DB Valuation - Maths query

AndyGB93

Having read other threads I'm conscious that asking questions about transferring out of a DB scheme can result in some harsh responses, so let me say up front that I am aware of the requirement to get professional advice and as I am still only 51 it will be a few years before I can do anything anyway and who knows what the rules will be when I hit 55 anyway !. This is purely a question about my calculations, if they are correct or have I misread/misunderstood something.

So my question:
I am lucky enough to have a deferred final salary pension from 20 years with a building society/bank that starts paying when I hit 62 (I left the company 10 years ago). I have just got the transfer out value and a projected pension value from the scheme today and by my calculations I would have to draw the pension until I am 105 to draw out the value of the pension if I were able to transfer it out today, are my calculation correct ?

The figures I have from the scheme are:

Guaranteed transfer value                                       £645,264.41

   which includes:
   Scheme pension built up before 6 April 1997

      transfer value of GMP                                          £27,153.52

      other rights                                                           £192,629.33

   Scheme pension built up after 5 April 1997

      value of Post 5 April 1997 rights                           £425,481.56

Retirement Pension Forecast (at 62)

Option 1 (Full pension) -                                              £ 15,168.64 a year

Option 2 - (Lump sum and reduced pension)              Lump Sum £ 77,430..41 / Pension £ 11,614.56 a year

So to my mind the transfer value (£645,264) divided by the forecast pension (£15,168) means that even without any capital growth I would have to draw an equivalent of the pension each year for just under 43 years after retirement before I exhausted the funds available. Given that the ONS predicts my life expectancy to be 84 and gives a 4% chance of me reaching 100 I think it is worth thinking about. But what have I missed, what have I misunderstood ? Any comments would be gratefully received.

ratechaser

Indexing? Spousal/dependants benefits? Annual value today versus revaluation for next 11 years until you start to take it?

Just a few starters for 10...

Marcon

AndyGB93 said:

Having read other threads I'm conscious that asking questions about transferring out of a DB scheme can result in some harsh responses, so let me say up front that I am aware of the requirement to get professional advice and as I am still only 51 it will be a few years before I can do anything anyway and who knows what the rules will be when I hit 55 anyway !. This is purely a question about my calculations, if they are correct or have I misread/misunderstood something.

So my question:
I am lucky enough to have a deferred final salary pension from 20 years with a building society/bank that starts paying when I hit 62 (I left the company 10 years ago). I have just got the transfer out value and a projected pension value from the scheme today and by my calculations I would have to draw the pension until I am 105 to draw out the value of the pension if I were able to transfer it out today, are my calculation correct ?

The figures I have from the scheme are:

Guaranteed transfer value                                       £645,264.41

   which includes:
   Scheme pension built up before 6 April 1997

      transfer value of GMP                                          £27,153.52

      other rights                                                           £192,629.33

   Scheme pension built up after 5 April 1997

      value of Post 5 April 1997 rights                           £425,481.56

Retirement Pension Forecast (at 62)

Option 1 (Full pension) -                                              £ 15,168.64 a year

Option 2 - (Lump sum and reduced pension)              Lump Sum £ 77,430..41 / Pension £ 11,614.56 a year

So to my mind the transfer value (£645,264) divided by the forecast pension (£15,168) means that even without any capital growth I would have to draw an equivalent of the pension each year for just under 43 years after retirement before I exhausted the funds available. Given that the ONS predicts my life expectancy to be 84 and gives a 4% chance of me reaching 100 I think it is worth thinking about. But what have I missed, what have I misunderstood ? Any comments would be gratefully received.

You don't need to wait until age 55 to 'do something' - you could transfer now if you wanted to. As you've spotted, people here jump down your throat the moment you mention transferring out of a DB scheme, and in many cases their unlooked for 'advice' could be correct...but not always.

The problem with your breakdown of the figures is how much you've omitted. A simple divide transfer value by projected pension isn't even half the story. The projected pension probably doesn't take into account further revaluation in deferment (i.e. increases between now and when you actually access your pension benefits) - and there's no guarantee that your transfer value will increase comparably, so it isn't a case of one moving in tandem with the other.

You also need to be aware of the costs of investing if you move your TV to a personal pension arrangement; that'll munch into your savings pot quite nicely.

If inflation shoots up, have you thought how much that could increase the value of your DB pension? Also the benefits your DB pension offers for survivors?

Many people are, understandably, dazzled by the figures they see when they are quoted a transfer value. By all means consider transferring - but do make sure you understand what you are giving up in terms of guaranteed income, peace of mind and the fact that you don't need to worry about looking after the 'pot' (or paying someone else to do so), which is an ongoing concern many quite simply overlook as they rush to tick the box and unleash this huge crock of gold..

