Reasons to cash in a DB pension?

Marine_life

A lot of very strong opinions here!
Let me split the question between:
- Whether it makes sense to make the transfer
- Where to put the money
Whether it makes sense to take the transfer depends on a number of things, not only the straightforward financial comparison i.e.:
1. There is the ability to pass any unused balance on to your heirs.
2. There is an inheritance tax component (as any lump sum would be outside of IHT if the holder dies before age 75)
3. There is a tax component in two dimensions:
a. A DC pension allows 25% to be taken as a TFLS (not an option in my DB pension)
b. As a higher rate taxpayer any DB pension would fall to 45% tax
4. Looking at the financial comparison, my comparison is based on the following:
a. Taking the maximum TFLS at age 60
b. Average growth excluding inflation of 2.5% (which I could achieve in a long term deposit account)
c. Begin drawing at age 63 (which is the NRA)
d. Tax of 40%
Based on the calculations in 4 the result is as follows:
a. My initial £400k is fully drawn down by age 104
b. By that time I would have drawn £790,000 compared to the DB pension of £677,000 (the difference being the TFLS)
If I reduce the growth rate to 0% (i.e. below inflation):
a. My initial £400k is fully drawn down by age 87
b. By that time I would have drawn £412,000 compared to the DB pension of £312,000 (the difference being the TFLS)
The above are a direct like for like comparison where the TFLS make a big difference to me as a higher rate tax payer.
I also think that with the DC pot I can make improvements on the above assumptions by:
a. Achieving a higher return
b. Managing our overall pool of investments to reduce average the average tax rate.
Lets say:
a. I can increase the average return to 5%
b. Reduce the average tax rate to 30%
The result would be:
a. By age 87 we would have drawn down around £492,000
b. BUT, the remaining pot would be around £850,000 which we can then pass to our heirs.
Finally, I ran a “meltdown” scenario where the post loses 30% of its value the day after its deposited and then achieves zero growth thereafter. Under that scenario:
a. My initial £400k is fully drawn down by age 81
b. By that time I would have drawn £287,000 compared to the DB pension of £216,000 (the difference being the TFLS)
c. Even under this scenario the DB pension only ‘catches up’ to the DC pension by age 86.

Am I missing something in my calculations?

I will come back to the choice of investments in a later post.

DBdoobydoo

Marine_life wrote: »

A lot of very strong opinions here!
Let me split the question between:
- Whether it makes sense to make the transfer

In my case if I had the option to transfer from my DB pension to a DC pension I would take it like a shot as unusually it's not index-linked. Even with the most prudent of investments & safest rate of drawdown it would be better than a pension that is decreasing in real terms year on year.

Suffolk_lass

I know you said your overseas pension does not count towards your LTA but your other pensions do. I would be asking for the LTA value of your other pension pots to ensure that the 32xCETV does not result in a tax liability for you, or a need to opt out of your current scheme (assumes this is still the non-contributory one you reference in the link at post 12) to avoid same.

The other thing that occurs to me is the early demise life cover that some DB schemes offer - is that what you mean by the age 75 TFLS IHT exemption or is this something else (my DH is a teacher, approaching retirement and mentioned it when I wasn't listening enough to take it all in.

By the way, the indexation lift of your frozen DB by 20% (from £10k to £12.5k) in nine years is cheering. It makes me question why you want to do this now and not defer until closer to the point where the pension scheme operators are expecting to start paying you.

Reference 3a above, are you sure your scheme does not permit commutation, even if it is not offered as a standard feature? It was a revelation to me that mine offered both commutation and inverse commution (as my version did offer an assumed standard TFLS)

Marine_life

Suffolk_lass wrote: »

I know you said your overseas pension does not count towards your LTA but your other pensions do. I would be asking for the LTA value of your other pension pots to ensure that the 32xCETV does not result in a tax liability for you, or a need to opt out of your current scheme (assumes this is still the non-contributory one you reference in the link at post 12) to avoid same.

