DB pension transfer......update

jamesd wrote: »

No, they didn't. The safe withdrawal rates worked fine for the 80s as well as every other starting point in the last hundred years. That's fundamental to what a safe withdrawal rate is.

You might be thinking of mortgage endowments, most of which also paid off the mortgage. The failures to do that resulted largely from paying less than a repayment mortgage, then not adjusting. Unlike safe withdrawal rates the performance and amounts used weren't chosen to have worked in all combinations over the last century.

I probably didn't word it very well. I was referring to the pension scandal in the 80's and 90's where people were 'persuaded' to opt out of their DB occupational pensions and invest in private pensions, as part of the Govt's strategy to deal with funding the growing life expectancy issue. Rather similar to now!

MSE didn't exist then but I bet (without the benefit of hindsight) there would have been people saying 'Yes, great idea', 'no brainer' etc etc. It turned out that it was in fact a lump of rotten cheese and the ensuing scandal commenced. Hindsight is a wonderful thing, but it appears that the longer ago it was, the less notice people take of it. I fear a repeat.

Looking back at previous threads, the 'advice' or opinion on here FOR transfers seems to be:

1) Where the person has reduced life expectancy. No suggestion of that by the OP.
2) Where other guaranteed income is available. No suggestion of that - in fact he has a DC pot so quite the reverse.
3) Pension fund insolvency. No suggestion that this is a problem.
4) No index linking. I might have got it wrong, but I thought I saw RPI mentioned somewhere.
5) Where the spouse has their own pension provision and doesn't need the OPs. In the OPs case his spouse doesn't and so - especially with 2/3 provision and also that she is eight years younger and as female likely to live longer anyway, this is a ridiculously valuable perk to give up.
6) The OP is an experienced investor. Clearly this isn't the case which is why he's thinking of paying a company to do it for him.
7) To leave to the children. Yes this is a factor in the OPs case - though I question this. Where the life expectancy is 85 to 90 these days, the children, such as they are at that age, will be 50-60 and is far less of an issue than people seem to think.

The only factor that I can see is that the figure is £1.2 million and the OP is clearly seduced by this figure, since he sees that he could effectively be a millionaire. However he is now taking his pension in an increased tax environment since he's now breached the LTA. That just seems daft!

Looking at the list above, I cannot see any positives in transferring out. He has achieved what he wants to achieve, one assumes. It's a nice retirement for both him and his wife. Why would he mess with that?

Leaving aside the wisdom of coming to an anonymous internet forum to ask about an absolutely massive, life changing financial decision, what he needs to remember that the people on here opining that he should transfer, it's a no brainer etc,- it's not their money and when it goes sour, it won't be them having sleepless nights.

jimi_man wrote: »

he is now taking his pension in an increased tax environment since he's now breached the LTA. That just seems daft!

Lifetime allowance first, he'll have to pay 28.75k lifetime allowance charge once. 2.4% of 1.2 million. Assuming he lives 25 years that's 0.96% a year effect on income.

There's a lot of misunderstanding of the lifetime allowance about. Here's how it can work for 1.2 million:

30k taken 25% tax free, 75% taxable using small pot rule three times
1055k lifetime allowance, 263.75k tax free lump sum and 791.25k put into taxable drawdown.
115k over lifetime allowance, 25% lifetime allowance charge leaves 86.25k added to drawdown, no tax free lump sum above lifetime allowance.

At this point 7.5k + 18k (small pots) + 263.75k = 289.25k has been taken out of the pension and 791.25k + 86.25k = 877.5k taxable in the drawdown pot.

There's additional lifetime allowance charge at 75 on just the growth on the 877.5k. You don't have to pay that if the amount hasn't grown, so if growth is say 4% on average you'd take out 35.1k a year to avoid it. Since Guyton-Klinger drawdown starts at 5% that's easy enough.

So how does the income look? 5% of 289.25 is 14.4625k and arranging for it to be free of tax is easy enough (gradual withdrawing into ISAs at 40k/year plus other allowances).

5% of 877.5k is 43.875k. Minus 12.5k personal allowance and income tax on the remaining 31.375k is 6.275k. 43.875k - 6.275k = 37.6k after tax.

6.275k / (14.4625k + 43.875k) * 100 = 10.756% effective tax rate. Adding the 0.96% lifetime allowance charge effect takes it to 11.716% effective tax rate.

Combined 14.4625k + 37.6k = 52.0625k after tax.

Now the 36k DB pension. 12.5k personal allowance means 23.5k subject to 20% income tax of 4.7k. 4.7k / 36k * 100 = 13.056% effective tax rate and 12.5k + 18.8k = 31.3k after tax income.

jimi_man wrote: »

increased tax environment

Effective tax rate dropped from 13.056% to 11.716% while after tax income rose from 31.3k to 52.063k. More tax to pay as a result of the 66% higher after tax income but that looks like a lower tax environment to me.

You could try the commuted DB income but if you want to try it be sure to include the annualised effect of the commutation factor loss.

Details aside, you seem to have over-egged the overall tax effect, maybe because you didn't know how it works - common! - or perhaps you just didn't check.

It'd make a bigger difference for someone further above the lifetime allowance and where the higher potential drawdown income required paying some higher rate income tax to avoid the age 75 lifetime allowance charge.

jimi_man wrote: »

the numbered points were the main thrust of my post, rather than the tax issue, hence why I concentrated on them....
Ultimately it's down to the OP, he'll do whatever he's decided, probably irrespective of anyone on here (I hope so).

I think it's not always about which route provides the most ££££ - accepting slightly less, but in a guaranteed, stress and worry free way, can provide the best value, depending on the individual.

More on the numbered points later - a part written post that I cut the lengthy lifetime allowance part from.

He values flexibility and the ability to vary income so he's not likely to be much influenced by posts mentioning income that's guaranteed ... to arrive at the wrong time, as well as to arrive.

Spending tends to decline with age in all income groups, the excess income being saved. I crudely approximate the full research results as "Typical is a 35% drop from 65 to 80 initially".

For those who expect to follow the normal pattern, neither fully inflation linked DB nor comparable annuities are a good fit and transfers can do better, with state pension deferral and some annuity buying a way to guarantee the whole of life base income need, leaving the rest to deliver the flexibility. But I wish that DB schemes allowing partial transfers or more flexibility at competitive cost were around.

It's entirely fine to prefer less money with less work and less to wonder about. That's where personal preferences come in and why I told someone that I thought a particular type of annuity was a good fit for them a week or so ago.

I wouldn't really think of 60% (1/1.66*100) as only being a little less but key is that the two thirds higher starting income from the Guyton-Klinger rules really is variable, with Kitces observing in his March 2012 Kitces Report that on average two 10% cuts, six skipped inflation increases and seven extra 10% increases happened. Skips after negative return for the year, cuts or increases in only the first fifteen years if the income that started at 5% of the pot went over 6% or under 4% of the current pot.