DB Pension cash in - sense check please

Mickimus

I'm planning to stop work in the next 18 - 24 months (or earlier if possible) and after talking to a few IFA's settled down to a full review with one of them. Early indications are that they are going to recommend transfer of my DB scheme and I would be grateful to have comments to sense check the advice.

Details:
Age 53 and married (OH is 57 and not working) with 2 dependant kids still at university
Homeowner - no mortgage
DB pension worth £16k pa (can take at 65 with index link) - CETV of £480k.
DC pensions worth £600k
OH pensions - DB £2,600 pa and DC £70k
We both have almost full SP entitlements
ISAs - £350k (split £250k in S&S and £100k in cash)
Cash type accounts - £95k

I'm tired of working away from home long term and hoping to retire at 55 on an income of around £55k about the end of 2020. All told I would have about £1.6m in the pot after the transfer plus whatever I can save between now and then.

Dazed_and_confused

Given you have substantial amounts already available in a DC scheme (and other non pension sources) what is pointing you towards transferring the DB pension?

zagfles

If you transfer the DB pension with a CETV of £480k, that plus your £600k DC will exceed the LTA. I presume your IFA has pointed this out to you and discussed the implications?

Mickimus

Thanks. IFA is working on the basis of flexibility and passing the DB value to my OH/kids. I'm not clear on that - I guess if the cash-in was the key to retiring at 55 I would do it. However if it was do-able without the transfer that would be more peace of mind - not sure I want to worry about investments in my old age. The CETV is also high at the moment which if I was ever going to do it now is the time.

Mickimus

Ah yes LTA has been discussed - just over the threshold so IFA thinks not a major issue.

tacpot12

Mickimus wrote: »

Thanks. IFA is working on the basis of flexibility and passing the DB value to my OH/kids. I'm not clear on that - I guess if the cash-in was the key to retiring at 55 I would do it. However if it was do-able without the transfer that would be more peace of mind - not sure I want to worry about investments in my old age. The CETV is also high at the moment which if I was ever going to do it now is the time.

Does the DB pension provide a spouses pension? If so, your OH will receive some of the DB pension value if your die, and they will not have to manage a retirement portfolio or pay an IFA to manage it for them - they just receive a guaranteed income every month.

Do your kids need the additional income that an EXTRA £480K would bring them? (If you don't die until you are over 75, they will end up loosing about half the DC pension value in tax if they take it as a lump sum, so taking it as income, or bumping you off before you are 75, is the only sensible option! )

Are you confident that you (or an IFA if you pay them) can produce a rising income from the DC portfolio (to replace the protection you have of the index-linking) and that they can make the portfolio last as long as you expect to live?

Are you aware of "Sequence of Return" risk? This is the risk that your investments in your DC pension fall in value just at the point when you need to sell them. Having some DB income that covers your day to day needs while being able to draw from the DC pension in times when the investments are doing well is a major bonus. Transfer the DB pension and your whole retirement plan is exposed to Sequence of Return risk.

To my mind, the only good reasons to transfer would be:

• if you have had a health issue and expect retirement to be shortened as a result, and the DB scheme won't provide any increased pension due to ill health
• if the company might be about to go bust (the Pension Protection Fund provides some protection, but not enough - I would want to move a pension exposed to such a risk)
• if the CETV is so high compared to the return needed that it becomes a "no brainer" e.g. if the critical return is 1% pa or thereabouts.

Brynsam

You're thinking of retiring on an income of £55K a year at age 55 and your rationale for transferring is to leave your DB benefits to your OH/kids. Would you OH qualify for a spouse/partner's pension from the DB scheme? If so, you've more chance of achieving your objectives by keeping the DB pension, based on the limited info in your question.

Mr_EDATD

If i had been given the same recomendation i would want to really understand the maths behind both scenarios and have confidence that the option being recommended was the right one (including what assumptions were being made about investment growth above inflation, what risk level i was investing in etc.).

Given that you felt the need to ask this question and based on some of your responses it doesnt sound like you really understand why this is required. The ifa that has given this advice probably needs to explain things better.

[Deleted User]

What is the incentive for IFAs if your DB pension value is commuted? Are you certain they are thinking about your best interest?

Mickimus

Thanks all for your replies which are helping to bring some clarity for me. My instincts are not to cash in but this is the second recommendation I have had to do this in 3 years and had me begin to doubt myself.

The prime objective for me is to retire at 55 - if this is do-able without the transfer then that is that - I can focus in on this with the IFA and see if the sums work. The £55k income would be nice to have but we can live on less if needs be and I'm quite prepared to top up with part time work or consultancy if necessary.

Secondary objective is to make provision for my OH - the DB pension has 50% spouse pension so that box is probably best ticked by leaving the DB in place (OH has no interest in controlling investments so safety first). Finally I figure there will still be plenty in the "inheritance pot" for my kids without the transfer so that shouldn't be a driver.

zagfles

tacpot12 wrote: »

Does the DB pension provide a spouses pension? If so, your OH will receive some of the DB pension value if your die, and they will not have to manage a retirement portfolio or pay an IFA to manage it for them - they just receive a guaranteed income every month.

Do your kids need the additional income that an EXTRA £480K would bring them? (If you don't die until you are over 75, they will end up loosing about half the DC pension value in tax if they take it as a lump sum, so taking it as income, or bumping you off before you are 75, is the only sensible option! )

Or not taking it as a lump sum - they could drawdown and get taxed at their marginal rate.

Are you confident that you (or an IFA if you pay them) can produce a rising income from the DC portfolio (to replace the protection you have of the index-linking) and that they can make the portfolio last as long as you expect to live?

And that the returns will cover their fees as well.

Are you aware of "Sequence of Return" risk? This is the risk that your investments in your DC pension fall in value just at the point when you need to sell them. Having some DB income that covers your day to day needs while being able to draw from the DC pension in times when the investments are doing well is a major bonus. Transfer the DB pension and your whole retirement plan is exposed to Sequence of Return risk.

To my mind, the only good reasons to transfer would be:

• if you have had a health issue and expect retirement to be shortened as a result, and the DB scheme won't provide any increased pension due to ill health
• if the company might be about to go bust (the Pension Protection Fund provides some protection, but not enough - I would want to move a pension exposed to such a risk)
• if the CETV is so high compared to the return needed that it becomes a "no brainer" e.g. if the critical return is 1% pa or thereabouts.

All good points. the other point to consider is what inflation protection the DB scheme has - most are limited price indexation (eg RPI/CPI up to a max of 5%) and usually different limits for different parts due to changes in legislation.