Cash valuation transfer out of final salary scheme

JonathanBFS

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Other circumstances need to be taken into account.

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hyubh

Mick70 wrote: »

I have now been offered a cash transfer valuation of £1.4m , which I assume I can then transfer into a low risk DC pot from age 50 and can then access/withdraw from age 55. I am not familiar with DC schemes as never had the need beforehand but am starting to read up on how they work and am now aware of the LTA tax charge also , although not fully sure how that works year on year (see my first post 0 ).
At new job which start soon (luckily found one) our DC scheme will be employee 8% employer 16%

Aside from the LTA, also watch out for the Money Purchase Annual Allowance (MPAA) - if you draw a DC pension flexibly, then the AA drops from £40K to only £4K, which if you work full time (or near it), will make that 16% rather moot.

Mick70

hyubh wrote: »

Aside from the LTA, also watch out for the Money Purchase Annual Allowance (MPAA) - if you draw a DC pension flexibly, then the AA drops from £40K to only £4K, which if you work full time (or near it), will make that 16% rather moot.

not sure if an MPAA would impact me as when come to draw from the pot it would only be once decide am retiring, wouldn't be paying anymore into the pot from then onwards

Thanks for all advice mind. At first i was thinking the cash valuation was almost a no brainer as seemed high, but once i have started to learn a little about fees / management and probably more importantly the big impact of an LTA Tax I'm now not so sure , as when use a pessimistic (or realistic) growth of the fund year on year at 2.5% , when withdrawing a salary each year the fund doesnt last as long as hoped , ive no idea at what rate these funds grow but as i would only want low risk i assumed 2.5% would be about right ?

Thanks again , this is a great forum that helps people like myself who aren't as clued up as others

Mick

crv1963

JoeCrystal wrote: »

The DB pension scheme is treated a lot more generous under Lifetime Allowance. As far as I can see, it is treated as worth £600,000 which will enable you to build up extra £400,000 outside the DB pension scheme, Also, having a DB pension doesn't trigger MPAA either. If you were able to draw on £26,000 pension from 50, nothing is stopping you racking up employee contribution to take advantage of tax relief either.

For easy sleeping at night I would not transfer but do as JoeCrystal suggests. The 80k TFLS could be put into ISAs, build a larger DC pot with your new employer which you could if you don't need the income be left to your wife/ children.

An appointment with an IFA does seem in order as even if you leave the DB pension where it is they should be able to help you maximise your savings rate into suitable products for you helping meeting your objectives with full knowledge of your circumstances.

Albermarle

ive no idea at what rate these funds grow but as i would only want low risk i assumed 2.5% would be about right ?

Firstly never forget about the impact of inflation and all estimates are based on a minimum 10 year time period( to ride out the ups and downs of the markets)
Although it is difficult to define 'low risk' exactly and predicting the future is also not easy …
However you could work on an estimate that lower risk investments ( not no risk savings ) would beat inflation by one or two per cent , A higher risk investment strategy can normally bring 5% over inflation and a medium risk strategy something in between .
It's all a bit theoretical and based on historical trends so no doubt will be other opinions/estimates.

Mick70

Albermarle wrote: »

Firstly never forget about the impact of inflation and all estimates are based on a minimum 10 year time period( to ride out the ups and downs of the markets)
Although it is difficult to define 'low risk' exactly and predicting the future is also not easy …
However you could work on an estimate that lower risk investments ( not no risk savings ) would beat inflation by one or two per cent , A higher risk investment strategy can normally bring 5% over inflation and a medium risk strategy something in between .
It's all a bit theoretical and based on historical trends so no doubt will be other opinions/estimates.

Thanks, possibly my forecast was too pessimistic then , maybe 4% growth is more realistic for a low risk fund. thanks again

jamesd

You are being offered a fantastically good transfer value that is some 53
times the defined benefit pension income. It's a life changing offer. It's so good in part because the income can be taken at 50 but after transfer not until 55. even at 50 if needed you could use borrowing and repay at 55.

Here's what might be expected from income drawdown if you were to use the Guyton-Klinger rules, which imply 5% of capital as initial income after allowing for charges.

the part up to £1,030,000: £257,500 PCLS and £772,500 taxable
the rest: £370,000 before LTA charge, no PCLS available. At least 25% LTA charge on income but you look likely to be a higher rate tax payer so 55% lump sum seems better.

Total for income generation: £424,000 after tax (£257,000 + 45% of £370,000) plus £772,500 taxable.

That's 0.05 * £424,000 = £21,200 tax free + 0.05 * £772,000 = £38,600 taxable. Total after tax £21,200 + £12,000 + 0.8 * £26,600 = £54,480 net a year.

That compares very favourably with the DB pension with huge margin before it would get as low and a 100% spousal pension.

The higher rate tax payer assumption won't apply until you get your state pension so paying 25% instead of 55% on some of the over LTA money may be better, see annuity buying later.

The G-K starting income I used is for 60% equities, 40% bonds and I suggest that you stick with that and cut income risk instead. You can do that by spending £20,000 every year or two on buying a level annuity. They only pay about 4% of capital at age 55, so £1,000 a year for each £20,000 buy. Gradual buying is for inflation protection and so you gradually get more income per Pound spent as you get older and to increase total guaranteed income as you get older. Level is because spending tends to drop as people get older and the lack of inflation increases gradually cuts real income.

Adding in state pension later and at 55 you could start on £60,000 or so a year after tax.

davidwatts

jamesd wrote: »

You are being offered a fantastically good transfer value that is some 53
times the defined benefit pension income. It's a life changing offer. It's so good in part because the income can be taken at 50 but after transfer not until 55. even at 50 if needed you could use borrowing and repay at 55.

Am I right in thinking that it is possible to transfer out of a DB scheme and preserve the protected pension age under certain circumstances, e.g. block transfer?

Pension_Geek

davidwatts wrote: »

Am I right in thinking that it is possible to transfer out of a DB scheme and preserve the protected pension age under certain circumstances, e.g. block transfer?

Yes, you can, often called a "Buddy Transfer".

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062240

aldershot

Albermarle wrote: »

Firstly never forget about the impact of inflation and all estimates are based on a minimum 10 year time period( to ride out the ups and downs of the markets)
Although it is difficult to define 'low risk' exactly and predicting the future is also not easy …
However you could work on an estimate that lower risk investments ( not no risk savings ) would beat inflation by one or two per cent , A higher risk investment strategy can normally bring 5% over inflation and a medium risk strategy something in between .
It's all a bit theoretical and based on historical trends so no doubt will be other opinions/estimates.

Can you tell me which low risk investments (ie not to risk savings) are offering real yields of 1 to 2 per cent?
Long term index linked gilts currently yield minus 1.8%.