Should I transfer out of DB scheme to buy annuity?

reg091

When I am 65 (currently 59) I will start to get paid from my employers scheme. I think this is a DB scheme (they closed it some years ago to new members). The numbers on that project a pension of £7,765, (less if I take a lump sum) or I could take a transfer value of £246,000.
My first question is could I take that £246K and buy an annuity and get a better income? 
Calculator at https://www.pensionwise.gov.uk/en/guaranteed-income suggests I could get a £61,500 tax free lump and £8,800 PA for life. This is a considerably better deal than it looks like would get if I left alone.
(Yes, the calculation above is for a single person annuity (my current scheme will pay 1/2 to spouse but I don't care about losing that element) and is a fixed amount PA, whereas the current scheme increases every year, which is a consideration of course).
Secondly, could I take that transfer and buy an annuity now? The scheme I am in does not pay out until 65 but retirement at 60 would suit me better.

HappyHarry

It is unlikely to be a good idea, but I suppose there could be a convoluted scenario where it would make sense.

The main concerns I would have are;
1. You said you don't care about the spouses' income, why is that?
2. You are looking at a level annuity. With a average life expectancy of around 26 years, inflation is going to have a massive impact on the value of your income in future years. The DB scheme will likely pay an increasing income. You may well be underestimating the impact inflation will have on a fixed income.
3. You will need to find, and pay a substantial amount to, a pension transfer specialist and receive advice on this. 

If the DB scheme closed some years ago, presumably you have a DC scheme in it's place. Do you have sufficient in the DC scheme to support you from age 60 to 65 when you will be able to access the DB pension?

reg091

Thanks for the info, much appreciated.
Wife earns a considerable salary and will have a considerable pension.
DB scheme closed to new members but those of us in it carried on paying in. 
I left the company eight years ago and haven't worked since so this is my only pension (aside from state pension when I am 67 (currently!). (I have been caring for child and claiming NI credits. I currently have 33 full years so two more to go on that).
I get what you are saying about the fact that the annuity calc I looked at did not pay an increasing amount, but the large lump sum available is a considerable factor. Any lump sum I take from the DB scheme makes a big impact on the payments.
I would have thought that people do this all the time, or is the fixed payment with no future increases the big factor do you think? 

george4064

You will 100% need specialist advice before transferring out of a DB scheme, but generally speaking (as what HappyHarry stated) it’s best to stay in a DB pension due to the protected benefits it provides at and throughout retirement.

wjr4

You want to give up a guaranteed increasing income for life for a guaranteed level income for life without spouse benefits? 

xylophone

I left the company eight years ago and haven't worked since so this is my only pension (aside from state pension when I am 67 (currently!). (I have been caring for child and claiming NI credits. I currently have 33 full years so two more to go on that).

Have you obtained a state pension forecast? What exactly does it say?

https://www.gov.uk/check-state-pension

You have a child- does your deferred DB pension pay a child pension should you die while he/she is still in education?

Dazed_and_C0nfused

I think this is the first time I have seen a poster thinking of transferring a DB pension to then purchase an annuity.

Seems a very odd choice and I wonder if the op has done the maths on what this would result in taking into account the inflation proofing on the DB scheme.

The numbers on that project a pension of £7,765, (less if I take a lump sum) or I could take a transfer value of £246,000.

My first question is could I take that £246K and buy an annuity and get a better income? 

Calculator at https://www.pensionwise.gov.uk/en/guaranteed-income suggests I could get a £61,500 tax free lump and £8,800 PA for life. This is a considerably better deal than it looks like would get if I left alone.

hugheskevi

The numbers on that project a pension of £7,765, (less if I take a lump sum) or I could take a transfer value of £246,000.

So equivalent to an annuity rate of 3.16%, for (probably) a joint-life, indexed pension payable from age 65. Or to look at it another way, a transfer multiple of 32 - that looks reasonable, but unremarkable.

Note that the comparison is probably of £7,765 without any allowance for 6 years price escalation, against an annuity paid immediately from age 65 - as you are not too far from age 65 that probably won't make a difference, but if you are investing very conservatively due to only having 6 years before purchasing an annuity it may not keep up with inflation and management fees.

My first question is could I take that £246K and buy an annuity and get a better income?

Is there a reason you prefer an annuity over drawdown/UFPLS? If you are strongly risk-averse that rather suggests a Defined Benefit is likely to be better.

What you are proposing is essential a PIE - Pension Increase Exchange - which Defined Benefit Schemes often offer to manage liabilities, but you would be doing it on a retail rather than group basis so the terms will not be as good. This provides a higher initial pension at the cost of a lower future pension, and typically a lower overall value of pension (which is why companies offer them, although that may not always be the case as it also makes liabilities easier to manage).

Secondly, could I take that transfer and buy an annuity now? The scheme I am in does not pay out until 65 but retirement at 60 would suit me better.

You could. Are you sure your pension scheme does not permit you to take an actuarially reduced pension from deferred status at an age earlier than 65?

It would usually be better value to purchase an annuity later in life, at some point in your 70s, than so young though.

Wife earns a considerable salary and will have a considerable pension.

I'd expect this to mean you were looking into the options which lead to the highest overall financial value, given you are (presumably) not at great need of money. An annuity is probably the lowest expected return of all options available.

Options such as drawdown/UFPLS also provide options around inheritance which annuity and DB scheme will not.

I currently have 33 full years so two more to go on that).

Have you checked this using the State Pension checker? You were in a Defined Benefit scheme (and so almost certainly contracted-out) so you may well need something other than 35 qualifying years for a full State Pension.

I would have thought that people do this all the time, or is the fixed payment with no future increases the big factor do you think?

It is an extremely important consideration.

In the DB scheme, you have no concerns about inflation or investment volatility.

With an annuity, you are exposed to inflation risk - although inflation has been benign, a few years at even just 5% would significantly reduce the value of a flat annuity. A lot can happen over the 25 years or so you expect to be retired.

With drawdown/UFPLS inflation is less of a concern due to being invested, but then you have investment risk to manage.

DiggerUK

You are considering giving up a safe, index linked pension for the rest of your life.
Why don't you take up sky diving without a parachute whilst you're at it.
Best of fortune..._

Albermarle

https://www.royallondon.com/siteassets/site-docs/media-centre/good-with-your-money-guides/five-good-reasons-good-with-your-money-guide-2018-edition.pdf

Brynsam

reg091 said:

I get what you are saying about the fact that the annuity calc I looked at did not pay an increasing amount, but the large lump sum available is a considerable factor. Any lump sum I take from the DB scheme makes a big impact on the payments.
I would have thought that people do this all the time, or is the fixed payment with no future increases the big factor do you think? 

Fortunately most people have more sense. If you buy an annuity, you are doing so at commercial rates (i.e. the annuity provider is in to cover their costs and make a profit). If you stay in your company-sponsored DB scheme, no such commercial considerations apply.