TVAS

You have missed that it will be an increasing pension from retirement not a level pension. You have missed the fact that on your death your spouse will receive half or two thirds of your pension. You have missed that fact that the scheme retirement age is  3 years early before 65.

You have a factor of 43 so the transfer value is generous but also it represents the amount you would need to buy an annuity matching the benefits of the scheme. 

You are 51 so take no action until you want to take benefits which may be earlier than 62. The comparison should be at that juncture to compare the scheme early retirement pension with what you can get on the open market, annuity or drawdown. 

If you have money purchase schemes and do want to retire early it would make sense to deplete the non guaranteed pension funds first losing a guaranteed pension by transferring.  

You also ignore the fact that once retired you do not have to worry about the pension if you transfer you will have to manage your pension.

The reason why responses were harsh in other posts is because the reasons given for transferring are idiotic. So I had one person who said ill health and large age gap between spouses. Perfectly good reasons but neither applied to him. Transferring because you don't think you will live until 105 (unless you have a lurgy disease or all your ancestors drop dead at 70) is not a good enough reason to justify a transfer.  

So go back and do some more maths you need your starting pension to the power of let's say 3% for each year and then see how long the funds last.

[Deleted User]

I think it makes sense to divide transfer value (minus the cost to execute the transfer) by annual DB payout. Good first step to give you an idea if its a good deal. 

 

The rest depends on how you plan to invest, deal with inflation, etc.  But its a good first pass.  

The answer is subject to you understanding your risks, ability to withstand volatility, etc. 

And if you were to transfer, its best to fo it sooner rather than later.  If you want to take on the risk and seek the opportunity, there is zero reason to wait. 

MarkCarnage

Indexing at 2.5% p.a. throughout the term would mean the break even comes out at 30 years. 2.5% is not an unrealistic inflation forecast IMO. Of course it wouldn't be constant but you get the drift....
That's before taking account of spousal benefits, which would be likely to extend the term of pension in payment by some years too.
Yes, the fund would be expected to grow in nominal terms too, but the basis for CETV quotes are generally pretty conservative, though a bit less than what would be calculated by the actuary under 'technical provisions' when calculating scheme funding which is done on a pretty prudent basis. Typically it will be based on gilt yields plus a margin of 50-100bps. CETV will therefore be based on a discount rate of c1.5% or so at current long gilt yields, and there will also be an allowance for future pension inflation too.....
Therefore it's not as simple as it seems by a long way. 

MarkCarnage

The problem with your breakdown of the figures is how much you've omitted. A simple divide transfer value by projected pension isn't even half the story. The projected pension probably doesn't take into account further revaluation in deferment (i.e. increases between now and when you actually access your pension benefits) - and there's no guarantee that your transfer value will increase comparably, so it isn't a case of one moving in tandem with the other.

Quite. Revaluation in deferment is probably more predictable in that it escalates by capped inflation. However, the CETV could well be moving in a different direction and faster if gilt yields were to increase. 

So go back and do some more maths you need your starting pension to the power of let's say 3% for each year and then see how long the funds last.

About 27 years is the answer......

Thrugelmir

AndyGB93 said:

 But what have I missed, what have I misunderstood ? Any comments would be gratefully received.

Why have you not considered option 2 ? 

2nd_time_buyer

Despite the 'safe' advice often being to stay-put with DB pensions. The reality is, as you get older, the value of money to you diminishes – there is less and less to enjoy spending it on e.g. is £1000 at 55 when you are fit and active worth the same as an inflation adjusted £1000 when you are 90 and can barely get out of a chair?

I think there is something to be said for heavily front-weighting your pension which may not be fully accounted for in the mathematical models.

AndyGB93

Thank you for the responses, I thought that my calculations were a bit simplistic hence asking the question here. 

Many people are, understandably, dazzled by the figures they see when they are quoted a transfer value.

I count myself among them, I couldn't believe a) the transfer value which seems extremely large to me and b) what my simple (and obviously flawed) calculations were coming out at.

I don't have any set plans on retirement yet, but I am hoping to at least partially retire around 62 as after 40 years in IT roles I am hoping to do something less stressful and that gives me more time to myself.

NedS

2nd_time_buyer said:

Despite the 'safe' advice often being to stay-put with DB pensions. The reality is, as you get older, the value of money to you diminishes – there is less and less to enjoy spending it on e.g. is £1000 at 55 when you are fit and active worth the same as an inflation adjusted £1000 when you are 90 and can barely get out of a chair?

I think there is something to be said for heavily front-weighting your pension which may not be fully accounted for in the mathematical models.

I honestly have no idea how much importance or value I will place on having good care home provision "when I'm 90 and can barely get out of a chair". However, I do know it's likely to be one of the most expensive things I've ever had to purchase / pay for in my life, maybe more so than my property. How should I account for that when front loading drawdown having cashed in my DB pensions?