Thinking about DB Pension Transfer

philgee

Hi,

Sorry for the long post - I didn't realise it would be this long when I started typing If you are able to read to the end, I would appreciate any thoughts or advice you may have, particularly if I am missing anything obvious.

As per the title, I am considering transferring out of my firms DB pension scheme in order to give me more flexibility around retirement income and when I retire.

I've spoken to an IFA, who believes there is some merit in doing a full investigation, however, this does come at a price of course, and they may end up recommending that I do nothing.

The reason for wanting more flexibility is that I have a long term health condition, which although shouldn't reduce my life expectancy, it could reduce my ability to enjoy the latter years of my retirement.

My wife and I both work for the same company and can take our DB pensions at age 60, although they will consider requests to take this at 55. Doing this will of course reduce the DB pension income, but there is no set formula that we can use to calculate the impact on income if we decide to take this early. My wife left the company and went to work elsewhere for a few years but returned 3 years ago.

The DB pension was frozen 8 years ago and we are both now putting the optimum amount into the DC pension that replaced it (i.e. the amount that gives us the maximum contribution from our employer).

My wife is 51 and I am 45. She would like to retire age 60 and I would like to retire at 55 or 56 (so within a year or 2 of her retiring).

We have received CETVs and income values from our DB pensions and have up to date values for other pensions that we hold:

Me:
CETV - £360,000
DB pension @ 60 - £7900
DC pension fund current value - £73500

OH:
CETV 1 - £310,000
DB pension 1 @ 60 - £7000
AVC transfer value £20,000
DC pension fund current value - £12500
CETV 2 - £35000
DB pension 2 @ 62 - £2800

My wife is quite risk adverse with regards to her pension and has decided that she wants the guaranteed income from her DB pension. She has her DC pension invested in the default lifestyle option. Using online calculators and a variety of scenarios, we feel comfortable that she can maintain a pension income of at least 60% of her working earnings, after taking 25% of her DC pension pot.

I am a bit more open to risk and have my DC pension invested in the self selected strategy. Using the same calculators, I should also be able to maintain at least 60% of working income, whether I transfer or not. Our gross joint earnings at present are £65,000 pa, excluding any overtime or bonuses.

One of the things we would like to do in retirement is to buy a property abroad so that we can spend 2 or 3 months there in the winter. The thinking being that this could benefit my health condition and also potentially provide an additional income in the summer months by renting it out. If I transfer my DB pension, this could allow me to take significantly more tax free cash, making this easier to achieve.

The main concern is whether we would be able to deal with a significant drop in the value of our pension investments.

We do not have a high level of savings or other investments at present (2 children have proved to be expensive and we have not always thought about the future in our spending habits). We currently have about £10,000 in savings and now that our children are largely self sufficient, are managing to save about £500 a month, so think we could have at least £60k saved at the point of retiring. The only other investments we have are shares in our company through an ongoing share scheme, that could be worth around £30k in 10 years time (assuming the share price remains at current levels). However, we intend to keep the shares for as long as possible to take the dividends as additional income (currently worth about 6% of the value of the shares).

We also have our property which was valued a couple of years ago at £330,000. Our intention is to downsize to a property worth about 2/3 of the value so could liberate about £100k from that. This could be enough to allow us to buy abroad, although we would have to downsize first.

We estimate that our joint monthly outgoings in retirement would be around £1600 (in today's money), assuming reduced travel costs, increased costs associated with having more free time and the fact that our mortgage will be paid off (this takes a sizeable chunk of our net income at present - about 40%). We should have about a year and a half after the mortgage is paid off before my wife retires so we are hoping to be able to put most of this into our savings or even into our DC pensions to save on tax (our contributions are made through salary sacrifice).

We do not have a lavish lifestyle, but are comfortable and this is the lifestyle that we want to continue with in retirement.

As I said in the first paragraph, would greatly appreciate your thoughts.

Many thanks

Phil

pennystretcher

This is my opinion only, but think very carefully before you touch your DB pots. Eg. in LGPS I think the current rate you can exchange your pension is £12 per £1 a year of pension, so in rough estimate for exchanging £1000 per year income would give you £12000 lump sum. So if you expect to live 12 years after retirement, you'd be losing money (not including index increases or income tax etc here though)


Contact the pensions administrator - they can give you the percentage rates by how much the annual pension is reduced if you take it out early.

