Advice sought..........

mlv-1967

Albermarle said:

and a small index linked final salary pension worth (in today's money) £7.3k at age 60, but upgraded by 8% for every year of deferral thereafter. 

Just maybe good to be aware that £7.3K of guaranteed income is actually quite significant ( not really small)

Also being paid at 60 is good ( rather than 65) as is the generous 8% deferral rate. Assuming it is inflation linked and there is a spouse payment on your death , to buy a pension like this ( as an annuity ) would cost about the same amount that is in your SIPP.

This high figure is partly a reflection of current poor annuity rates, but also reflects the high value of guaranteed income, which is often underestimated. 

The final salary scheme is a TFL one - I briefly worked for them several years ago.  It is pretty generous by modern standards.
The pension is linked to RPI up to 5% a year and the spouse pension in case of my death is 50% of the value of the pension.

Do you think I should sell it for a lump sum instead?  Or is it worth keeping it?  I assumed that I would get a lump sum around 20 times the value of £7.3k but you are indicating it would be more, so I'm intrigued.

jamesd

Audaxer said:

@jamesd, if the OP has a spouse, surely deferring the State Pension for more than 5 years will mean the deferred amount is unlikely to be recouped in his lifetime, meaning less of the overall pot left to his spouse?

Lets take a look at annuity rates, assuming good health for both and similar ages:

Single life, RPI, 5 year guarantee: Age 65 2.731%. Age 70 3.645%. Age 75 4.946%.
Single life, 3% escalation, 5 year guarantee: Age 65 3.391%. Age 70 4.152%. Age 75 5.488%.
Joint life, 3% escalation, no guarantee: Age 65 2.848%. Age 70 3.602%. Age 75 4.634%.

Compare that to the 5.8% increase for each person if they individually defer, with CPI increases.

The joint life pension only makes the spousal payment after the first person has died. The state pension pays both people when they stop deferring. That could easily mean 20 or more years of payments made to the spouse vs the annuity. But at a certain age, the single person is going to get enough extra from the annuity to make up for this, if they live long enough - and we don't know whether they will.

The best answer depends on what life expectancy assumptions you want to make. If you want to assume an early death, the annuity could be better, but that depends on age.

Say both defer, for the same price that's a 2.9% increase with CPI increases and each gets that regardless of whether the other is still alive. So it starts out at 5.8% combined, then after first death falls to 50%. That beats the annuities even at age 75 if we assume death within a few years of each other. There's also the option of having the spouse defer longer than the principal.

Assuming good health it's easy and cheap to cover the possibility of early death in the state pension case by buying term life insurance.

I'm comparing annuities with state pension deferral because I assume that the desire for guaranteed income that prompts the initial consideration of an annuity is still there for the spouse.

Albermarle

mlv-1967 said:

Albermarle said:

and a small index linked final salary pension worth (in today's money) £7.3k at age 60, but upgraded by 8% for every year of deferral thereafter. 

Just maybe good to be aware that £7.3K of guaranteed income is actually quite significant ( not really small)

Also being paid at 60 is good ( rather than 65) as is the generous 8% deferral rate. Assuming it is inflation linked and there is a spouse payment on your death , to buy a pension like this ( as an annuity ) would cost about the same amount that is in your SIPP.

This high figure is partly a reflection of current poor annuity rates, but also reflects the high value of guaranteed income, which is often underestimated. 

The final salary scheme is a TFL one - I briefly worked for them several years ago.  It is pretty generous by modern standards.
The pension is linked to RPI up to 5% a year and the spouse pension in case of my death is 50% of the value of the pension.

Do you think I should sell it for a lump sum instead?  Or is it worth keeping it?  I assumed that I would get a lump sum around 20 times the value of £7.3k but you are indicating it would be more, so I'm intrigued.

More typically , the CETV ( Cash equivalent Transfer Value) offered is more in the region of 30X. However you should note 
1) If it was transferred is has to be to a DC pension, so into your current SIPP for example.
2) There are many arguments for and against transferring from a DB to a DC scheme. This is a good explanation .
Five good reasons to transfer out of your company pension....and five good reasons not to - Royal London
3) Last but not least , the process is expensive ( you have to have an IFA go through the figures , as explained in the above guide) and if the advice is not to transfer ( which it is more often than not ) , then you are a bit stuck and out of pocket.

The whole subject has been debated to death on this forum .
Transfer DB pension — MoneySavingExpert Forum
If you look at the second post ( from me ) there are more links to threads on the subject .

My own personal opinion ( others will differ ), is that having a guaranteed income from the DB ( on good terms ) and a SIPP, is the sweet spot/having the best of both worlds , so I would not change that to being 100% in a SIPP due to the increased risk.

mlv-1967

Albermarle said:

mlv-1967 said:

Albermarle said:

and a small index linked final salary pension worth (in today's money) £7.3k at age 60, but upgraded by 8% for every year of deferral thereafter. 

Just maybe good to be aware that £7.3K of guaranteed income is actually quite significant ( not really small)

Also being paid at 60 is good ( rather than 65) as is the generous 8% deferral rate. Assuming it is inflation linked and there is a spouse payment on your death , to buy a pension like this ( as an annuity ) would cost about the same amount that is in your SIPP.

