DB Transfer Value

Hoenir

Lowtrawler said:

When transfer values were running around 40x, many experienced investors could see an opportunity and were happy to take on the risks. 

Known as the Dunning-Kruger Effect. Over confidence in ones investment skills.

Cobbler_tone

I know people who ‘cashed in’ their DB pensions when the option became available, all for a high value at the time. I don’t have exact figures but in the ball park of £600-700k for c£15-20k pensions. The few I know live up north and bought 3 or 4 buy to let’s for £30k each. I keep in contact with a couple and they seem to do OK, although the BTL market has changed somewhat since then. They certainly haven’t worked since. Personally I think BTL’s are more hassle than they are worth these days, unless you land your feet with some dream tenants. When I give up work I don’t want to run other properties, I know the stress and hassle it brings.

Altior

Linton said:

Altior said:

If the CETV of the pension is 'irrelevant', and it's the value of benefit in today's money that counts, then the required advice benchmark should be based on the value of benefit upon maturity, not the CETV. Which actually makes perfect sense, as what people who transfer are giving up is the implied value of benefit upon maturity, and not the CETV. 

£1500 per annum is obviously just over £100 pcm in today's money, in reality a negligible amount and not a game changer to anyone. Whereas the CETV invested in equities over a decade or more could easily be a game changer, and certainly beat the implied cash value of the DB pension over the long term. 

The CETV will also increase the nearer one is to taking the pension since it represents the cost now of providing a pension in the future.  Furthermore the DB pension is probably guaranteed to fully increase with inflation in that period. So the risk in giving up the DB pension is much higher than you suggest especially if you are fairly close to retirement.

A second important factor is longevity. Keeping the DB pension protects you from the risk of reaching extreme old age. If you invest in equities instead you must cover that risk yourself at a significant cost in extra capital value at retirement.

 A third consideration is the responsibility placed on you. A well managed portfolio will probably produce a higher return than a poorly managed one. Are you confident in your ability to provide that management despite crashes and periods of high inflation despite the uncertainty and stress? 

My point is that the threshold should be based on the value of the pension to the recipient when activated, obviously in today's value of money. 

In my example, the CETV has halved, yet I could now transfer with no advice. Which is far lower than when I was effectively blocked from transferring. Yet the value of the pension to me when activated remains exactly the same, inflation considered. It's only the predicted cost to the pension provider of delivering that pension, that wildly fluctuates in real terms. 

It's not really about perceived capability of managing your own portfolio, as legislation deems you are free to do that if bond yields are high enough at a point in time. It's completely illogical, but the odds of it ever changing are negligible to none. Theoretically you could still purchase an annuity after realising the CETV, and investing the lump sum into equities, and the annuity then beating the original DB pension.

Linton

Altior said:

Linton said:

Altior said:

If the CETV of the pension is 'irrelevant', and it's the value of benefit in today's money that counts, then the required advice benchmark should be based on the value of benefit upon maturity, not the CETV. Which actually makes perfect sense, as what people who transfer are giving up is the implied value of benefit upon maturity, and not the CETV. 

£1500 per annum is obviously just over £100 pcm in today's money, in reality a negligible amount and not a game changer to anyone. Whereas the CETV invested in equities over a decade or more could easily be a game changer, and certainly beat the implied cash value of the DB pension over the long term. 

The CETV will also increase the nearer one is to taking the pension since it represents the cost now of providing a pension in the future.  Furthermore the DB pension is probably guaranteed to fully increase with inflation in that period. So the risk in giving up the DB pension is much higher than you suggest especially if you are fairly close to retirement.

A second important factor is longevity. Keeping the DB pension protects you from the risk of reaching extreme old age. If you invest in equities instead you must cover that risk yourself at a significant cost in extra capital value at retirement.

 A third consideration is the responsibility placed on you. A well managed portfolio will probably produce a higher return than a poorly managed one. Are you confident in your ability to provide that management despite crashes and periods of high inflation despite the uncertainty and stress? 

My point is that the threshold should be based on the value of the pension to the recipient when activated, obviously in today's value of money. 

In my example, the CETV has halved, yet I could now transfer with no advice. Which is far lower than when I was effectively blocked from transferring. Yet the value of the pension to me when activated remains exactly the same, inflation considered. It's only the predicted cost to the pension provider of delivering that pension, that wildly fluctuates in real terms. 

It's not really about perceived capability of managing your own portfolio, as legislation deems you are free to do that if bond yields are high enough at a point in time. It's completely illogical, but the odds of it ever changing are negligible to none. Theoretically you could still purchase an annuity after realising the CETV, and investing the lump sum into equities, and the annuity then beating the original DB pension.