Also remember that the deferred pensions typically are tied to RPI or CPI so increase every year in value (as long as index is positive).

I have couple of deferred DB schemes and I definitely would not touch those, I'd rather take money out from my AVC schemes instead...

As mentioned, this is not financial guidance, but my opinion.


You might also want to google exchanging your DB pension etc - plenty of articles available, e.g. https://www.thisismoney.co.uk/money/pensions/article-4922958/Should-cash-final-salary-pension.html

Suffolk_lass

To understand your full picture have you both also checked your State Pension forecasts? Don't forget this in your calculations (including whether you need to satisfy any more contribution years in the time between stopping work and drawing your SP).

Also I think the previous post may have confused commutation rates with CETV (cash equivalent transfer value, or cashing in). Can I suggest you do ask your DB Pension administrator about commutation (taking more of a lump sum by giving up some of your default income) as you could go this route to take the maximum 25%TFLS (tax free lump sum) and still retain an income. - this particularly works well in some DB schemes if you are considering retiring before the normal pension age for the scheme (which you are) as the (actuarial) reduction in benefits is often a little lower for the lump sum than it is for the income.

Were you thinking of drawing down capital from your DC pots to top up income before SPA? Or were you considering the potential to preserve your assets so that your family could inherit (DB dies with you, with the exception of your dependant spouse) - different objectives have different answers.

Albermarle

The CETV 's on the main two pensions look unbelievably high . Yours is 45X, whereas 40X is normally seen as the max and it is usually less.
I think you need to be clearer on what the figure of £7,900 pa @60 exactly refers to .
If it is the figure you were given 8 years ago when the scheme closed , then normally this will have increased by inflation over the 8 years so would now be approx. £10K ? This would reduce the CETV to 36X which is still high .
These guaranteed inflation increases whilst the pension is deferred and when it is in payment are a big advantage for keeping a DB pension.
By the time you are 60 it will have gone up a lot more of course.

blisteringblue

Albermarle wrote: »

The CETV 's on the main two pensions look unbelievably high . Yours is 45X, whereas 40X is normally seen as the max and it is usually less.

Not necessarily, I did a CETV this time last year that worked out at 46x my IFA said it was one of the largest he had seen, and that pension was non-contributory back in the day.

Having said that I also did a smaller one that only worked out at 36x

Albermarle

Not necessarily, I did a CETV this time last year that worked out at 46x my IFA said it was one of the largest he had seen,

Wow that is high. Still I think my question is valid , as if you use the annual pension figure you are given when you leave a DB scheme , rather than one for today that has increased with inflation in the meantime, you will get an inaccurate/too high multiple.
One issue ( for me anyway ) is I never get an annual update of what the annual pension figure now is I have to work it out using historical inflation info from the internet.

blisteringblue

I didn't take the decision lightly when I transferred both mine but it's the only way I can retire at 55 in 4 years.

I have a smaller 3rd DB pension and was only offered around 20x which I didn't transfer so will be a little extra when I hit 65.

Have you asked an IFA to run the numbers though? I got a pack for each transfer from mine detailing the numbers you are asking about. You will get a Transfer Value Analysis report of your CETV and the important numbers are the critical yield. That is the rate of growth needed from your transfer to match the DB scheme.

philgee

Suffolk_lass wrote: »

To understand your full picture have you both also checked your State Pension forecasts? Don't forget this in your calculations (including whether you need to satisfy any more contribution years in the time between stopping work and drawing your SP).

Also I think the previous post may have confused commutation rates with CETV (cash equivalent transfer value, or cashing in). Can I suggest you do ask your DB Pension administrator about commutation (taking more of a lump sum by giving up some of your default income) as you could go this route to take the maximum 25%TFLS (tax free lump sum) and still retain an income. - this particularly works well in some DB schemes if you are considering retiring before the normal pension age for the scheme (which you are) as the (actuarial) reduction in benefits is often a little lower for the lump sum than it is for the income.

