What to do with old contracted out pension?

ToneP

Hello. I'm seeking views on whether it makes much difference which pension to access first in the following scenario.

My wife will be retiring shortly (turned 60 in 2025). All the pot figures given below are approximate for ease of calculation. All three of the pensions happen to be with Aviva and allow the usual options of drawdown etc. She has no need for a large lump sum and intends to take the money as income until and after state pension age at 67 (full new state pension). She wants an annual income of £16k to avoid tax - part tax free and part taxed at lower rate.

She has £200k in an consolidated SIPP. She has a small pension pot of £11k from her current employer. She has an old contracted out SERPS pension (37 years) that has received no contributions for a long time but has ticked along above the rate of inflation. It's currently £38k plus a final bonus of £14.5k so a pot of £52.5k.

She also has ISAs (cash & S&S) to around £80k.

The SERPS pension guarantees a minimum 4% bonus on one of it's funds (50% of the total) and a maximum 1% annual charge although it's never reached that anyway. This means the only benefit is effectively a 2% guarantee on the fund total (without bonus). Performance has been mediocre at best but has beaten inflation. There are no guaranteed annuity rates on this pension.

Is it worth transferring the SERPS into her other larger pension to benefit from potentially higher returns (Average 12% per year and the other company pension also has an average return of 11%) when she starts to drawdown or should she just start drawing down on the SERPS pension and leave the others alone for now? I can't see much benefit in using the SIPP first and not touching the SERPS due to it's lower return rate and higher charges so I'm inclined to say consolidate them and start drawing down rather than run them separately.

Any views would be much appreciated.

Marcon

All three of the pensions happen to be with Aviva and allow the usual options of drawdown etc. 

The SERPS pension guarantees a minimum 4% bonus on one of it's funds (50% of the total) and a maximum 1% annual charge although it's never reached that anyway. This means the only benefit is effectively a 2% guarantee on the fund total (without bonus). Performance has been mediocre at best but has beaten inflation. There are no guaranteed annuity rates on this pension.

Are you sure this one allows drawdown? The contract will have been set up many years before that became an option.

ToneP

https://forums.moneysavingexpert.com/discussion/comment/81894833#Comment_81894833

It claims to do so in the options given on the web portal for this pension but I was also sceptical for the same reason as you. Selecting the drawdown option asks you call them to set it up but the option to take all the pot allows you to go ahead online.

For the purposes of my question can we assume that it is possible to drawdown on this SERPS pension?

Marcon

It claims to do so in the options given on the web portal for this pension but I was also sceptical for the same reason as you. Selecting the drawdown option asks you call them to set it up but the option to take all the pot allows you to go ahead online.

For the purposes of my question can we assume that it is possible to drawdown on this SERPS pension?

Why not check the facts and proceed on the basis of certainty rather than assumptions or guesswork? If you call them and ask to set it up as drawdown, you're almost certain to get the response that you'll need to transfer it to a more modern contract before drawdown becomes a possibility - which is highly likely to impact on the relevance of the answers you'll get here.

dunstonh

The SERPS pension guarantees a minimum 4% bonus on one of it's funds (50% of the total) and a maximum 1% annual charge although it's never reached that anyway. This means the only benefit is effectively a 2% guarantee on the fund total (without bonus). Performance has been mediocre at best but has beaten inflation. There are no guaranteed annuity rates on this pension.

A lot of the time, people use the guaranteed growth rate element to be the defensive part of their portfolio. Therefore allowing their SIPP with more advanced investment options to be higher up the risk scale.

Is it worth transferring the SERPS into her other larger pension to benefit from potentially higher returns (Average 12% per year and the other company pension also has an average return of 11%) 

The average will only be the recent average. Not the long term average. And its quite possible that average is distorted by not having had a major drop in the period.

You dont say what the risk differences are. we know the guaranteed growth rate is defensive.

or should she just start drawing down on the SERPS pension and leave the others alone for now?

not possible to say based on the very limited information you have given.

You need to view the portfolio as a single entity and not funds in isolation. Then look at the investment risk of the portfolio as a whole and how it fits in with your chosen drawdown strategy and then adjust it accordingly.