This high figure is partly a reflection of current poor annuity rates, but also reflects the high value of guaranteed income, which is often underestimated. 

The final salary scheme is a TFL one - I briefly worked for them several years ago.  It is pretty generous by modern standards.
The pension is linked to RPI up to 5% a year and the spouse pension in case of my death is 50% of the value of the pension.

Do you think I should sell it for a lump sum instead?  Or is it worth keeping it?  I assumed that I would get a lump sum around 20 times the value of £7.3k but you are indicating it would be more, so I'm intrigued.

More typically , the CETV ( Cash equivalent Transfer Value) offered is more in the region of 30X. However you should note 
1) If it was transferred is has to be to a DC pension, so into your current SIPP for example.
2) There are many arguments for and against transferring from a DB to a DC scheme. This is a good explanation .
Five good reasons to transfer out of your company pension....and five good reasons not to - Royal London
3) Last but not least , the process is expensive ( you have to have an IFA go through the figures , as explained in the above guide) and if the advice is not to transfer ( which it is more often than not ) , then you are a bit stuck and out of pocket.

The whole subject has been debated to death on this forum .
Transfer DB pension — MoneySavingExpert Forum
If you look at the second post ( from me ) there are more links to threads on the subject .

My own personal opinion ( others will differ ), is that having a guaranteed income from the DB ( on good terms ) and a SIPP, is the sweet spot/having the best of both worlds , so I would not change that to being 100% in a SIPP due to the increased risk.

Thank you for this.  Just to clarify, my DC pension is an employer's pension, not a SIPP, and the £22k contributed yearly is from me and also my employer's contribution.

Albermarle

Just to clarify, my DC pension is an employer's pension, not a SIPP, and the £22k contributed yearly is from me and also my employer's contribution.

It does not really matter . At the end of the day they are both DC pensions , invested normally in risk based assets .

mlv-1967

One more thing worth pointing out is my wife's situation. She is currently 51 and has a small pot of £170k, no other pensions, but she is an only child and her mother is in her mid 80s, with a house worth around £700k and investments and cash totalling around £200k, around half of which were inherited from her late husband (my father in law).  Therefore, at some point in the next 20 years, I would expect my wife to inherit a large sum, even if my mother in law goes into care (she is relatively healthy at present).  My wife wants to go part time at 60 but I'm concerned that this will damage her pension pot - she currently earns £30k and contributes 11% of pay to the pension, while her employer contributes 10%.  What advice would you give her?

GunJack

Just make sure her state pension is up to the max, buy added NI years if needed. If you die, she'll get 50% of your DB plus all of your remaining DC pension on top of anything of her own. Plus, with that kind of inheritance in the offing even allowing 10 years of care home costs @ £70k p.a. she'll probably come out of it with rather a lot... 

mlv-1967

GunJack said:

Just make sure her state pension is up to the max, buy added NI years if needed. If you die, she'll get 50% of your DB plus all of your remaining DC pension on top of anything of her own. Plus, with that kind of inheritance in the offing even allowing 10 years of care home costs @ £70k p.a. she'll probably come out of it with rather a lot... 

She is only a couple of years away from full NI contributions - she has paid into the system since age 18 with no interruptions.  We have no children.  

Albermarle

mlv-1967 said:

One more thing worth pointing out is my wife's situation. She is currently 51 and has a small pot of £170k, no other pensions, but she is an only child and her mother is in her mid 80s, with a house worth around £700k and investments and cash totalling around £200k, around half of which were inherited from her late husband (my father in law).  Therefore, at some point in the next 20 years, I would expect my wife to inherit a large sum, even if my mother in law goes into care (she is relatively healthy at present).  My wife wants to go part time at 60 but I'm concerned that this will damage her pension pot - she currently earns £30k and contributes 11% of pay to the pension, while her employer contributes 10%.  What advice would you give her?

I am not an expert on inheritance tax but I think the way your MIL's will is written could increase or decrease IHT liability.
As she has 'inherited' her husbands nil rate band for IHT , she will have a minimum limit of £650K before IHT is due .
However if she leaves the house directly to her only child , rather than the house value being added to the general estate the nil rate band will be increased to One Million Pounds .
That is my understanding but best to get confirmation on that.

On the other subject clearly if her salary reduces by half, her pension contributions will do the same .Not a lot you can do about that . However the pot is already £170K ( you might think that is small but it is well above average ) + 9 years of full contributions + hopefully some investment growth and then a few years of lower contributions and hopefully more growth .
maybe by the time she is 65 , it will have doubled ( although inflation will have had an effect on its real value )  

 even if my mother in law goes into care (she is relatively healthy at present).  
Contrary to what you might think reading the Daily Mail /Daily Express, only a relatively small minority of older people incur huge care costs . Most never go into a care home at all ( although needing care at home is more common, but cheaper) and of those that do, the average stay is only around 18 months .

NannaH

I’d be thrilled with a ‘small’ pot of only £170k 🙄  
 It will likely be £250k+ by the time she is 60 without further input -  I’d be going p/t tomorrow and putting all my earnings into a pension.