Plan A, Plan B or is there a better Plan C?

squarebeard

First time poster and have been studying this board for a while now and am now looking for some valued opinions on retirement plan / withdrawal strategy from the knowledgeable folk on here

 

Background: I’m 54, wife is 56 and I would like to retire or maybe semi-retire in 18 months. Wife is at the same juncture, and although we both may do some sort of lower-paid or voluntary work, these plans are based on neither of us are working for income after around Feb/March 2023.

The mainstay is my deferred DB pension which closed in 2011. Current valuation is £26k pa which is inflation linked (RPI capped to 5%) and which I can take at age 60 without penalties (the scheme allows withdrawal access from age 50 at roughly 5% reduction for each year if accessed before 60). So for context, as of now, aged 54 I can take £20k pa. Spouse pension of 50% on my demise.

There is also another AVC element worth 4k pa which closed in 2008 – not inflation linked and no penalties if taken at age 62. Similar early retirement reductions as main DB pension. No spouse pension payable from this part. If I was to take it now, I could have £2.5k pa

 A DC scheme and another DC AVC scheme was set up after 2011 to replace the DB elements to which I contributed for a couple of years before being made redundant in 2013 (that current pot size is about £60k)

I can also take a tax free lump and reduced pension – to facilitate this, the scheme will take the bulk of the cash from the DC elements of the replacement schemes along with the old AVC scheme thus preserving as much as possible of the main DB pension. So as of now, I could take a TFLS of £127k and a pension of 19k pa (this includes £1700 pa from the old AVC pension)

The main DB scheme has a current CETV of £868,000 which I’ll come back to in a bit. Also have the following:

Me:

ISA = £60k

DC = £30k (from current employment)

SIPP = £96k

Rental property = funded by redundancy money + BTL interest only mortgage, LTV approx. 50%. 10k pa rental income, property in joint names with wife

State pension entitlement but reduced by a few hundred £ pa as I was contracted out

 

Wife:

ISA = £40k

DC1 = £100k

DC2 = £29k

A few other small pension pots, all added together less than £10k

Full state pension entitlement

On our main house we have a small mortgage left of around 30k but I don’t want to pay this off as it currently tracks the base rate + 1% so seems best to let it ride for the 4.5 years I have left on it unless interest rates dramatically rise of course. No other debts or leases

First and foremost I recognise that whichever way I choose I am in an extremely fortunate and good place whichever way we go.

1st opinion = is the tax free lump + reduced pension offer from the DB scheme a good one?

 

Plan A: burn down our ISA and DC pots to bridge the gap till I’m 60 and penalty-free DB age. I’ve calculated that we could live off the ISA’s and the 25% tax free lumps from the DC pots so effectively no tax payable for the next 5 years. I guess I could alternatively take UFPLS payments to take us to the 12.5k allowance but is there any real benefit to that? Then take the TFLS and reduced pension from my DB scheme. Live off this lump sum for 3-4 years and use DC pots to help our son on property ladder / wedding etc and fund any big purchases we have / want to make and bridge any further gaps to state pension age.

Even without any growth I reckon we should still have plenty left in the DC pots – along with the TFLS from the DB pension, the upcoming state pension and the guaranteed regular income for life, it seems much more than enough

 

Plan B: consider taking the CETV if advised to do so. A good friend of mine who I worked with at the same company and was in the same DB pension scheme as described above for the same number of years (30) has just had formal IFA advice to take his CETV which came in a shade over £1m but just under the LTA to which he is now going through the transfer process. He is 2 years older than me. If I went for this option I probably would not need to even touch any of the other DC pots which could be left to our son for tax-free inheritance. Yes there may be some LTA issues but that wouldn’t be a huge hang up for me. And of course I fully recognise the potential risks of managing the pot. What does alarm me though is that he paid 20k for the advice(!) and it is the same IFA firm who recommended the transfer that will also be managing his portfolio which concerns me a bit as it seems a conflict of interest

So as I write this, I’m leaning towards Plan A but would really welcome opinions on Plan B as well. Do we have enough other income and asset sources to even consider a CETV transfer or is it plain madness? I wouldn’t be an insistent client and if I was properly advised not to transfer, I wouldn’t but the fact that my friend has had a positive recommendation (even in these current times) has at least got me intrigued. His wife is 10 years younger than him which was a factor but otherwise we are in similar positions. There’s no way I’m paying 20 grand for advice though, I'd just stick with the pension. Looking at the current climate though it seems the choice of even taking a CETV will become more and more limiting

