Possible Transfer Value and Advice

jamesd

PlanToRetire wrote: »

I need some help with a possible Final Salary Pension Scheme Transfer.
I am 54, and my husband has just retired. I have 3 smaller pensions to the value of about £100,000. My main scheme is a Final Salary and I am thinking of taking it at 55. However I will probably still work part time. If I leave the pension where it is, at 55 I can get a lump sum of £67.5k and a pension of 10k per year.
The estimated transfer value is 498k and I am considering transferring to a drawdown arrangement.

What benefit are you seeking from transferring? What's your general investment experience and how is the existing DC pension money invested? What is the income and asset situation of the whole household?

Assuming 1.5% a year of ongoing costs a £493k after transfer costs has among others these safe withdrawal rate potentials:

1. £15,776 (3.2%) increasing each year by uncapped inflation on a 30 year plan. 4% rule (constant inflation-adjusted income).
2. £24,650 (5.0%) variable usually increasing with inflation but kipping that and adding extra increases or decreases depending on the time you live through on a 40 year plan. Guyton-Klinger rules.

Both can be adjusted to pay more before state pension age then less once the state pension starts. And/or to pay more at younger ages and less when older.

DB would be £12,160 with the lump sum used for 4% rule or £13,375 using Guyton-Klinger.

DB income is 2.32% of the £430,500 after lump sum amount, very low but unsurprisingly low if it's all increasing with RPI. At 43 times it's one of the higher multiples discussed here and far more than twice what say the Local Government Pension Scheme would pay.

There's a lot of material in the Drawdown: safe withdrawal rates topic but to give some idea of what SWRs are able to handle, the US Dow fell by 89% between the 1929 peak and 1932 trough with the great depression accompanying it until WW2 and that's not even the case which sets the US SWR.

The UK worst case starts just before WW2 and includes much physical destruction, huge costs and national debt with food rationing until July 1954, 16 years in. With milk restrictions into the 80s limiting cheese production this retiree would expect to be dead before food restrictions ended.

The US worst case was high inflation in the 1960s and Bill Bengen of the 4% rule has written that it's what concerns him most. Looking at historic UK inflation and using the BoE calculator to buy in 1983 what £1 bought in 1970 would cost £4.58. That's comparable to bonds as well as equities dropping to just 21.8% of their initial value. That's far worse than a 50% equity drop which never recovers in say a 50:50 portfolio that retains 75% of its value.

PlanToRetire wrote: »

Is it usual for an Advisor to not assist with a Transfer if they recommend not to transfer?
is 1% of the Transfer Value reasonable?

Neither usual nor uncommon, depends on the firm's (not your) risk tolerance for the risks they are exposed to. 1% isn't unreasonable in the current market.

PlanToRetire wrote: »

I am prepared to pay for advice, however I know that the Advisor will err on the side of caution – which is understandable – but I feel that if I do decide to Transfer I will have to pay the first Advisor and still be in the same position.

All you need is confirmation that you have received advice, not a positive recommendation. The firm has to provide that, though not go beyond it.

There was no advice requirement in the original pensions freedoms law proposal. It was added at the request of a Parliamentary committee.

There isn't a shortage of places that will receive a transfer against advice.

In general, the UK transfer advice market is an example of the principal–agent problem, alternatively called the agency problem. Regulators put in overly cautious and outdated (critical yield assuming pessimistic growth and annuity purchase) requirements because they get criticised for failures not normal cases and advisory firms and their insurers add more restrictions to reduce their regulatory risk exposure. With two key parties acting in their own interests rather than that of the client it's understandable why people with good transfer cases might end up being advised not to transfer.

jamesd

PlanToRetire wrote: »

So I have a free first consultation with him next week.

One area to be wary of is overly simplistic risk tolerance assessment questions.

A bad question might ask "Is guaranteed income better than unguaranteed?" and I'd answer that guaranteed is better, as I hope most people would. That answer suggests an annuity or don't transfer recommendation.

But the actual choice being made is reflected more properly by the question "Is guaranteed income better than a 30% higher unguarateed income that would have to be reduced if you live through worse conditions than seen in the last 125 years? Or 84% variable more depending on the times you live through?" In this case I'd go with unguaranteed or partially guaranteed.

Try not to let your nuanced tradeoffs of risks and benefits be made into a pigeonholing exercise.

[Deleted User]

jamesd wrote: »

There isn't a shortage of places that will receive a transfer against advice
.

There is a real shortage of places that will receive a transfer against advice without the signature of the adviser on the transfer form of the receiving scheme.

The ONLY one that is commonly known is A J Bell.

Linton

jamesd wrote: »

.......principal–agent problem, alternatively called the agency problem. Regulators put in overly cautious and outdated (critical yield assuming pessimistic growth and annuity purchase) requirements because they get criticised for failures not normal cases and advisory firms and their insurers add more restrictions to reduce their regulatory risk exposure. With two key parties acting in their own interests rather than that of the client it's understandable why people with good transfer cases might end up being advised not to transfer.

I think this is an unfair characterisation of the problem. Of course all parties will act in their own interests. Platform and Adviser companies are not charities and they have responsibilities to their shareholders to operate their business prudently The essence of a good deal is that it is in the interests of all participants. It is unreasonable for regulators, advisors or platform managers to be held responsible for the consequences of foolish investment choices against advice.

The real risk with DB transfer is that the general public are being asked to make decisions on risk and financial management that they are not equipped to make either through lack of education or life experience. This is in my view a far more serious and fundamental problem than the chances of a crash or arguments around drawdown strategies.

Who should bear this risk? Do we reduce the regulatory controls so that those who foolishly forego the benefits of a DB pension and possibly lose their lump sum through poor investment choices are left struggling without redress but those people who know what they are doing benefit?

One answer perhaps is that DB transfer should require some sort of check of competence, which if not passed would require professional management of the pot under aTrust regime. In my view DB transfer should never have been permitted to become a mainstream option in the first place beyond some flexibility in hard cases where the permission of the pension trustees would be required. What DB pensioners signed up for was a guaranteed income for life so that is what they should get in most circumstances.

[Deleted User]

dmelife wrote: »

Just get them to agree that they will sign an advice declaration and then find a provider who will except a transfer in without positive advice.

The advice from demelife is incomplete and unhelpful.

The contingency of almost all providers is that the FA signs a declaration on their transfer-in form.

Otherwise you won't be able to transfer-in.

The only commonly known exception is AJ Bell.