I can't see much benefit in using the SIPP first and not touching the SERPS due to it's lower return rate and higher charges so I'm inclined to say consolidate them and start drawing down rather than run them separately.

Its worth noting that its likely the legacy plan with the guaranteed growth rate has beaten the typical defensive options used in SIPPs over the last decade. That may not be the case going foward but nobody can say except one option gives guarantees and the other does not.

It really depends on how it is going to be invested in the SIPP

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81894865#Comment_81894865

I had an Aviva appropriate personal pension scheme from 1988 just for the contracting out rebates. When I came to take the benefits I got a thick booklet including the various options (leave it alone, take an annuity drawdown UFPLS and take it all in one go).

Under drawdown it said this "To take drawdown, you will need to move some or all of your pension pot into a drawdown account specifically designed to provide an income for your retirement. Your current pension with us may already include this option but if it doesn't, you'll need to transfer to one that does."

That will be why you need to call them.

If she is going to have to transfer the pension anyway to do drawdown then she might as well transfer it to the SIPP.

Interestingly the booklet did not say the same thing about UFPLS (which is what you describe as the likely method of accessing the contracted out pension) so she should ask them if she would have to transfer in order to take UFPLS payments. She should make the distinction between drawdown and UFPLS to see what they say.

If UFPLS also requires a transfer then she may as well transfer to the SIPP (but perhaps she should check that the SIPP is set up for UFPLS and drawdown and how easy it is to do either one - some "SIPPS" are set up more for one thing than the other)

ToneP

We have spoken to Aviva and none of the pensions will allow UFPLS. They also said that they don't offer one that does on an unadvised basis but she could use an IFA to set it up and then manage it herself from thereon.

The SERPS and works pension DO allow drawdown or ad-hoc withdrawals without having to be moved to another pension. The SIPP is the only one that can be set up to create scheduled withdrawals for regular income, the others need to be managed for each instance.

Returns on the SERPS are approx 4.5% smoothed by the bonus guarantee. It's split in to 3 funds, 40% property (4/7 risk), 48% with profits guaranteed 4% bonus (3/7 risk), 12% with profits not guaranteed (3/7 risk). It's annual charge is 0.88% compared to 0.35% on the SIPP. The SIPP is 50/50 in 4/7 and 5/7 funds.

She wants to have the entire process normally as hands off as possible with the option of dipping into the funds ad-hoc if needed. This is an important factor for her.

Since she doesn't currently want to take a lump sum of any kind there seem to be several options; option 1. move it all to an unadvised SIPP with another provider that allows regular UFPLS. option 2. consolidate the SERPS into the SIPP and set up a regular income. option 3. manually dip into the SERPS on a regular basis until it runs down.

To my mind there seems little point retaining the SERPS based on it's performance and cost other than it's guaranteed bonus on one of the funds and it's lower risk but that could be replicated by choosing similarly rated funds in the SIPP (dunstonh - point noted about the possible benefits of the SERPS' guaranteed bonus). Accessing it doesn't fulfil the 'hands off' approach for regular income. On that basis, as an interim measure, I'd transfer the SERPS into the SIPP and take an initial £4k tax free sum so that an accompanying £12k is moved in to drawdown, then setup a regular monthly income from that and put the tax free amount into her easy access cash ISA to be drawn on as required. Repeat on a yearly basis and dip in again if further money is required.

The only reason for staying with Aviva at present is that all the pensions are in one place and she finds their portal easy to manage. If they were all consolidated during the next year then it might be beneficial to find a UFPLS provider at that point.

Any thoughts?

DRS1

One thought, from reading other posts on here I understand that "regular UFPLS" is hard to find. Most SIPP providers don't seem to cater for it. Before you ask I don't know of one who does but someone like @dunstonh might. If you want to use UFPLS it is very much a one off thing which will require action on her part whenever she wants a payment. For regular payments FAD is better - so as you say "take an initial £4k tax free sum so that an accompanying £12k is moved in to drawdown, then setup a regular monthly income from that".

dunstonh

. Before you ask I don't know of one who does but someone like @dunstonh might

On the IFA side, pretty much all of them offer it. On the DIY side, I don't have the knowledge to answer as I only pick up DIY provider issues from reading here.