I seem to be talking myself out of Plan B but as the title suggests, is there a better Plan C? I welcome anyone’s constructive thoughts!

tacpot12

The price that your friend paid for the Pension Transfer Advice is likely to have been £2K for advice and £18K for the insurance to cover the chance that the advice was bad. The insurance cost isn't optional and no IFA will confirm how they allocate the costs within the fees they charge you, but I expect that it will not be too far off the £2K/£18K split I have suggested.  (Regular readers migh recall that I paid £1000 for pension transfer advice for two pensions with a total CETV of £70K about four years ago. This seems to have been an optimal time to take this advice as the cost of doing so seems to have risen exponentialy!) 

I doubt you will get transfer advice for much less than your friend paid, but you should get a quote and compare the alternatives (assuming you get positive advice to transfer).

The CETV (£868K) would produce an income of about £43K per annum NOW (assuming a safe withdrawal rate of 5%), which makes the £26K pa at age 60 look pretty sick. Even if you paid £20K for the transfer advice, you would be better off after two years (BTW 5% should a safe withdrawal rate - you might see a figure of 4% quoted elsewhere but this assumes you live in the USA and don't have a state pension.)  

There are some significant risks in managing your own pension. Managed well your pot might enjoy a return of 8%, but if you have to pay the IFA 1.5% and the funds managers 1% of this, you are only receiving a return of 6.5%. I manage my own pension and my current total return over the last three years is 6.38% (after charges) per year. Given that no IFA or Fund Manager will guarantee the extra return they can earn you, I would rather not pay their charges. (I pay about 0.65% in charges to my SIPP platform providers and the expert fund managers I use.) 

Albermarle

If you have been studying the board , you will have seen numerous threads about the issues surrounding DB transfers . There are at least three active just today . Apart from the huge financial decision involved, you should be fully aware all the regulatory and administration problems and the difficulties in transferring if you get a negative recommendation.
That's not to say it is a good or bad idea for you though. Is there any possibility to do a partial transfer ? Normally it is not but can be available sometimes .

Tacpot said The CETV (£868K) would produce an income of about £43K per annum NOW (assuming a safe withdrawal rate of 5%), which makes the £26K pa at age 60 look pretty sick. 
On the other hand if you wanted to buy an annuity at 60 that paid £26K pa with RPI ( max 5%) and 50% spousal pension , it would cost somewhere up to £1.5 million .

 I guess I could alternatively take UFPLS payments to take us to the 12.5k allowance but is there any real benefit to that? 
Yes you do not want to waste your personal allowance and you will also still have some tax free cash for later ,as you will not have used it up so quickly.

dunstonh

There’s no way I’m paying 20 grand for advice though

Nobody should be and there was no reason your friend should have. 

but the fact that my friend has had a positive recommendation (even in these current times) has at least got me intrigued.

Plenty of people are getting recommendations to transfer.  We have had two go through in the last few months.

Thrugelmir

Plan C. You've no need to anything at the current time with the DB pension. Let events unfold. The next few years are likely to be very interesting. 

squarebeard

tacpot12 said:

The CETV (£868K) would produce an income of about £43K per annum NOW (assuming a safe withdrawal rate of 5%), which makes the £26K pa at age 60 look pretty sick. Even if you paid £20K for the transfer advice, you would be better off after two years (BTW 5% should a safe withdrawal rate - you might see a figure of 4% quoted elsewhere but this assumes you live in the USA and don't have a state pension.)  

I should perhaps qualify that the pension is annually re-evaluated against inflation every year so if to assume say a modest 1.5% RPI pa then in 6 years time when I reach 60, this pension would be nearer 30k and of course more should inflation tick higher. What the CETV would be at that time is anybody's guess. But I take your point about the potential returns from such a pot size - when I ran through Plan B's calculations it seems I could live off my existing ISA pots and the TFLS from the CETV up until state pension age even assuming no growth. I can't see I would need to even touch any of the other pension pots for general income, possibly ever. And of course the potential inheritance benefits. So definitely something to consider - thanks tacpot

Out of interest, I have asked for a CETV every year from age 50 till now and they were:
2017 = £513k
2018 = £664k
2019 = £762k
2020 = £878k
2021 = £868k

So this year shows the first dip after some pretty spectacular increases

squarebeard

Albermarle said:

If you have been studying the board , you will have seen numerous threads about the issues surrounding DB transfers . There are at least three active just today . Apart from the huge financial decision involved, you should be fully aware all the regulatory and administration problems and the difficulties in transferring if you get a negative recommendation.
That's not to say it is a good or bad idea for you though. Is there any possibility to do a partial transfer ? Normally it is not but can be available sometimes .

