Reasons to cash in a DB pension?

LHW99

My reservation on with profits is that it is far more difficult, even nowadays, to unravel exactly what they are invested in, and I prefer to know that at least to some degree.

Thrugelmir

Marine_life wrote: »

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If I can achieve average growth of 2.5% on the invested portfolio then I would need to live to 120 before the DB pension starts paying back. Clearly, I want to do much better than that.

With a 60% bond allocation?

What's your forecast for inflation over the same time frame?

Malthusian

Marine_life wrote: »

I'm not sure that smoothing is necessarily bad so long as the investor has their eyes open.

If the investor has their eyes open With Profits is a totally pointless expensive waste of time.

Looking at the "smoothed" value of a With Profits fund is closing your eyes - to the real value of the assets. The point of With Profits smoothing is to close your eyes and let you ignore minor fluctuations in value. (But during major fluctuations in value, when the pretend value falls below the real value, the blindfold is whipped away by Market Value Reductions.)

For most investors the use of With Profits can still be explained away as defensible. But not when they are transferring out of a DB scheme, at which point it becomes nonsensical. If you are comfortable with the risk of transferring out of a DB scheme you don't need With Profits. It makes no sense to give up valuable guarantees that you can't buy on the open market and then pay for pretend guarantees. Nobody has ever managed to square this circle convincingly.

I am all for simple (as opposed to lazy) ...so long as the fees reflect simple...so I will definitely be challenging the suggestion.

Unfortunately the fees won't reflect simple because With Profits isn't simple. A quick glance at Morningstar says that PruFunds have total annual charges of anything up to 1.9% (although some shareclasses are considerably lower than that and Prudential don't make it clear what a normal charge would be for a Prudential pension + PruFund). And you have adviser fees to add on top of that.

If what you want is a single-fund solution for the sake of simplicity - notwithstanding that the complexity of a more bespoke solution would be the adviser's problem and not yours - there is nothing stopping the adviser from recommending a multi-asset passive-based single-fund solution. (Vanguard, BlackRock Consensus, L&G Multi-Index, etc etc etc.) However PruFund fans are hammer salesmen. All their clients' needs look like nails. Even those sufficiently comfortable with risk to transfer out of a DB scheme.

I have yet to come across an adviser who reduced their ongoing fees below the 0.5% per year modal average to take into account that they had outsourced the portfolio research part of their job to a single-fund provider or DFM. Maybe yours will be the first.

jimi_man

Can I just check I'm reading this right? It involves swapping a guaranteed Index Linked DB Pension of £12.5K per year for life to a fund with the Prudential where the fees (Google seems to suggest 2% +IFA fees of say 1% - so around 3% maybe?) probably amount to near the same as the pension would have paid out - £12k per year? I imagine the IFA did say it's a no brainer - he would say that, wouldn't he!


Every single fibre in me is just screaming DON'T DO IT!

daveyjp

The point of pensions seems to be lost by many and the thought of seeing a big balance in an account is more persuasive than receiving a salary payment every month for the rest of their lives.

Comments such as this:

'I would need to live to 120 before the DB pension starts paying back.'

demonstrates a fundamental misunderstanding of what a pension is for.

HappyHarry

Marine_life wrote: »

Have now had an initial meeting with an IFA who confirmed my own calculations that given our position a transfer is a complete no-brainer.

...

Any thoughts?

My thoughts are that your IFA has just broken every rule in the book, by giving an opinion at this stage. The FCA have been cracking down (rightly so) on this kind of pre-analysis advice/comments, which goes completely against the new guidelines introduced in October 2018.

If your IFA is being dumb enough to cut-corners like this, what else are they cutting corners on?

PruFund for all of a £400,000 pension? Again, that's just lazy, dumb work.

As Malthusian says above, find another IFA.

Mick70

The IFA may not have your best intentions at heart ?
A db pension of £12,500 - if key that into a simple spreadsheet and increase it yearly by 2.5% inflation say, at 30 years you would have received £575k... Yes I know you may not live 30 years , hopefully you do though . The Transfer value should be higher IMO for you to transfer
Mind you I have a similar decision to make in the next 6 months and dont have a clue which way to go

Suffolk_lass

bluenose1 wrote: »

Not sure if this is feasible but have you considered taking the pension at 55 with an actuary reduction if the scheme lets you?
You could then invest the payments into a SIPP.

I understood from the paperwork I received when about to draw my DB Pension that this is recycling and is illegal. You can do it with other income but not the pension income as I understand it.

Malthusian

Suffolk_lass wrote: »

I understood from the paperwork I received when about to draw my DB Pension that this is recycling and is illegal. You can do it with other income but not the pension income as I understand it.

Recycling pension income is absolutely fine. If you still have enough earned income to make the contributions tax relievable, and enough annual allowance, you can pay the whole lot into a pension.

Recycling tax free cash is what there are rules against. And even then they take a bit of effort to break.

Most people with DB pensions in payment don't have earned income, so HMRC and the Government view the small number of people who "double-dip" tax relief in this way as not a big problem.

Seabee42

The FCA talks about cracking down on transfer advice but its just that talk. 75% of all transfers are advised to transfer despite the FCA advising that it should be seen as inadvisable in most cases. There is no money to be made if they stay put which matches the advice!