Defined Benefit transfer recommendations - Media article

LHW99

IMO the option should be there, but perhaps it should be necessary for the advice to transfer must be positive - no opportunity to become an "insistent client".
Should circumstances change, there could then be the possibility of having the original advice reviewed, perhaps by the same adviser at a somewhat reduced cost, depending on time elapsed (5 years, no reduction; 5 months 20% say)

Thrugelmir

jimi_man wrote: »

£1 million in a pot sounds infinitely more attractive than £30,000 a year index linked with spousal benefits.

Particularly when peoples investing experience extends to little more than an extended bull market. As Sir John Templeton famously said "The four most expensive words in the English language are This time it's different".

DBdoobydoo

I think that I am probably one of those who could have benefited from a DB to DC transfer although the pension reforms came too late for it to be an option for me.

Unusually my DB pension is not index linked. Since 1997 it has been a legal requirement that DB schemes be index linked but I left the pension scheme before that law came into force. The scheme was closed years ago & Company A that I worked for was acquired by Company B & then that was in turn acquired by Company C. Increases in line with RPI were always at the discretion of the company & while Company A took contribution holidays for years they did provide regular increases to pensioners. With Company C this has never happened & it seems unlikely it ever will basically because they aren't legally required to & don't give a !!!! about employees who worked for Company A twenty years ago.

The pension is already worth about 16% less in real terms than when I started drawing it seven years ago. I am now 65 & would love to be able to transfer out & then draw down from a DC pension at an accelerated rate to pay off my mortgage over the next nine years instead of a pension of a flat £10K per annum for the rest of my life. My wife is ten years younger but even a 60% pension for her after my death isn't as attractive as me retiring now & us living on our other pensions with housing costs taken care of.

xylophone

I am now 65

Is there any post 88 GMP?

What is your state pension position?

fifeken

hugheskevi wrote: »

It said 234,951 scheme members received transfer advice, and of those, 162,047 (69%) were recommended to transfer out, while 72,904 had been advised to stay in their scheme.

I've read often on here that roughly 1 in 10 would be better off transferring which is way off these figures. Why the discrepancy?

HappyHarry

fifeken wrote: »

I've read often on here that roughly 1 in 10 would be better off transferring which is way off these figures. Why the discrepancy?

Transfer values have been much higher in the past couple of years.

I am a pension transfer specialist, and have recommended less then 10 transfers in the past three years, out of around 25 serious enquiries. Not one of those recommended transfers were from LGPS schemes.

These figures seem similar to my local peer group. This implies that there are an awful lot of companies still churning out DB transfers,, which concerns me as I suspect a large number of these may not be in the clients best interest.

Personally, I would prefer to see such transfers banned outright. I understand that there are occasions where keeping a DB scheme is clearly not optimal, but when someone signs up to a DB scheme, they wouldn't have done so with an expectation they could transfer to a DC scheme later. Many people are going to regret transferring in the future, and the cost of financial services will rise as a result of increased FSCS levies following the demise of the churning companies.

I suspect that the FCA are trying to stop the transfer market by the backdoor,. Their first step has been to increase compensation levels for mis-sold financial products, prompting PI insurers to withdraw cover for a significant part of the market. I'm sure we will see more backdoor regulations following soon. Which will be no bad thing.

DairyQueen

DBdoobydoo wrote: »

I think that I am probably one of those who could have benefited from a DB to DC transfer although the pension reforms came too late for it to be an option for me.

Unusually my DB pension is not index linked. .

This was one of the several positive points in favour of my transferring. The GMP component meant that approx 1/3 of my pension was capped at max 3% indexation. The other 2/3 was subject to discretionary increases (which hadn't materialised for several years prior).

Other points in favour:

1) Reduced life expectancy so unlikely to live for more than 15 years after scheme NRD.
2) I received a x 32 CETV.
3) Married but no dependents. OH well-pensioned and not requiring the 50% widow's pension from my scheme.
4) We have sufficient other guaranteed income to cover all non-discretionary expenses regardless of who dies first.
5) We have additional SIPPS and investments
6) My beneficiaries will now receive the fund balance on my death - free of tax should I die before age 75.
7) We both had experience of managing S&S investments. By no-means expert but sufficient to understand the risks and responsibilities.
8) Flexible drawdown enables us to optimise tax on our joint income.
9) Not risk averse.

It was a no-brainer for us. Even if I live longer than anticipated, we will still have benefited by my transferring out. Instead of a barely-inflation-ptotected £5k pa, of income which we didn't need to cover expenses, I received £162k (now worth in excess of £200k) which will be available for flexible drawdown or as an inheritance. Even if it loses 30% of its value tomorrow, the flexibility of the lump sum more than compensates for the loss of the guarantee.

