Transfer valuation from DB Pension - advice

Mick70

Yes I thought feed high but it seems 2% maybe about right for such a high value . He did say the annual 0.75% might be able to come down on , so I could ask if can do 0.5% which seems about the norm to manage it ?
I know the CETV is high (64 times the dB , £1.7m compared to £26.2k rising rpi ) , But was suprised in our conversation as he almost assumed we wanted the dc and more or less the positives of taking this offer.

On another note also , if I ask for minimum risk going ahead he said should still make 3% (after costs) year on year , which I wasn’t sure if true or not

JoeCrystal

Well, Mick70, you can always proceed with it and then move the SIPP to another platform with a cheaper IFA. I assumed you are aware of the Lifetime Allowance issue for having such a large pension pot?

Mick70

yeah Joe, i finally got my head round the LTA part , at 75 would get a 25% charge against any unused pot value as well as any (if any) growth in activated drawdown pot . Suppose always risk of more political changes regarding LTA but nobody has a crystal ball

ian16527

The DB transfer firm I had a suitability report from (via my IFA) would cost 1.35% up to 250k then next 500k 0.9% then any after that would be at 0.5%.

Aegis

ian16527 wrote: »

The DB transfer firm I had a suitability report from (via my IFA) would cost 1.35% up to 250k then next 500k 0.9% then any after that would be at 0.5%.

I've mentioned elsewhere that I don't really like this percentage-based charging for DB work especially, as it implies that the advice firm gets nothing if they don't transfer the funds, which puts a significant incentive on them to recommend a transfer that may not be in the interest of the client. This is magnified if it's a firm that operates as an outsourced pension transfer specialist, as that presumably ids their main source of income.


That said, this set of percentages does look like decent value on smaller cases, but for anything larger (the definition of which will depend on location) a fixed fee arrangement would undoubtedly be cheaper.

Mick70

Out of interest when compare the CETV (1.7m) with the DB pension (26k+rpi) , how do you work out the factor ie I know it comes out as 65 times my dB amount , but it’s more complex than that and a much lower factor ?

sandsy

Mick70 wrote: »

Out of interest when compare the CETV (1.7m) with the DB pension (26k+rpi) , how do you work out the factor ie I know it comes out as 65 times my dB amount , but it’s more complex than that and a much lower factor ?

It's based on the expected cost to the scheme of providing you with your benefits. That will depend on:
a) what assets the scheme holds to meet its liabilities (ie. if it holds low yielding assets, it needs to set aside a high amount to meet your expected payments and vice versa), and
b) expected life expectancy of scheme members and their spouses

Also, it will be based on the highest value option you could choose to take. That will normally be your guaranteed income if you didn't take tax free cash. I think your £26k is after tax free cash?

One question you could ask yourself is whether you are prepared to invest in riskier assets than the trustees who have to guarantee your income if you took it from the scheme?

Aegis

Mick70 wrote: »

Out of interest when compare the CETV (1.7m) with the DB pension (26k+rpi) , how do you work out the factor ie I know it comes out as 65 times my dB amount , but it’s more complex than that and a much lower factor ?

It's not - but that multiple is only a first glance at whether the scheme is offering value for money or not. I have figures in my head where I think it broadly at par value and others where it represents really good value. How schemes get to these figures is part of the dark art that is actuarial science, and I have recently seen transfer multiples ranging from 19 to 60, so there is clearly a lot of scope for different approaches.


One thing to watch out for is that many DB schemes quote the CETV based on expected retirement income at normal retirement date but will refer to the scheme at the date of leaving in the paperwork rather than the current uplifted value (i.e. inflation-adjusted). This can make the income multiple seem more appealing.


