISEMAN wrote: »

I am 57 years old, married to a 62 year old. After 20 years with my employer I am being made redundant in April next year. My redundancy amount is a reasonable £86k before tax. I could use this to pay off our mortgage and some debt (combined total about £30k), but I’m thinking about claiming on our MPPI.

A DB scheme that would pay £14k year. The transfer value for this is £560k – almost exactly 40 times the current annual pension. The DB scheme is with a major UK bank and quite good in terms of increases and spouse benefits. I currently have £340k in a DC and will be paying in c£1.25k per month until next April.

The main decision is what to do about the DB scheme. It’s a good scheme, but 40x the value is very tempting and will give me a combined “pot” of c£900k. Would I be able to take 25% of that as a tax free lump sum & place the remaining £675k in an Income Drawdown? Is that a good idea? Do I have to take the 25% in one go, or can I do it over a period of time and leave the remainder invested?

On what date in April? How do you plan to avoid higher rates of tax on the top £56k of your redundancy money?

What's MPPI?

I think that usually a combination of DB and DC is very valuable, but at 40x I'd ponder transferring too.

Yes you could take 25% tax-free, over as many years as suits you, unless - say - a Corbyn government decides to stop you. You could drawdown from the 75% at your own sweet rate too. For example, you could drawdown to avoid paying any income tax, or to avoid paying 40% income tax. (Or 50%, or 80%, or 98%, or 103% ... or whatever throwback into Labour Party history might arise. And Lord knows what a Conservative or Coalition government might get up to.)

OldMusicGuy

You look like you have the ideal situation to me. Good DB pension, a reasonable sum in a DC pot and good SP. IMO it would be madness to convert a safe, secure DB pension to cash when having a secure income floor from a DB pension plus the DC pot which you can use any way you want seems like a great combination.

I have a similar sized DC pot to your combined pot (a bit smaller) but no DB pension. I would give my right arm to convert a chunk of that into a good DB pension. However, I am very risk averse. You need to ask yourself if you are comfortable managing such a large sum over 30 plus years to provide a good income. Can you take the ups and downs in the market? Or would be comfortable to pay (and trust) an IFA to do it for you?

If you are confident doing that, maybe it's the way to go. How has your DC pot done this year? If you experienced drops, magnify those across the bigger combined pot. How would that make you feel?

CRUISEMAN

Already got the date sorted - 12th April - that allows for more creativity when it comes to tax.


MPPI is Mortgage Payment Protection Insurance. It covers redundancy and even though my mortgage finishes in December 2019, it would pay out £900 per month between April & December. So why not?

CRUISEMAN

OldMusicGuy wrote: »

You look like you have the ideal situation to me. Good DB pension, a reasonable sum in a DC pot and good SP. IMO it would be madness to convert a safe, secure DB pension to cash when having a secure income floor from a DB pension plus the DC pot which you can use any way you want seems like a great combination.

I have a similar sized DC pot to your combined pot (a bit smaller) but no DB pension. I would give my right arm to convert a chunk of that into a good DB pension. However, I am very risk averse. You need to ask yourself if you are comfortable managing such a large sum over 30 plus years to provide a good income. Can you take the ups and downs in the market? Or would be comfortable to pay (and trust) an IFA to do it for you?

If you are confident doing that, maybe it's the way to go. How has your DC pot done this year? If you experienced drops, magnify those across the bigger combined pot. How would that make you feel?

Thanks. I guess I am slightly risk adverse and this option is very tempting. I've actually seen the DC pot fall this year, but realise that this is hopefully a short term blip and it will be okay over the longer term

Aegis

At 40 times annual income, I can see why the transfer value is tempting. It's going to sound very self-promoting, but I would suggest finding a good nearby financial adviser with a pension transfer specialism and having an analysis done of your retirement plans, together with a good degree of stress testing (i.e. "what happens if this investment falls in value" or "what happens if inflation is higher than expected without commensurate rises in investment returns?").


You may be advised to leave the pension where it is after an initial examination, but you might also be told that your retirement needs are very modest and easily achievable at a realistic level of risk, which may leave your pension able to support other goals.

squirrelpie

Another thought. If you transfer your DB pension to a DC it will put you fairly close to the Lifetime Allowance. You will need to calculate possibilities fairly carefully to be sure not to hit it sometime between now and your 75th birthday. Leaving it as a DB assigns it less value for Lifetime Allowance purposes (20x IIRC) which is almost the opposite of what would be 'fair'.


As others have said, I would leave the DB where it is and enjoy what looks to be a comfortable retirement.

xylophone

Someone I knew (very senior Civil Servant) retired with his index linked DB pension at the age of 60 and drew it for 35 years.

You are only 57 and may be equally long lived......

Albermarle

For reasons given above, I recently turned down an offer of 32 X but at 40X I have to admit I would have been more tempted.
One point to consider is the Lifetime allowance for pensions ( LTA ) . Currently at £1,030,000 and in theory will increase with inflation .
However if you did cash in the DB pension and you left a large part of it invested for any years then you might catch up with this limit .
If you kept the DB pension the LTA contribution would 'only' be around £280K as DB pensions are treated very leniently . So in this case you would have no LTA worries.

kidmugsy

Given that you are tempted we should ask the usual questions.

How good is the index-linking? How sound are the scheme's finances?

50% widow's pension? How's your health and your wife's? Any objective reasons to expect unusually short or long lifespans?

Any compelling purposes for a large TFLS?

And perhaps the clincher: is either of you given to fretting?