DB (final salary) transfer into a SIPP is £1.9M - manage this myself or have a professional manage?

dawsonna

I consider myself fortunate and lucky in the current climate.... I am just taking voluntary redundancy (very happy) and retiring at the age of 52.  Currently I am toying with the option of taking my final salary pension (30 years blue chip corporate) immediately at age 52, OR deferring and SIPP'ng the pot, and starting in 2.6 years time at age 55.  

I am very close to hitting the button on transferring out of the final salary pension scheme.   My transfer value into a SIPP is £1.86 million.   With this kind of money I am in two minds as to whether to manage it myself with an off the shelf SIPP provider (eg. AJ Bell) OR go with the professional managed SIPP route (namely a paid fund manager looks after the pot and makes the spread of investment decisions for me).     My FA has presented me both options, but is clearly recommending the professionally managed SIPP route.  At this level of investment the annual management fees can approach £25-30k, even £40k per year - its almost as if your pension fund provides an annual salary for a professional finance person.   We have my wife's DB pension also (activate-able in 2030), which is higher than mine, and so we are in a very fortunate position to "gamble" in a sense.  My view is to just take the cash (~£1.9M) put it in a low-ish charge SIPP and manage it myself - I would spread it across some very low risk investments to just try and maintain inflation value.  £1.9M with drawdown at age 55 to £50k per year (20% tax threshold), taking the max tax free cash of £293k (as my LTA is enhanced), and taking account of the 25% charge on monies above my LTA, the pot would last me till I am 87 assuming no growth on the £1.9M  My wife's pension kicks in in 2030 and with state pensions and other savings/assets we have no need to worry about cash needs in our late 70s.   So why be greedy, just take the cash, live well for 30 years and dont pay some expensive fund manager to manage your SIPP money and potentially get growth that you dont really need?... Granted £1.9M could grow to £3M in 30-40 years and then be passed on IHT friendly to my kids/surviving family.  Its kind of like bird in hand is worth 2 in the bush - do you live for now on a big bucket of cash, or try to grow it even bigger?

What would you do?

SouthCoastBoy

Without knowing the details of the db pension and your current financial position e.g. other income, projected expenditure, current liabilities etc. It is difficult to comment

Mistermeaner

I would say see and INDEPENDENT financial advisor - estate and tax planning will be important 

at that value you'll need an advisor to sign off a transfer out any way 

dawsonna

I have seen all the FAs that I need - numerous, some tied and some Independant.  I just wanted to glean people's experiences with self managing a large £M SIPP fund or having it professionally managed with the annual costs that go with it.

Prism

Have you managed any investments along the way that are independent of your pension? Maybe an ISA?

SouthCoastBoy

Ultimately it is a personal decision only you can make

gm0

Nobody can say whether your planned lifestyle and guaranteed income levels support taking the risk in jumping from indexed DB to DC drawdown.   Look at what it costs to by 3% indexed income with DC funds at 55/60.  The extra income of drawdown and its heritability come with longevity, market crisis, sequence of return, inflation all as risks for you in a pool of one. 

Assuming you decide you do have enough spouse DB and State Pension to give you a variable income floor in very adverse markets then turning this into a heritable DC portfolio may (a rare case) be a DB/DC transfer with a  logic to it.  And with a fairly low withdrawal rate selected well below MSWR (max safe WR) you can have as good an evidence base as exists for back testing and/or stress testing (via MC simulation) i.e a high confidence that the DC drawdown element will likely be OK over a full retirement for the envelope of "known markets" i.e. the past and some level of stress.  But not extreme black swans or the truly unprecedented. 

Add variable income extraction.  Add some cash buffering to suspend in a crisis for a year or three.  Risk keeps reducing but never goes away entirely.  Doesn't guarantee anything.  That's what you are giving up.

But this situation is definitely a "tall ship" within the flotilla of DC pensioners so if you run out others in the same age cohort will have drowned much earlier.

The LTA treatment you allude to crystallising and taking full basic rate income tax band as income x 20 years 55-75 (in fact making sure all nominal growth in the 75% of personal LTA is drawn 55-75 paying higher rate as needed (smoothed out to minimise this but ensuring broadly keeping up with it over 20 years). 

I do not believe there is a materially better treatment than crystallise early to the LTA and manage the nominal 75% growth via drawn income.  It may depend (in fine detail) on whether your enhanced LTA is indexed (like the standard one) or not so you can play around with this with a few phases (Phased FAD approach). 

Is this a terrible novice investor error - some would say it is !!!!

Crystallised only as needed via phased FAD - keeping pension as pension not taking full TFLS and moving it all into the estate and creating 40% IHT liability is often regarded as "best practice".  This builds a bigger 25% LTA liability for later.  But solves the 40% IHT.  So clearly this is *critically* dependent upon your consumption plan.  Full crystallisation is only best if you know what happens to the money.  If it is going to be "sat there invested" then it should be in the pension wrapper if possible.

