DB Pension considerations before rejecting transfer

NSG666

This has probably been asked and answered many times before but when I tried to search, the system threw a wobbly and gave me all sorts of unrelated results.

Anyhow, I've got a deferred DB pension with Peugeot and have always thought DB pensions are like gold dust and should be hung onto. A few years ago Peugeot paid for an optional review with an IFA to see whether it would be better to keep the DB or switch it elsewhere and the answer, along with some calculations, came back to leave it. So I did.

In about 3 years time I intend to start taking the benefits from the DB pension and automatically assumed that it would be best to take some / all of the tax free lump sum plus whatever the monthly payment was from the company pension plan.

Are there any other things that should be considered i.e. are there any benefits to moving the whole 'pot' elsewhere and drawing it using a different means? 
I haven't included figures as I'm not looking for advice what to do just simply things to consider other than leaving it where it is.

EDIT 16.28 - thanks for the replies so far. I think I've been clumsy with my question. My starting point is essentially "I have a DB pension that I want to draw upon in c.3 months time and cannot think of ANY circumstances in which I should transfer it to say a SIPP. What might I have not considered?"

I'm not expecting anyone to come up with a counter argument but asking the question just in case I've not considered something.

Are AVCs any different?

Thanks in advance

Malthusian

Nothing in your post indicates that you should change your decision to leave it where it is (and draw benefits from the scheme) rather than take a CETV and transfer it elsewhere.

Are there any "AVC" (Additional Voluntary Contribution) pensions linked to the DB pension that could be used to fund the tax free cash?

Otherwise, to draw tax free cash you will need to give up guaranteed inflation-linked income. Every scheme has its own rate (the commutation rate) as to how much you need to give up. Some are generous, others less so.

Even with an "ungenerous" scheme, there will still be no other way to exchange cash for that much guaranteed income; however that doesn't necessarily make it a good idea to give up a tax-free lump sum in your own hands for a taxable income that dies with you / your spouse.

It may actually help if you give us some figures and an idea of which is your priority (secure regular income or the bird in the hand of tax free lump sum).

MX5huggy

The major benefit is you have the money to spend as you like or can leave it to your children/cats home. 

The risk is live till you’re 110 having spent the money by 75. 

Without figures is fairly difficult to decide, if the pension is £10k per year index linked or they are offering £100k its easy to stick with the pension if the offer is £1m then take the cash, of course the offer will be somewhere in the middle. 
AVC’s is a cash pot that you can move to drawdown as you wish or buy an annuity. You may be allowed to take the AVC tax free in place of the lump sum. There by receiving more annual pension.
What’s the cost of the bigger lump sum (non AVC)? Ie increase in lump sum divided by reduction in pension. 

Albermarle

This has probably been asked and answered many times before

The subject of DB transfers - pros and cons and the practical difficulties - is discussed a lot on this forum - ad nauseum in fact .

The thread above yours is on the very subject ( with 151 replies)

Final Salary Pension Transfer — MoneySavingExpert Forum

and another recent one .

DB transfers — MoneySavingExpert Forum

Happy Reading !

NSG666

Albermarle said:

This has probably been asked and answered many times before

The subject of DB transfers - pros and cons and the practical difficulties - is discussed a lot on this forum - ad nauseum in fact .

The thread above yours is on the very subject ( with 151 replies)

Final Salary Pension Transfer — MoneySavingExpert Forum

and another recent one .

DB transfers — MoneySavingExpert Forum

Happy Reading !

Thanks Albermarle. I did see some posts similar to your links but, like the ones in your links they seem to have a couple of things different to my situation.
1. The question being asked by someone a way off drawing the pension where growth rates and investment strategies are an even more significant consideration than they are at retirement age
2. The poster seems to want to switch and is looking for ways to do it.

I guess my starting point is more. "I think I should leave my DB pension where it is but under what circumstances might this be the wrong choice"

An extreme example might be if my wife and I had very poor health and short life expectancy then it might be worth crunching numbers to see whether there might be a pot left to pass on if it were moved into a SIPP.

I'm not expecting any suggestions but I don't know what I don't know.

Nebulous2

Are you a gambler? Or a steady as she goes type of person? Would you sleep well if you transferred and very quickly lost 30% of your pot in a market crash? 

Some of my friends / acquaintances are contractors, earning very well, with little job security and prepared to take risks. Some of them have done really well out of contracting since the financial crash and have ‘forgotten’ the risk they are taking. Some of them are public sector with great job security and DB pensions. 

While there are times they will envy some aspects of the other groups lifestyle, few of them would seriously consider swapping. It amuses me when the public sector types consider transferring their pension, as I don’t think they have the constitution for it. 