You need to understand the history.  The "Pension Freedom" bill only directly applied to DC pensions. DB pensions could previously have been  transferred with minimal hassle but very few people would want to since the only alternative for most people was to buy an annuity which would generally give a lower nicome than the DB pension.

In the committee stage when the bill went through parliament MPs were agitated about the issue since without amendment people would be likely to cash in a transferred DB pension for ££££s. This had happened (I think) when the Welsh steel works closed in the earely 2000s making a largely elderly workforce redundant.  Groups of dodgy advisors were there waiting outside to persuade them to transfer their DB pensions to "clever" shemes which would release the cash. Needless to say it did not work out well for the pensioners though the advisors did quite nicely.

So to get their bill through, the Government was forced to add the requirement that people seeking to transfer a DB pension should receive regulated advice before doing something stupid.  The £30K limit was simply a cut-off point to avoid spending large amounts of time and money on trivial cases.

If you dont like it you should raise the matter with your MP but  I dont see you getting anywhere.

Altior

Linton said:

Altior said:

Linton said:

Altior said:

If the CETV of the pension is 'irrelevant', and it's the value of benefit in today's money that counts, then the required advice benchmark should be based on the value of benefit upon maturity, not the CETV. Which actually makes perfect sense, as what people who transfer are giving up is the implied value of benefit upon maturity, and not the CETV. 

£1500 per annum is obviously just over £100 pcm in today's money, in reality a negligible amount and not a game changer to anyone. Whereas the CETV invested in equities over a decade or more could easily be a game changer, and certainly beat the implied cash value of the DB pension over the long term. 

The CETV will also increase the nearer one is to taking the pension since it represents the cost now of providing a pension in the future.  Furthermore the DB pension is probably guaranteed to fully increase with inflation in that period. So the risk in giving up the DB pension is much higher than you suggest especially if you are fairly close to retirement.

A second important factor is longevity. Keeping the DB pension protects you from the risk of reaching extreme old age. If you invest in equities instead you must cover that risk yourself at a significant cost in extra capital value at retirement.

 A third consideration is the responsibility placed on you. A well managed portfolio will probably produce a higher return than a poorly managed one. Are you confident in your ability to provide that management despite crashes and periods of high inflation despite the uncertainty and stress? 

My point is that the threshold should be based on the value of the pension to the recipient when activated, obviously in today's value of money. 

In my example, the CETV has halved, yet I could now transfer with no advice. Which is far lower than when I was effectively blocked from transferring. Yet the value of the pension to me when activated remains exactly the same, inflation considered. It's only the predicted cost to the pension provider of delivering that pension, that wildly fluctuates in real terms. 

It's not really about perceived capability of managing your own portfolio, as legislation deems you are free to do that if bond yields are high enough at a point in time. It's completely illogical, but the odds of it ever changing are negligible to none. Theoretically you could still purchase an annuity after realising the CETV, and investing the lump sum into equities, and the annuity then beating the original DB pension.

You need to understand the history.  The "Pension Freedom" bill only directly applied to DC pensions. DB pensions could previously have been  transferred with minimal hassle but very few people would want to since the only alternative for most people was to buy an annuity which would generally give a lower nicome than the DB pension.

In the committee stage when the bill went through parliament MPs were agitated about the issue since without amendment people would be likely to cash in a transferred DB pension for ££££s. This had happened (I think) when the Welsh steel works closed in the earely 2000s making a largely elderly workforce redundant.  Groups of dodgy advisors were there waiting outside to persuade them to transfer their DB pensions to "clever" shemes which would release the cash. Needless to say it did not work out well for the pensioners though the advisors did quite nicely.

So to get their bill through, the Government was forced to add the requirement that people seeking to transfer a DB pension should receive regulated advice before doing something stupid.  The £30K limit was simply a cut-off point to avoid spending large amounts of time and money on trivial cases.

If you dont like it you should raise the matter with your MP but  I dont see you getting anywhere.

People make poor decisions about their personal financial affairs all the time. If they screwed up it should not impact the viable options on the table for millions of other people. Anyway, the genesis of the threshold doesn't explain why it's based on the CETV, which is the fluctuation of the implied cost to the provider for delivering the accrued benefit. The accrued benefit doesn't fluctuate in real terms. Therefore the yay or nay answer to the transfer decision should be based on the implied value of the actual benefit when in receipt, and not the cost of delivering it to the provider.

I wouldn't get anywhere with my MP for sure, but it's moot for me anyway, I don't anticipate the CETV of my little DB pension reaching £60K again any time soon.

