DB vs SIPP vs pension planning

tiernsee · 16 June 2018 at 5:17PM

Thank you for all the comments, plenty to think about.

One point which was raised has got me a little concerned. With respect to the LTA - I had been looking at this in respect of my DC pensions so I have around £400k currently in these. I'm planning another nine years where I will put in say a further £300k. I had (naively) assumed that DB pensions didn't have a value as such and hadn't considered these against the LTA. I got valuations (?transfer values)of the pensions 8 years ago and at this time the two bigger schemes (which each give around £4.5k pa) were valued at around £45k each so I had assumed that the three DB schemes values was circa £100k so I would potentially be around £800k when I came to retire. How are DB pensions valued then with respect to the LTA and what happens if you go over the LTA -I'm not clear of the ramifications of this.

My pension has to cover me and husband, as he has no provision (stay at home Dad) apart from some home responsibility protection. It's a shame I cant have his LTA as well!!

This has been really useful and I knew I would get some good comments posting here, so thanks.

jsinc · 16 June 2018 at 6:17PM

tiernsee wrote: »

...How are DB pensions valued then with respect to the LTA and what happens if you go over the LTA -I'm not clear of the ramifications of this.

"Usually 20 times the pension you get in the first year plus your lump sum - check with your pension provider"
https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

I'm not sure about ramifications (in terms of potentially mitigating them) but more info here:
https://www.moneyadviceservice.org.uk/en/articles/the-lifetime-allowance-for-pension-savings

LHW99 · 16 June 2018 at 6:22PM

Which is why i said what i did by low LE. People of average health at retirement have an LE Above age 75.

Certainly, and I have no quarrel with what you say.
My point was, as Dairy Queen's post above, if you do not need a spouse pension, or one for dependent children, these may be appropriate considerations for transferring a DB pension - not the only considerations for sure, but something to "add to the pot", and perhaps was an aspect that made an adviser consider it suitable for the OP's acquaintance as described in post 1

jamesd · 17 June 2018 at 12:10AM

The way to minimise the lifetime allowance effect of DC pensions is to take the tax free lump sum early, around age 55. This causes the lifetime allowance calculation to be done. There's another calculation based on growth in value at 75 and you avoid that by withdrawing enough so that the value isn't higher.

Transfer values today are likely to be in the 25-35 times income range. That's what often makes transfers an excellent idea now when they used to be much more marginal. Assuming 10k total income that implies a transfer value in the 250-350k range today. With 400k in DC already that's perhaps 650-750k if transferred vs only 600,000 if 10k is left in DB at 20 times income with no lump sum. At either level you need to start thinking about lifetime allowance issues but it seems that you may be able to make another 300k of contributions without exceeding it if you start crystallising at 55 to minimise the impact.

Even though drawdown income after a transfer can normally start at 5% of capital, maybe twice what the DB would pay and 100% inheritable as income and lump sum the lifetime allowance charge effect might make the lower before charge income the better deal even ignoring the guaranteed nature of the income.

You can reduce the lifetime allowance value of defined benefit pensions by taking them before the scheme's normal pension age. This leads to an actuarially reduced income paid for more years. The lifetime allowance calculation is based on this lower income, ignoring the extra years in payment.

Have you elected to have your husband receive the child benefit and its associated national insurance credit years towards his state pension? It's an excellent move if he might not make it to 35 years, free unlike buying years which he might also end up doing.

It's also likely to be worth him making his maximum of £3600 gross a year of pension contributions. He may get less tax relief than you on the way in but he has his own income tax personal allowance so he'll probably be able to take it all out free of tax.

jamesd · 17 June 2018 at 1:11AM

For this post I'll consider your potential income as if you were 55 and wanting to retire now. I'll assume 10k of DB pensions with 50% spousal pension and that you both arrange to have 8.5k of state pension entitlement. I'll assume that DB and state pensions pay out at age 68 and that your husband is the same age as you.

For the UK the initial safe drawdown rate is 5% of capital for a 40 year retirement if costs are 1.5% and the Guyton-Klinger rules are used with 60% equities. This is adjusted based on the investment performance you live through and it can reduce during bad times, while increasing by inflation and more in average or better times.

The base household position at 68 is 2 * 8.5k + 10k + 0.05*400k = 47k. After your death this would fall to 8.5k + 0.5*10k + 0.05*400k = 33.5k.

At 55 with only the DC available it'd be 0.05 * 400k = 20k.

A more even split is usually desirable so take all 400k of DC, ignore growth and split it over the 13 years until age 68. 400k / 13 = 30.8k a year followed by from 68 2 * 8.5k + 10k = 27k. More even but perhaps don't plan on using all of the 400k by 68, likely easy enough because the DB probably really start sooner. The after you die picture is substantially worse at 8.5k + 0.5*10k = 13.5k.

So, an initial thing to consider is whether you'd want to retire at 55 on 30k variable a year followed by 27k from 68 and boosted a bit by the DB starting before 68. Also need to take your husband's age and state pension age into account.

If that's not desirable you could say transfer a 4.5k paying DB pension at say 30x transfer value of 135k and non-guaranteed income from it for 40 years of 0.05 * 135k = 6.75k. Assuming that you also only spend 300k instead of 400k in the 13 years this takes you to initial 0.05 * 135k + 0.05 * 100k + 300k / 13 = 34k. At 68 it's 0.05 * 135k + 0.05 * 100k + 2 * 8.5k + 5.5k = 34.25k. After your death 0.05 * 135k + 0.05 * 100k +8.5k + 0.5 * 5.5k = 23k.

What that DB transfer from guaranteed to unguaranteed did is significantly improve the mixture, notably after your death, compared to no transfer. The increased flexibility after transferring can be very useful. The three scenarios:

At 55		20	30.8	34
At 68		47	27	34.25
After death	33.5	13.5	23

Say more guaranteed income is desired, either after a transfer or not. State pension deferral currently increases the state pension by 5.8% a year and you could both spend 8.5k a year to defer for five years and increase guaranteed income by 2.46k each. He could defer longer if desired.

You can use similar calculations to estimate your position after four more years paying in ( 4 * 35k * 0.05 = 7k more unguaranteed income from 55 ) or delaying beyond 55 ( /12 instead of /13 ).

It's also been found that spending declines with age, the excess going into savings, and it could be a good move to plan for this to boost income during your younger years.

I don't know what income you need but your position looks pretty good overall and with good options to improve it by retiring later than 55. I'll leave the age 62 calculations to you but I suspect that the delay may seem unattractive, particularly given the higher non-monetary value of younger years.

DB vs SIPP vs pension planning

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