GMP Defined Benefit Pension - keep or transfer out?

Hobgoblin63

My wife is trying to decide what to do with a defined benefit pension pot which she has from an employer she worked for for four years in the 1980s.

I understand that most advisers don’t recommend transferring out from DB schemes, but I would like advice from members of this forum.

She has been sent the following two options for putting the pension into payment:

Option 1 - full pension

Excess Plan Pension: £1,781.57 

Guaranteed Minimum Pension (GMP): £2,990.00  

Total Plan Pension: £4,771.57

Option 2 – Maximum Cash Sum and reduced pension

Lump Sum: £21,332.72

Excess Plan Pension: £209.91

Guaranteed Minimum Pension (GMP): £2,990.00  

Total Plan Pension: £ 3,199.91

She has been quoted a CETV of £81,694.00

Note that the GMP element of pension is not index linked and will remain at £2,990 for life.  The Excess Plan element is index linked to RPI with a maximum uplift of 5%.

She is concerned that because most of the pension is not index linked, it will be at risk from inflation over the coming years.

She also has a Scottish Widows SIPP pension.  Might she be better off transferring this DB pension into the Scottish Widows one, where the value might keep better pace with inflation, since it can be invested to provide growth?

Is it likely she could get approval for the transferring out of this pension?  Is the CETV value lower than it would be for a fully index linked pension because the Pension Provider doesn’t have that liability?

I understand that in order to transfer out of the scheme, she would have to pay for an assessment to be done by an independent adviser (costing typically 3% of CETV) that might still not approve the transfer.

Note that our concern here is not to free up cash, more to protect against inflation.

Thanks in advance for your responses.

tacpot12

Option 1 would appear to be better than Option 2 due to the inflation protection for £1,781 of pension, but taking the transfer would be more likely to provide inflation protection for a greater amount of pension.

It would be worth having an initial conversation with an IFA to see if they think it is worth doing the detailed calculations to show that a transfer is a good option. I suspect that the eventual result is that they will not recommend a transfer because there is too much uncertainty, but it's probably worth that initial conversation. 

Brie

If your wife doesn't need the lump sum then the £5k a year on option 1 sounds pretty good to me.  

I agree with tacpot that a conversation with an IFA would be a good idea but unless she has a fair bit of other bits and pieces to discuss a second conversation is unlikely to take place.  Has she talked to PensionWise?  That might be a great place to start to get general ideas and possibly questions she might ask an IFA if things ever get that far.  

Marcon

Hobgoblin63 said:

Is it likely she could get approval for the transferring out of this pension?  Is the CETV value lower than it would be for a fully index linked pension because the Pension Provider doesn’t have that liability?

I understand that in order to transfer out of the scheme, she would have to pay for an assessment to be done by an independent adviser (costing typically 3% of CETV) that might still not approve the transfer.

'Approval' is irrelevant. The requirement is for her to receive advice from a suitably qualified and regulated person; she doesn't have to follow it.

Proof of receiving advice is required before the DB scheme can transfer the cash. They won't want to know what they advice says, just confirm she's received it.

The receiving scheme must be willing to accept the transfer - and currently a stakeholder pension is the only scheme which must accept any transfer from a UK registered pension scheme. If she doesn't already have a stakeholder, she can set up one herself - there are providers open to new direct retail business, so no adviser involvement requirement for that.

The usual caveat: just because she could transfer doesn't mean she should...

GDB2222

A simple starting point for all this is to find out how  much index linked pension you can get for £80k.  

Suppose that is £2500 a year, for example, just to pick a figure out of the air.

£1800 of the DB pension is already fairly well protected against inflation, so that you will have swapped £2990 of non increasing GMP for around £700 of inflation protected pension. You may decide that is a non starter. 

You obviously need to get the annuity quote, which may be entirely different from the example I gave.  

Hobgoblin63

Thanks everyone for your very valuable comments.  I used the Scottish Widows calculator to run some calculations as GDB222 suggested.  It gave an estimate of a £4,420 pension (with a 2% uplift per year) compared with the Option1 pension of £4,771.57, so I don't think it would be advantageous to transfer out to buy another annuity.