HappyHarry

Theoretically you could still purchase an annuity after realising the CETV, and investing the lump sum into equities, and the annuity then beating the original DB pension.

Theoretically yes, in practice no.

 I’ve never seen that, and it would make  for a very easy recommendation to transfer if it was the case. 

Altior

HappyHarry said:

Theoretically you could still purchase an annuity after realising the CETV, and investing the lump sum into equities, and the annuity then beating the original DB pension.

Theoretically yes, in practice no.

 I’ve never seen that, and it would make  for a very easy recommendation to transfer if it was the case. 

It's an option I would have seriously considered, but the relative cost of obtaining advice is prohibitive on a modest DB pension like mine. With no guarantee it would be positive.

The biggest frustration for me is seeing the value of the pension static in real terms, when over 15+ years it's close to inevitable to obtain significant growth in real terms, being invested in global equities. The portfolio I manage myself has annualised 12% growth since 2014. The second biggest frustration was that the indexing was capped, at a time when RPI was hovering around double digits, and I was effectively powerless to do anything about the prospect of it losing value in real terms. 

If I wait until NRA and receive the pension income as normal, I will hardly notice it. C'est le vie 

Albermarle

Linton said:

Altior said:

Linton said:

Altior said:

If the CETV of the pension is 'irrelevant', and it's the value of benefit in today's money that counts, then the required advice benchmark should be based on the value of benefit upon maturity, not the CETV. Which actually makes perfect sense, as what people who transfer are giving up is the implied value of benefit upon maturity, and not the CETV. 

£1500 per annum is obviously just over £100 pcm in today's money, in reality a negligible amount and not a game changer to anyone. Whereas the CETV invested in equities over a decade or more could easily be a game changer, and certainly beat the implied cash value of the DB pension over the long term. 

The CETV will also increase the nearer one is to taking the pension since it represents the cost now of providing a pension in the future.  Furthermore the DB pension is probably guaranteed to fully increase with inflation in that period. So the risk in giving up the DB pension is much higher than you suggest especially if you are fairly close to retirement.

A second important factor is longevity. Keeping the DB pension protects you from the risk of reaching extreme old age. If you invest in equities instead you must cover that risk yourself at a significant cost in extra capital value at retirement.

 A third consideration is the responsibility placed on you. A well managed portfolio will probably produce a higher return than a poorly managed one. Are you confident in your ability to provide that management despite crashes and periods of high inflation despite the uncertainty and stress? 

My point is that the threshold should be based on the value of the pension to the recipient when activated, obviously in today's value of money. 

In my example, the CETV has halved, yet I could now transfer with no advice. Which is far lower than when I was effectively blocked from transferring. Yet the value of the pension to me when activated remains exactly the same, inflation considered. It's only the predicted cost to the pension provider of delivering that pension, that wildly fluctuates in real terms. 

It's not really about perceived capability of managing your own portfolio, as legislation deems you are free to do that if bond yields are high enough at a point in time. It's completely illogical, but the odds of it ever changing are negligible to none. Theoretically you could still purchase an annuity after realising the CETV, and investing the lump sum into equities, and the annuity then beating the original DB pension.

You need to understand the history.  The "Pension Freedom" bill only directly applied to DC pensions. DB pensions could previously have been  transferred with minimal hassle but very few people would want to since the only alternative for most people was to buy an annuity which would generally give a lower nicome than the DB pension.

In the committee stage when the bill went through parliament MPs were agitated about the issue since without amendment people would be likely to cash in a transferred DB pension for ££££s. This had happened (I think) when the Welsh steel works closed in the earely 2000s making a largely elderly workforce redundant.  Groups of dodgy advisors were there waiting outside to persuade them to transfer their DB pensions to "clever" shemes which would release the cash. Needless to say it did not work out well for the pensioners though the advisors did quite nicely.

So to get their bill through, the Government was forced to add the requirement that people seeking to transfer a DB pension should receive regulated advice before doing something stupid.  The £30K limit was simply a cut-off point to avoid spending large amounts of time and money on trivial cases.

If you dont like it you should raise the matter with your MP but  I dont see you getting anywhere.

I think another trick was when organising the transfer, it was done using unregulated and expensive investments, which paid big commissions to the advisors.
Needless to say the value of the transfer often when into terminal decline.

Hoenir

Altior said:

The portfolio I manage myself has annualised 12% growth since 2014. 

Which coincidentally happens to be the longest bull market in history driven by a unique set of circumstances.  While history doesn't predict the future with certainty it can inform our understanding of potential future outcomes.