For the above your LTA portion - that can be left uncrystallised as there is no TFLS and no way to miss the 25% penalty charge so it can arguably wait invested for 20 years of legislative change and the age 75 test. Whatever happens - happens.   Your money - and Rishi's can stay in the market.

Other thoughts

You need to be careful with benefiicary nomination as there are traps around choice of lump sum and income for heirs. Check this out personally or with adviser while in the transaction/relationship.

The DIY decision. 

This is a huge amount to manage for a novice investor if that's not your prior working discipline.  But if you have time to educate here and with a few books and during the transfer and the desire to do so than an OK "not screwing it up" solution is relatively easy to construct.  But depending upon your ability to "trust" things without taking them to pieces (engineers are prone to this) the education process can take a long time.

Books/Web

I would suggest if you think you might want to DIY that you go and self educate.  Monevator, ERN. McClung Living off your money are all good.  I just finished Bernstein - Rational Expectations.  Also good and very readable. 

Pick an approach and plan.  It doesn't need to be that complex a plan as your drawdown extraction outside of suspensions in a crisis is largely driven by the nominal growth/tax rates rather than a true variable harvesting and deaccumulation approach.  

If your spouse is also comfortable with all of this then fine.  If not have a plan for what happens if you drop dead and aren't around to run it DIY.  (Which could be going advised then rather than from the start).

ISA recycling

If this DC portfolio generates excess drawn income over consumption then it can be S&S ISA recycled under current rules to an equivalent tax shelter for growth without LTA issues but inside estate for IHT.  With spouse transfer there is plenty of capacity for this with this sort of income level/pot at 40k/year.

The bigger issue with the "take the pension" approach is IHT planning and your consumption plan.
Does your consumption planning and lifetime gifting - family and charity - sit well with the TFC + income coming into your estate alongside other assets - and leave you with a sensible estate value position now at year 5/10 and incrementally to 40 years out.  Don't die suddenly and unexpectedly at the start of the process with a massive 40% exposure.

If it doesn't look good then the IHT rules push you more towards a spend the pension last approach.  And the 25% LTA charges are just a smaller drag than the IHT taxes would be.  This is largely why people say "don't do it".

Other risks

With a decent buffering + income plan for SORR the biggest risk of all to this is sort of big pot DC drawdown treatment is regulatory.  You could execute this plan and take TFLS of 25% to LTA.  S&S ISA recycle some of it via family (spouse transfer and PET to heirs).  And the very next day Rishi hits ISA's but not pensions with filtered and targeted wealth taxes aimed at things (for greater political acceptability) which aren't your primary residence or your pension.  Just an example - not to set hares running.  Whatever you do - he may well get you one way or another.

Careful with the whole FA thing.  Examine charging from all angles. way in, ongoing, layers, way out.  Terrible practices exist.  SJP most famously with early exit charges and resetting their clock with portfolio changes (reinvestment).  Be super careful with FA terms and conditions.  Standard forum is advice is to avoid and use an actual IFA if that's your route. (Pension transfer specialist certified in this example)

dunstonh

dawsonna said:

I have seen all the FAs that I need - numerous, some tied and some Independant.  I just wanted to glean people's experiences with self managing a large £M SIPP fund or having it professionally managed with the annual costs that go with it.

There are those that do a very good job of self-managing their investments and others that have made a right pigs ear of it or used options that are actually more expensive than advised investments.       The key is what you are going to do.  

dawsonna

Prism said:

Have you managed any investments along the way that are independent of your pension? Maybe an ISA?

Yes.... I have a large ISA portfolio (~£260k), which I manage myself.

dawsonna

Thanks gm0.. some great perspectives and insights from someone incredibly well informed.    I have always been on the fence about whether to give up my final salary pension which I can take now (age 52) at an extremely beneficial (low) reduction from age 60, our normal scheme retirement age.  The other benefit with my final salary scheme is the the commutation factor is very high at 36.5, meaning that the tax free cash value only reduces the annual pension by a relatively small amount.   For me its that we have two large pension pots, and so the temptation of having the flexibility of the SIPP is very appealing.  But I am very nervous about the effect of a market crash.

Marcon

dawsonna said:

Thanks gm0.. some great perspectives and insights from someone incredibly well informed.    I have always been on the fence about whether to give up my final salary pension which I can take now (age 52) at an extremely beneficial (low) reduction from age 60, our normal scheme retirement age.  The other benefit with my final salary scheme is the the commutation factor is very high at 36.5, meaning that the tax free cash value only reduces the annual pension by a relatively small amount.   For me its that we have two large pension pots, and so the temptation of having the flexibility of the SIPP is very appealing.  But I am very nervous about the effect of a market crash.

That alone means you don't sound a good candidate for transferring out of a DB pension. If you are only 52 you'll have years ahead of you to worry about the next market crash!

If you have a protected retirement age (and you must have, if you can access your DB pension before age 55), remember that your transfer value almost certainly won't take into account the fact you can access your pension at 52 with a very low reduction.