I only have some other relatively immaterial pensions in the UK (I have some other smaller pots outside the UK) but nothing that would breach my LTA

Suffolk_lass wrote: »

The other thing that occurs to me is the early demise life cover that some DB schemes offer - is that what you mean by the age 75 TFLS IHT exemption or is this something else (my DH is a teacher, approaching retirement and mentioned it when I wasn't listening enough to take it all in.

There are various rules which enable you to pass on the asset IHT free:
https://www.pensionwise.gov.uk/en/when-you-die

Suffolk_lass wrote: »

Reference 3a above, are you sure your scheme does not permit commutation, even if it is not offered as a standard feature? It was a revelation to me that mine offered both commutation and inverse commution (as my version did offer an assumed standard TFLS)

I've checked, it does not

Thrugelmir

Marine_life wrote: »

a. I can increase the average return to 5%

Will you though. For the London Markets the historical long term average (over 100 years) is around 5%. However this is with income reinvested. Without capital growth averages a meagre 0.5%. Naked portfolio too, no costs accounted for.

daveyjp

The big error many make is thinking they will live a happy life in their own home until the day they die.

For many this is not now the case.

The cost of long term care has to be part of your considerations.

It may be beneficial to have a set monthly DB income rather than a lump sum which can soon disappear when paying £40k a year care home fees.

MarkCarnage

5

Thrugelmir wrote: »

Will you though. For the London Markets the historical long term average (over 100 years) is around 5%. However this is with income reinvested. Without capital growth averages a meagre 0.5%. Naked portfolio too, no costs accounted for.

For global equities on a weighted basis the real return is just over 4% p.a. over the last 100 years. The data on bond markets isn't generally good enough to calculate the equity risk premium as accurately, but most agree on about 3-4%.

Right now, I would suggest that a nominal forward return expectation of 5% for equities isn't unreasonable, so about 3-3.5% real. I look at global as UK returns alone are increasingly less relevant. Inflation might be more of an issue here though....

5% is before costs though, as previous post notes, so net return will be a bit less than that.

xylophone

£40k a year care home fees.

Only £40K? Not in the South East.

Make that (at current rates) at least £60,000 plus......

Suffolk_lass

Marine_life wrote: »

I only have some other relatively immaterial pensions in the UK (I have some other smaller pots outside the UK) but nothing that would breach my LTA

Have you actually checked the LTA on your other pensions? Given that your DB CETV is £100k more than you first estimated, and the UK rules changed in respect of treatment of overseas pensions taken after 2006 and again in 2017?

From what you have said, your overseas (Austrian?) pension is an employer funded retirement benefit scheme. Your posts allude to your intention to retire in the UK and pay UK Tax. I presume you have looked into the tax liabilities on any TFLS from that overseas benefit and the implications of being resident in the UK in the tax year when you take this?

Your post in 2010 said:

1. Two schemes from when we contracted out of SERPS - both have a current (transfer) value of around £30,000 each and a combined pension of arounf £4,000 from age 60/65 respectively.
2. My wife has a small private pension that currently estimates a pension of around £500 per annum from age 55.
3. I have a non-contributory pension scheme with my employer which is currently worth around £15,000 per annum (starts paying at age 62)
4. I have a frozen UK final salary scheme which is worth around £10,000 per annum in todays money (starts paying at age 62).
5. I have a deferred compensation scheme which currently has a balance of around £350,000 (starts paying at age 60 with the balance paid over 5 years).
6. I have just started a new private pension scheme which, with what I have paid in to date, will have a minimum pension of £2,000 per annum. (starts paying at age 60)

So of those, numbers 1, 2 and 4 are fixed i.e. we will not pay in any more.

Number 3 will increase simply by me staying with my current employer. If I stay another 4 years it will increase to around £18,000 per annum.

I am continuing to paying into option 5 and expect that this will increase to arounf £600,000 over the next 4 years.

I will continue to pay into option 6 with the hope that this will increase to at least £8,000 per annum.

