Transfer final salary pension to new DC scheme

GMNN

I quit my job last month after 9 years working there, and had a generous final salary pension scheme.

Just got a letter from my pension provider this week with a summary of my accrued benefits, stating I had built-up a total pension of £8,876 per year as of my final date of employment.

I will be starting a new job soon, which provides a defined contribution pension.

I initially assumed the best course of action was to do nothing and leave my pension in the DB plan until I retire, but the more I think about it, the more it feels like it would be better to transfer it to my new DC pension..

From my research, it seems that "cash-equivalent transfer values" have traditionally been calculated at 20x the annual pension income, but recently 30+ is not uncommon apparently. In my case, this would correspond to £177k (20x) to £266k (30x).

If I leave my DB pension as is, it will increase with inflation up to a max of 2.5% per year. However, I should be able to do better than that if I invest it into my new DC scheme (say a global tracker fund, assuming 5+% CAGR). I'm 31yo, so not planning on touching that money for 30+ years - I'm completely fine with market volatility and fully expect to see significant drawdowns during that period.. 

Reading a few threads around this subject on this forum, it seems I would struggle to find an IFA to recommend doing this, and I just don't understand why. The difference for my pension pot at the end of my career over such a long period of time could be massive. And wouldn't I still be able to purchase an annuity from my DC pension pot at the end of my career if I did want to switch back to a guaranteed income until I die?

So, what am I missing? What is so great about a DB pension that IFAs would all advise against what I'm proposing (yes - I know guaranteed income when I retire, but anything else?)

Thrugelmir

GMNN said:

However, I should be able to do better than that if I invest it into my new DC scheme (say a global tracker fund, assuming 5+% CAGR).

Markets don't increase in a linear fashion. At 31 you've known nothing more than the longest bull market in history.  Cheap money isn't going to drive markets upwards indefinately. Every fiscal policy comes with a sting in the tail. 

GMNN

Thrugelmir said:

Markets don't increase in a linear fashion. 

Of course, but would you not agree that investing in the market would beat a 2.5% annualised return over 30+ years?

Marcon

GMNN said:

Thrugelmir said:

Markets don't increase in a linear fashion. 

Of course, but would you not agree that investing in the market would beat a 2.5% annualised return over 30+ years?

It's not people on this site you need to convince. It's an IFA!

Thrugelmir

GMNN said:

Thrugelmir said:

Markets don't increase in a linear fashion. 

Of course, but would you not agree that investing in the market would beat a 2.5% annualised return over 30+ years?

If investing were that easy previous generations would all be multi millionaires. Markets do fall, underperform inflation for periods of time. Equities are living breathing companies run by people that need to generate increasing levels of profitability. They are not simply ATM's that print money. 

GMNN

So is that what the IFA's argument would be for advising against this kind of transfer? That having my money invested in the market for 30 years is perceived as too risky?

Dazed_and_C0nfused

The difference for my pension pot at the end of my career over such a long period of time could be massive. And wouldn't I still be able to purchase an annuity from my DC pension pot at the end of my career if I did want to switch back to a guaranteed income until I die?

You don't currently have a pension pot though, you have a guaranteed pension which is inflation linked and quite possibly with dependant benefits.

Have you checked how much it would cost to buy an annuity of £8,876/year with joint life cover and 2.5% inflation linking?

If you contribute working you will no doubt accrue the standard new State Pension so the two combined will be worth £18.2k, a great platform for retirement.

NedS

It's REALLY nice to have flexibility in retirement. In an ideal world you would have enough guaranteed inflation-linked income (DB + SP) to meet your essential living costs, combined with the flexibility of a DC pot to cover the unforeseen or luxury items.

You are already in a very strong position by having £8,876 of inflation linked DB pension in the bank and hopefully an assumed full state pension by the time you retire in 30 years time which will go a long way towards covering those essential living costs (combined just over £18k). I would suggest you leave your DB pot where it is and focus on building that DC pot over the next 30 years as you are unlikely to get the opportunity to participate in another DB final salary pension scheme.

Accumulation is the easy bit. The tricky bit starts when you retire and start spending it, making sure you don't run out of money if you live to be 100. Having a sizable chunk of guaranteed inflation-linked income makes things a whole lot easier.

Albermarle

GMNN said:

So is that what the IFA's argument would be for advising against this kind of transfer? That having my money invested in the market for 30 years is perceived as too risky?

You are not arguing against the IFA personally . They have to work to strict guidelines and the FCA that supervises this area has sent out guidelines, that the default position is that it is normally not in the best interests of the client to transfer out of a DB pension.
The IFA has also to take out expensive indemnity insurance against the possibility of the client , blowing all the money ( or investing it in Amazonian teak forests etc ) and coming back saying the IFA should never have approved the transfer and they want mega compensation.

It all stems from historical issues where there were scandals/dodgy advisors involved in getting unwitting NHS and British steel DB members to make unsuitable transfers . So now it is difficult for everybody to do it even if on the surface it seems a good idea.

There have been a lot of people getting upset about this on this forum , blaming everybody but with no result.

To change the subject slightly, I hope your new job has a suitably higher salary to compensate for moving from DB to DC.
Typically an employer will add over 20%/25% to a DB scheme as they are expensive to run , whilst DC contributions tend to be more in the 3% to 8% region, although they can be higher.

At least when you retire you will have a DB pension and a DC one . Regarded as the 'sweet spot' by many .

Current similar thread, to add to all the others .
Pension transfer costs — MoneySavingExpert Forum

Albermarle

Have you checked how much it would cost to buy an annuity of £8,876/year with joint life cover and 2.5% inflation linking?

Good Point - probably just short of half a Million Pounds at age 65 and probably over half a Million at 60 .

Let's say the OP gets offered a CETV of £270 K . Average growth of pot 5 to 6% - so after inflation say 3% .

In 30 years pot would be about £550K , so similar .

Of course it could be more but the critical point is that it could be less.

Also annuity rates are currently poor and may improve . On the other hand if life expectancy was better in 30 years they could be worse.

Of course the alternative argument , would be to drawdown rather than buy an annuity and from £550,000 you should be able to take a bigger income . But who knows in 30 years time.

DaveT55

I was in my thirties when I transferred my DB pension last year. I weighed up all the options and it was the best decision for me. 18+ months on I have absolutely zero regrets. I had no need for the security of a DB pension in my 80's/ 90's - early retirement without penalties and leaving the full value to family was a key driver for me, given my family medical history.

At your age there is a 99.9% certainty you will be an insistent client i.e no adviser would recommend the transfer. In the current climate this leaves it almost impossible for this transfer to happen because there is also no platform that will accept the transfer in on this basis (possible options exist with SSAS which has been mentioned on previous strings). 

ICB transfers are not completely dead, but pretty much.