You mention a wife. Has she a significant pension? If you died would she be dependent on a survivor pension from your DB pension? How would she feel about managing a pot instead of getting a pension if something happened to you? 

Andy_L

NSG666 said:

This has probably been asked and answered many times before but when I tried to search, the system threw a wobbly and gave me all sorts of unrelated results.

Anyhow, I've got a deferred DB pension with Peugeot and have always thought DB pensions are like gold dust and should be hung onto. A few years ago Peugeot paid for an optional review with an IFA to see whether it would be better to keep the DB or switch it elsewhere and the answer, along with some calculations, came back to leave it. So I did.

In about 3 years time I intend to start taking the benefits from the DB pension and automatically assumed that it would be best to take some / all of the tax free lump sum plus whatever the monthly payment was from the company pension plan.

Are there any other things that should be considered i.e. are there any benefits to moving the whole 'pot' elsewhere and drawing it using a different means? 
I haven't included figures as I'm not looking for advice what to do just simply things to consider other than leaving it where it is.

Are AVCs any different?

Thanks in advance

It depends on the scheme rules

You may have no choice & have to take the lump sum or you might have to "commute" (give up) some of the annual pension in exchange for a lump sum or possible a bit of both
Depending on the rate at which you exchange pension for lump sum it may be a great deal, neutral or an absolute rip off.

jamesd

NSG666 said:

Anyhow, I've got a deferred DB pension with Peugeot and have always thought DB pensions are like gold dust and should be hung onto. A few years ago Peugeot paid for an optional review with an IFA to see whether it would be better to keep the DB or switch it elsewhere and the answer, along with some calculations, came back to leave it. So I did.

AVCs are investment-based so the outcome depends on the investments that you choose to use with them and what it any income you choose to take and how.

Transfer values have probably increased substantially in the last several years. The calculations probably assumed that you would use the transferred capital to buy an annuity, roughly equivalent to throwing away almost half of the value.

It's unlikely that safe withdrawal rates and their flexibility in timing while assuring that you'd need to see something worse than has happened in the last 120 years before even cutting back to the DB payment level is required was considered.

Safe withdrawal rules (methods) vary in their approaches from including uncapped inflation increases to starting higher and skipping them occasionally if you happen to live through less good times. Same success rate, one using more flexibility than the other and able to use that flexibility instead of having to assume the worst case seen. One might start at 3.5% of transfer value, the other at 5%, same success rate, 99-100% of historic cases. Failure would mean an income drop lower than specified in the drawdown rule, but unlikely to fall as low as DB.

DB vary a lot but generally provide much lower income, typically at the moment a bit more than half as much, lower spousal pension and no inheritance value, typically also having inflation increases capped at 5%, except in the public sector.

The combination of much higher income and ability to vary that over time to take more when younger, better spousal benefits and likely inheritance need to be compared to the simplicity of the DB option and it's generally more certain income.

State pension deferral is a very efficient method of buying more guaranteed income, with uncapped inflation increases. Some annuity buying to cover core needs can also be used.

Malthusian

NSG666 said:

EDIT 16.28 - thanks for the replies so far. I think I've been clumsy with my question. My starting point is essentially "I have a DB pension that I want to draw upon in c.3 months time and cannot think of ANY circumstances in which I should transfer it to say a SIPP. What might I have not considered?"

All the caveats in the recommendation from the IFA as to why the advice to leave it might be wrong would be a good starting point.

They pretty much all boil down to either

a) You might do better for yourself by investing the CETV instead of taking the guaranteed income (but equally could do worse, especially if a combination of withdrawals and poor performance eroded the fund)

or b) You might do better for your spouse and wider heirs instead of taking the guaranteed income (ditto)

B is much more likely to happen than A because the deal with a DB pension is that the guaranteed income is chopped by around half to a third on your death and expires completely on the second death, in exchange for providing a higher level of guaranteed income. A money purchase fund can be passed on in full.

But that factor is usually heavily discounted on the basis of "put on your own oxygen mask first". Unless you are in very poor health.

To get any indication of how likely "might" is you would normally need to pay for professional advice, although in your case a starting point would be to check the advice you have already received (and potentially asking for a new CETV to see if it has changed significantly).

Thrugelmir

Does the DB pension help you meet your personal financial objectives? There's little in the way of investments that provides a secure guaranteed income for life at the moment. There's nothing magical about stock markets once you dig deeper. The only certainty is that the future is uncertain. 

Albermarle

In about 3 years time I intend to start taking the benefits from the DB pension

I have a DB pension that I want to draw upon in c.3 months

Can you just clarify if it is 3 years or 3 months , and say when you intend to take the DB pension is this the 'Normal Retirement Age ' or are you taking it earlier than that ?