Those who believe that the option to transfer-out should be removed fail to appreciate that for some, even if a minority, transferring out is beneficial.

DBdoobydoo

xylophone wrote: »

Is there any post 88 GMP?

There must be a very small amount. There is an item on the pension payslip labelled as "CPI Inc ServeBetween 6-4-97 & 7-3-00". In June 2012 this was £96.94 & in June 2019 this was £109.73. The other amounts for "In Plan AVCs" & "Pre-1997 Pension" are unchanged. My pension of £10,000 per year has only increased by £153.48 in seven years which amounts to a cut of over 15% in real terms.

xylophone wrote: »

What is your state pension position?

I'm drawing it. I was contracted out & worked abroad for some time so had to purchase added years in order to get the maximum possible for me of £139.50/week.

jimi_man

DairyQueen wrote: »

Those who believe that the option to transfer-out should be removed fail to appreciate that for some, even if a minority, transferring out is beneficial.

Actually I think my point still stands and in fact your post merely reinforces it. Whether or not it was more beneficial to you, and that won't become apparent until the final reckoning, by your own admission the pension made little difference to you as it was a small part of your retirement portfolio. Therefore if the option to transfer had been removed, you wouldn't have been much better or worse off so no real harm done.

If, by not having the option to transfer, the majority of people are prevented from making a stupid costly mistake, with the very small side effect that a tiny minority MAY possibly be denied the opportunity to make a couple of extra pounds, then it's definitely worth it.

DairyQueen

DBdoobydoo wrote: »

My pension of £10,000 per year has only increased by £153.48 in seven years which amounts to a cut of over 15% in real terms.

I sympathise. Few people appreciate that, unlike public sector schemes, private sector DBs are vulnerable to zero/limited indexation once in payment.

The government pulled a fast one when it introduced the new pension rules. Until then, all indexation on pre-1988 GMP, and any indexation shortfall on post-1988 GMP, on pensions in payment, had been guaranteed and paid by the state. Since 2016, the government has rescinded on that guarantee. Private DB schemes have no responsibility to step-in and pick up the tab and, unsurprisingly, are not doing so. Those who contracted-out into a DB scheme are no longer receiving any/full inflationary increases on the GMP elements of their pensions in payment. Public sector schemes have special arrangements and their retirees are not as affected.

On leaving the scheme, my deferred benefit statement stated that the non-GMP pension (i.e. 'the excess') would be escalated by RPI up to a max of 5% whilst deferred. This changed to CPI in 2012 without the scheme informing members.

The scheme rules (unseen by me until decades later) stated that inflationary increases on the excess when in payment were discretionary and, unsurprisingly, the scheme had paid zero such increases for several years.

Ironically, whilst deferred, pre-1997 GMP increased the projected pension beyond inflation as many schemes opted to use fixed-rate escalation then available on deferred GMP benefits. These rates were adopted in a much higher inflationary period and, with hindsight, were generous thanks to the low-inflationary period that has prevailed in recent years.

I suspect that your scheme looked similar. It's likely that your pension was fully inflation-protected whilst deferred and, depending on when you accrued GMP, it may have received above inflation increases on part of the value. However, once in payment, the limited indexation means that it is losing value in real terms each year.

xylophone is an expert on the intricacies of the SP and contracting-out. I am certain that he will correct me if necessary

With his help I was able to negotiate the small-print of my DB and understand the benefits and disadvantages of the scheme. The IFA I used for my DB transfer did not share xylophone's intimate understanding of GMP rules, let alone how they affected me and my scheme. He had made no allowance for the impact of (minimal/zero) indexation on the pension in payment until I pointed it out. This is just one example of the limitations of IFA advice. Many are very good but they are rarely experts in every aspect of several decades of pension legislation, and the devil is in the detail.

I owe xylophone a very great deal.

Had you been able to transfer-out then you would have been exposed to market risks (and they are considerable) but, for some, that risk may have been preferable to the certainty that a substantial part of their retirement income will devalue in real terms each year.

The alternative would have been to purchase an annuity. Possible that the initial income would have been lower but you would, at least, have had the opportunity to inflation-protect that income.

You have been denied the opportunity to make an informed choice with expert support. That is the freedom from which I have benefited. If 'informed choice' is the part of the process that is failing then this is the aspect that needs to be addressed by the regulator.

A suggestion:

Are you under 75? Are you able to invest £2880 in a SIPP? If so, then you could benefit from a £720p.a. 'income bonus' each year. Those without earned income are able to invest £3600p.a. gross into a pension. The net payment of £2880 will trigger tax relief if invested in a SIPP.

Cash held in SIPPS doesn't incur platform charges. Hold it in cash, wait for the tax relief to arrive, and then withdraw it (leaving the balance required to keep the account open untouched).

Next year, rinse and repeat.