The other two main factors for looking at value are the annuity critical yield, which shows the return needed to replace benefits at retirement age by buying a secured income, and the drawdown critical yields, which show the constant rate of return needed to match benefits to a series of given ages. Generally it doesn't make sense to look at the annuity option except in rare instances of poor health or lifestyle factors, so the drawdown critical yields are much more important. However, again that's the starting point. From there you also need to consider sequencing risk (or "pound-cost ravaging"), so the aim should be to achieve the long-term return required while also minimising volatility. This becomes a careful balancing act, and it's a good idea to run a series of projections using a cash flow forecast to stress test the transfer before proceeding. All of this should be based on the pension net of any lifetime allowance excess charge to ensure that you're not then left relying on income from a smaller pot than modelled.

jamesd

Mick70 wrote: »

if I ask for minimum risk going ahead he said should still make 3% (after costs) year on year , which I wasn’t sure if true or not

Risk scales vary but personally for investing I'd say that minimum risk means cash in FSCS backed deposit or savings accounts with no more than the FSCS limit in each banking group. I doubt that there are enough groups in the UK to do this for you and if it was done, no, 3% after costs (and inflation, as normally expressed for investment returns) is too high, 0% to -1% would be more like it.

But... that's the wrong answer to give you, because it's mainly about how much investment values can go down in a bad market.

Your risk-related interest is:

1. success at drawdown. Many ways to define this but one candidate is income not going below DB combined with simple income for your wife after your death and little need for day to day money worries. To do this, an integrated approach is best:

a. state pension deferral for both of you, perhaps ten years for her. Lots of extra easy to use inflation-linked income.

b. regular annuity buying after age 75-80 when annuity rates tend to start improving as people start to die in larger numbers, subsidising those who live. Annuities in her sole name using pension contributions that she continues to make from now are efficient for this, but some dual life bought from your pot can be used. The idea of these combined with her state pension is to ensure that she has enough fuss-free core income after your death, with no dramatic change needed to get her income.

c. maybe 50k every 2-3 years from now to buy a level (no inflation increases) dual life annuity. Annuity rates are poor at young ages and inflation will eventually cut the buying power a lot but this is gradually shifting towards more guaranteed income over the decades.

d. maybe a year or two of annual investment income in cash, maintained in part by using income fund versions instead of accumulation versions. Counted as part of the bonds percentage.

e. flexible drawdown rules like Guyton-Klinger with a high 95% success rate. Failure means taking less income, not running out of money, helped by already having switched to lots of guaranteed income way before the end of say a 40 year plan.

f. the rate you have to take money out of the pension to avoid the age 75 lifetime allowance charge on growth.

2. not seeing drops in bad markets that scare you out of investing. This is what the word risk tends to be used for. If you can handle it I suggest that you specify a 25% drop when equities drop by 45% because that allows the 65:35 or 60:40 equity:(bonds and cash) that helps with high drawdown results. Going below 20% starts to hurt a bit but is OK.

Looking at the whole drawdown risk picture:

A. low drawdown risk and 3% returns is fine
B. a big market drop makes no big day to day difference:
B1. the drawdown rules cut no more than 10% at a time for each year if markets are down and stay down
B2. the cash, dividends from income units and the pension drawing rate makes it obvious that you can continue with little effect even after big drops
B3. the bit of annuity buying, state pension deferring then greater annuity buying gradually makes what stock markets do mostly irrelevant

ian16527

Aegis wrote: »

I've mentioned elsewhere that I don't really like this percentage-based charging for DB work especially, as it implies that the advice firm gets nothing if they don't transfer the funds, which puts a significant incentive on them to recommend a transfer that may not be in the interest of the client. This is magnified if it's a firm that operates as an outsourced pension transfer specialist, as that presumably ids their main source of income.


That said, this set of percentages does look like decent value on smaller cases, but for anything larger (the definition of which will depend on location) a fixed fee arrangement would undoubtedly be cheaper.

This was indeed the case as they recommended not to transfer, and therefore did not get any fees. They did say that I could be insistent and transfer but also said come back to them in a year or two to check if it was worthwhile then.