 I guess I could alternatively take UFPLS payments to take us to the 12.5k allowance but is there any real benefit to that? 
Yes you do not want to waste your personal allowance and you will also still have some tax free cash for later ,as you will not have used it up so quickly.

Albermarle, indeed I have - and I know from personal experience with my friend of how difficult and frustrating the process was. They (the IFA's) told my friend that the likely outcome would be a positive recommendation, he was left with the worry of potentially having a 20k bill and no lump sum to pay it. I also know another ex-colleague in the same scheme, same years etc (we were all apprentices with the same company many years ago) who was also advised to transfer by St James Wealth who looking at their fees must be rubbing their hands together

Re: partial transfers, the scheme allows transfers of the different elements, ie the old and new AVC schemes and the separate DC elements that replaced the closed scheme but you have to transfer the whole tranche, so I couldn't do a partial transfer of the main DB scheme, it would be all or nothing

UFPLS did look another alternative and I guess yes it makes sense to preserve the tax free element for growth 

squarebeard

Thrugelmir said:

Plan C. You've no need to anything at the current time with the DB pension. Let events unfold. The next few years are likely to be very interesting. 

Another good idea! One benefit of waiting as well is to see how my friend gets on over the next 2-3 years. He said that even after taking the 250k TFLS, his managed portfolio costs on the remainder will be circa 20k per year + he has to beat inflation as well. Will indeed be interesting 

RoadToRiches

squarebeard said:

I should perhaps qualify that the pension is annually re-evaluated against inflation every year so if to assume say a modest 1.5% RPI pa then in 6 years time when I reach 60, this pension would be nearer 30k and of course more should inflation tick higher. What the CETV would be at that time is anybody's guess.

If inflation goes up, so will interest rates and so will 15 yr UK Gilts which your CETV will be based on. These high CETV values won’t be around for long if that happens in my opinion.

jamesd

You wrote that "AVC element worth 4k pa which closed in 2008 – not inflation linked and no penalties if taken at age 62. Similar early retirement reductions as main DB pension. No spouse pension payable from this part. If I was to take it now, I could have £2.5k pa". What is the current cash value of the AVCs? It seems likely that the income quote is based on buying an annuity and that's seldom a good idea in your sort of position, where there are more cost-effective ways to increase income:

1. Using AVCs money to allow claiming DB later, so less actuarial reduction
2. Deferring state pension claim to get a 5.8% increase per year of deferral, with no inflation cap

All of the usual safe withdrawal rates either include uncapped inflation increases or use well-defined rules to skip them only when markets do badly. There's an introductory thread at Drawdown: safe withdrawal rates. Those like Guyton-Klinger which allow skipping sometimes are likely to be better because they can start closer to the long term average* of 7% of initial capital withdrawn a year plus uncapped inflation increases.

* Use the 4% rule (pick a starting percentage and increase with uncapped inflation every year for thirty years total) for each period and note the highest withdrawal percentage that works, The average of them all is 7%. SAFEMAX - 4% - is the highest rate that worked in the worst case, that is, the one that always worked. This paragraph uses US statistics and 7% is from Bill Bengen's analysis, the creator of that rule.

jamesd

squarebeard said:

There’s no way I’m paying 20 grand for advice though, I'd just stick with the pension. Looking at the current climate though it seems the choice of even taking a CETV will become more and more limiting

There's a rule here; advisers aren't allowed to contact posters offering their services.

There's no rule which prevents posters from sending advisers private messages asking for their firm's contact details.

In the past I've checked that dunstonh was really an IFA and considered doing business with his firm and I'd be happy to do so in the future if the circumstances fit - I happened to be considering maybe doing it a few days ago to manage 100k but that may well not happen, it depends on how keen I am to have diversified - away from me - investment management. The firm does take remote business or visits from time to time can undoubtedly be arranged. It happens that the area where the firm operates is not a high cost part of the country.