You do not say if your option 5 has increased to £600k or more (your original post seemed to have a four year horizon) but if you are planning to take this while in the UK, this is taxable - your drawdown period may not be 5 years for all of this, but you have not updated.

Your original post suggests you have paused your contributions to your private pension that you were hoping might pay at least £8000 - is this the same as the £75,000 pot you mention? If that is anticipating an annuity or with profits option that would need to be well over £250,000 wouldn't it?

Your opted out of SERPS scheme you mention - in your position I would be looking to obtain the updated value of this for LTA purposes especially if it is index linked, as many DB pensions were (with reserved rights at the point they ceased to accrue) - I was really surprised at the LTA of mine. You might not be able to transfer it but the LTA will still count.

You should also check if 65 is still the date of normal retirement age for this scheme, which could be tied instead to State Retirement Age. Speaking of which, have you been paying NI Class 2 voluntary contributions while working abroad? And have you checked your SP forecast? If you have not been paying, you can normally only go back up to 6 years to make previous years count. If you are not currently "in it" looking now would give you an additional 10-11 years (be aware the forecast assumes you will pay for every year until you start the contribution (tax) year in which you reach State Pension Age (67/68 for you I think)

Where you put your deferred contribution payouts may be impacted in an unexpected way if you do not check - especially if you plan to tax shelter some of it in a private pension in the UK.

Marine_life

Thank you for keeping me honest - see my comments below!

Suffolk_lass wrote: »

Have you actually checked the LTA on your other pensions?

I have checked. Provided the scheme has not been subject to UK relief then it is outside of the LTA calculations.

Suffolk_lass wrote: »

I presume you have looked into the tax liabilities on any TFLS from that overseas benefit and the implications of being resident in the UK in the tax year when you take this?

There is no TFLS from my overseas pension. The only TFLS is that which would be available if I opt for the CETV.

Suffolk_lass wrote: »

Your post in 2010 said: I've updated the figures to 2019!

1. Two schemes from when we contracted out of SERPS - both have a current (transfer) value of around £30,000 each and a combined pension of around £4,000 from age 60/65 respectively. Current value is £94,000
2. My wife has a small private pension that currently estimates a pension of around £500 per annum from age 55. That is the same - current value of the pot is around £15,000
3. I have a non-contributory pension scheme with my employer which is currently worth around £15,000 per annum (starts paying at age 62) This is the big change and represents my main DB pension. Value is currently around £41,000 (the value went up massively when my rights fully vested at age 50) and is index linked. Now starts paying out at age 60.
4. I have a frozen UK final salary scheme which is worth around £10,000 per annum in todays money (starts paying at age 62). This is the one that is the subject of the CETV
5. I have a deferred compensation scheme which currently has a balance of around £350,000 (starts paying at age 60 with the balance paid over 5 years). Actually now fixed at £850,000. Will be subject to tax.
6. I have just started a new private pension scheme which, with what I have paid in to date, will have a minimum pension of £2,000 per annum. (starts paying at age 60) No change

Suffolk_lass wrote: »

Your opted out of SERPS scheme you mention - in your position I would be looking to obtain the updated value of this for LTA purposes especially if it is index linked, as many DB pensions were (with reserved rights at the point they ceased to accrue) - I was really surprised at the LTA of mine. You might not be able to transfer it but the LTA will still count.

I will take a look at that

Suffolk_lass wrote: »

Have you been paying NI Class 2 voluntary contributions while working abroad? And have you checked your SP forecast? If you have not been paying, you can normally only go back up to 6 years to make previous years count. If you are not currently "in it" looking now would give you an additional 10-11 years (be aware the forecast assumes you will pay for every year until you start the contribution (tax) year in which you reach State Pension Age (67/68 for you I think)

We've checked that.
I have full contributions with a big chunk in the German state pensions and the remainder in the UK. As the rules currently stand I would receive the benefit of my German contributions but lets see what happens after Brexit.

Many thanks for the detailed response!