Were you thinking of drawing down capital from your DC pots to top up income before SPA? Or were you considering the potential to preserve your assets so that your family could inherit (DB dies with you, with the exception of your dependant spouse) - different objectives have different answers.

Thanks for that. We have looked at taking tax free cash from the DB pension as I have got the commutation rate for that. The thing is, the DB pension gives me much less tax free cash than if I'd transferred out.

The idea was to allow for the possibility of buying the property and then allowing me to draw down before the state pension and then continue to draw down at a reduced rate to maintain a comfortable lifestyle. Being able to leave any residual money to the children after we've both gone would be a nice, but is not the main aim.

LHW99

Do any of the DB's allow you to give up income to increase the lump sum? It moay not be good value, but then again, it may make sense.

Brynsam

philgee wrote: »

I've spoken to an IFA, who believes there is some merit in doing a full investigation, however, this does come at a price of course, and they may end up recommending that I do nothing. Even if they recommend that, you could still proceed with the transfer (the trustees of a DB scheme need you to demonstrate that you have received advice, not that you have followed that advice - although please note I'm not suggesting you should disregard it!) if the receiving scheme will accept it.

My wife and I both work for the same company and can take our DB pensions at age 60, although they will consider requests to take this at 55. Doing this will of course reduce the DB pension income, but there is no set formula that we can use to calculate the impact on income if we decide to take this early. The scheme should be able to give you the 'early retirement reduction factors', although they will come with a caveat that these can be reviewed at any timeMy wife left the company and went to work elsewhere for a few years but returned 3 years ago.

The DB pension was frozen 8 years ago It wouldn't have been frozen. DB pensions revalue in deferment - i.e. from the time you leave active membership of the scheme to the time where you either start to draw your benefits from that scheme, or transfer them elsewhereand we are both now putting the optimum amount into the DC pension that replaced it (i.e. the amount that gives us the maximum contribution from our employer). Why is that the optimum amount? You'd still get tax relief on further personal contributions and increase your retirement benefits

My wife is quite risk adverse with regards to her pension and has decided that she wants the guaranteed income from her DB pension. She has her DC pension invested in the default lifestyle option. Using online calculators and a variety of scenarios, we feel comfortable that she can maintain a pension income of at least 60% of her working earnings, after taking 25% of her DC pension pot. If she's risk averse, the default lifestyle may be rather riskier than she realises... and if you think she will get at least 60% of her working earnings, that's an optimistically high percentage for someone who wants to retire early

The main concern is whether we would be able to deal with a significant drop in the value of our pension investments. Do you mean investments, or the benefits available from those investments?

We do not have a high level of savings or other investments at present (2 children have proved to be expensive and we have not always thought about the future in our spending habits). We currently have about £10,000 in savings and now that our children are largely self sufficient, are managing to save about £500 a month, so think we could have at least £60k saved at the point of retiring. See above re possibly putting more into your DC scheme - tax relief on contributions, builds up in a tax favoured environment

Sorry if the above looks overly critical. It isn't meant to be; I just picked out the bits where I thought it was worth suggesting you might have another think/find out some more info.

philgee

Albermarle wrote: »

The CETV 's on the main two pensions look unbelievably high . Yours is 45X, whereas 40X is normally seen as the max and it is usually less.
I think you need to be clearer on what the figure of £7,900 pa @60 exactly refers to .
If it is the figure you were given 8 years ago when the scheme closed , then normally this will have increased by inflation over the 8 years so would now be approx. £10K ? This would reduce the CETV to 36X which is still high .
These guaranteed inflation increases whilst the pension is deferred and when it is in payment are a big advantage for keeping a DB pension.
By the time you are 60 it will have gone up a lot more of course.

The figures are correct (well, I've rounded them for ease of posting) but my employers are known for the high CETVs. Several colleagues moved theirs before the rules were tightened and got large CETVs.

The £7900 is the DB pension quoted on the CETV pack, however, I think you may be right about the RPI increases, as reading the pack again it says this figure is at the date of leaving, which it gives in the notes as 2011. With RPI, this would now be £9875 or thereabouts