DB pension - take early or transfer?

indiasign

Hi everyone, I've been lurking on this forum for a month or so, and all it's really done is show me how little I know about pensions!



So, I was wondering if I could test the water here for some advice.


I've just turned 55, currently working as a Civil Servant in an Exec Agency, which was previously a NDGB. I have a DB pension from the NDGB which is automatically payable from age 60, but which I can take in a reduced format now or transfer out into a flexible scheme.


One handy point about this pension is that it's not subject to CSP abatement rules, so if i take it now or at 60, I can still kep working at full wages


The pension pot is just under £380K, and if I leave it till 60, it will pay out £11K pa with £33K lump sum, or £9.5Kpa and £28K lump sum if I take it now.


As I said at the start, I know nothing about pensions and, more particularly, investments, so I'm shying away from the idea of transferring the pot out (although the 25% tax free lump sum of around £90K is tempting!)


So, I wouldn't be confident doing a DIY flexible scheme, but at the same time, the likely fees for the transfer and ongoing service seem quite high (a colleague in a similar position has been quoted £8K for the transfer, with 1% ongoing charges).


As a result, I'm leaning towards leaving the pension where it is, but taking it early, so that benefit from a few years of extra money while I'm still young(ish) enough to enjoy it


But am I potentially missing out on a more lucrative option of the flexible scheme?



All opinions/advice welcome


Thanks

xylophone

NDGB

Is this an unfunded defined benefit public service scheme?


If so, see below re transfer out

http://www.hscpensions.hscni.net/transferring-out-of-the-scheme/

If not, and transfer out is permitted from your DB Scheme, see

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-transfers-conversions/?utm_source=redire

The FCA rules require that advice on pension transfers must be provided by, or checked by, a pension transfer specialist and firms wishing to provide advice on pension transfers and pension opt outs must apply for and obtain special permission to carry out that activity. Areas requiring a pension transfer specialist include:

Transfer of Defined Benefits to Defined Contribution schemes

This will not be cheap. You should also be aware that your choice of transferee scheme could be restricted without a positive recommendation from the PTS.

If you choose to take your DB pension early on an actuarially reduced basis, and continue to work full time, then you could be pushed into a higher tax bracket.

If you take the pension early, you will be missing out on the index linking on that part of the pension you forgo for the rest of your life.

Have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

HappyHarry

Just to note, with new rules that came into force a few days ago, you may now find it difficult to find an adviser to advise on the transfer.

GunJack

HappyHarry wrote: »

Just to note, with new rules that came into force a few days ago, you may now find it difficult to find an adviser to advise on the transfer.

Could you please expand on this Harry?

indiasign

Thanks for the replies - to answer you questions

No, it's not an unfunded scheme and yes, it can be transferred out.
Yes, the scheme administrators made it clear an IFA's advice was required before any transfer could go ahead (hence my colleague having been quoted £8K by the Pru)
Yes, I'd assumed I would lose some index-linked value, but to be honest, I've no idea how to work that out
Yes, I've checked my State Pension - basic £164pw from 67
I've also used the CSP modeller to work out my estimated civil service pensions at £10,700pa

Harry, what are the changes you've referred to and why will they make finding an IFA more difficult?

Thanks again

HappyHarry

For advice from 1st April, the compensation limit that can be awarded by the FOS was raised from £150,000 to £350,000.

DB transfers are probably the most significant advice area affected by this change, as following a successful complaint to the FOS, the cost of putting a client back in their 'original position' can be huge.

PI insurers were not involved in the conversations the FCA has prior to the raising of the compensation limit. In fact, it appears that the FCA ignored almost all advice they received regarding the dangers of raising the compensation limit.

Given that the FCA has a starting point that DB transfers are unsuitable for a client, the risk of a successful complaint by a client to the FOS is significant.

An adviser must have appropriate PI insurance to give advice.

There are very few PI insurers in the market for small/medium size advice firms, and these PI insurers are now refusing to cover DB transfers, or are looking at them on a case by case basis with a significant increase in cost.

The leaves many advisers suddenly unable to advise on DB transfers, or at least face extortionate insurance to do so, which needs to be passed on to the consumer.

There is a school of thought that this is a deliberate action by the FCA to close down the DB transfer market, due to the significant number of clients that have had poor outcomes.

It should be noted that the FCA have completed analysis of DB transfer recommendations on two recent occasions, and both times found that more than 50% of DB transfer advice has, at best, not shown clearly that a transfer is suitable.

AnotherJoe

Worth adding to what HH posted that even advisers who advise against a transfer can find themselves liable if the client then transfers (since technically you dont need a positive recommendation to transfer, just need to have done the study) on the very Nannyish State grounds that they have indirectly enabled the transfer to happen.

Hence many firms not even wanting to look at these at all.

Albermarle

Yes, I'd assumed I would lose some index-linked value, but to be honest, I've no idea how to work that out

Well if you have £10,000 per year today and it is not index linked then in 20 years time it might only be worth around one third of that.
One thing you can do is find out what level of annuity the £380K would buy a useful reference .
There are plenty of annuity calculators you can find in Google .
You can check what a level annuity would pay ( that means with no inflation linking) and then what it would pay with inflation linking. You might be surpised at the large difference

NoMore

You haven't stated why you want to take the pension early other than your now 55 and could do it.

You seem to imply you would stay in work, so an extra income could end up you moving up a tax bracket ?

Do you need the money now? or Just tempted by the numbers ?

indiasign

Thanks again for the replies.

Interesting stuff Harry - fancy a Regulator not listening to the people their decisions affect! 😉

I remember there were similar issues with the Banks in the late 80s/early 90s, not making sure customers took independent advice when mortgaging/remortgaging

Joe, I'd be astonished if anyone would be able to make that fly, if the advice against transferring was clear. Having said that, I wouldn't put it past some chancer trying it under a CFA, in the hope of getting a halfway decent nuisance offer! 😣

Albemarle, the pension would still be index linked if I take it early. I assumed xylophone was referring to the impact of the index-linking applying to the reduced amount for the lifetime of the pension. Or have I misunderstood?

NoMore - just tempted by the numbers to be honest - it probably wouldn't have occurred to me if my colleague hadn't mentioned what she was doing!

Having said that, my daughters are in their early 20s, have been with their respective partners for some time so it's likely either weddings or houses (or both) will be on the horizon and it would be nice to be able to help them out, or to enjoy some bucket list holidays while we're still young enough to make the most of them.

And no, taking the pension wouldn't push me into a higher tax bracket. Close, but not quite, and CS wage increases arent likely to do it either! 😐

arnoldy

Just as a ranging shot: the current yield of the FTSE All Share is about 4.4%. That would give you a natural yield pension of 16.7k, increasing in line with all share dividend increases. Yes there could be costs but worth thinking about and it would be payed out in a very flexible and tax efficient manner (25% tax free). Also if you didn't need the money you could leave it to accumulate tax free in the pension.