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  • FIRST POST
    • Kempstongirlsboy
    • By Kempstongirlsboy 20th Aug 19, 8:04 PM
    • 5Posts
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    Kempstongirlsboy
    DB pension transfer......update
    • #1
    • 20th Aug 19, 8:04 PM
    DB pension transfer......update 20th Aug 19 at 8:04 PM
    So I posted recently whilst away about a potential DB transfer to SJP and was advised to add some specific details so here we go.
    DB scheme was closed by my company after 29 years of contributions. I then started a DC pot.
    Im 53 with a view to retire at 60.
    My reason for considering a transfer out is I want more flexibility and the option to leave the children some funds after we pass away.
    My wife is 8 years younger than me and has no pension to mention so the transfer out would also ensure her financial position should I pass away. Shed only get 2/3rds of my DB if we left it in and the kids get nothing.
    So then the numbers, CETV is 1.2m, DB pension is offering 36k annual pension or 180k lump and 27k. My DC pot will be worth c.175k at 60 assuming very modest annual growth. There should also be c. 100k cash/shares at 60 plus full state pension later on in 60s.
    So my question is, general thoughts about SJP, fees, lock ins and anything else given some things Ive been reading about them recently.
    Appreciate thoughts on the above.
    Thanks, DG
Page 2
    • Mick70
    • By Mick70 22nd Aug 19, 3:36 PM
    • 121 Posts
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    Mick70
    I have a similar dilemma myself (have posted mine on here) , however my DB is 26k and spouse 15k, if my DB was 36k and spouse 2/3 and it was rising with rpi I personally would Not transfer , thats a great DB package to have - if you key it into a spreadsheet and increse the 36k by say 2.5% each year i bet over 25 years it outstrips or comes very close to that cetv value anyway .
    Others on here no far more than me , but from what i can see i would stick.
    • stephenadarglas
    • By stephenadarglas 22nd Aug 19, 3:52 PM
    • 65 Posts
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    stephenadarglas
    A little greediness creeping in to the mind perhaps?
    • Albermarle
    • By Albermarle 22nd Aug 19, 4:48 PM
    • 1,582 Posts
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    Albermarle
    I have a similar dilemma myself (have posted mine on here) , however my DB is 26k and spouse 15k
    Mick 70 you have an even much higher CETV , even though the pension is lower, so an exceptional situation and an easy decision.
    Normally, like in this case it is probably a bit more 50:50, and depends on personal circumstances and personality . I had an offer of 475K for 16 K ( RPI linked 2/3rds spouse ) and turned it down although it was tempting. ...
    • Audaxer
    • By Audaxer 22nd Aug 19, 4:49 PM
    • 1,883 Posts
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    Audaxer
    My wife is 8 years younger than me and has no pension to mention so the transfer out would also ensure her financial position should I pass away. Shed only get 2/3rds of my DB if we left it in and the kids get nothing.
    Originally posted by Kempstongirlsboy
    The usual spouse pension is 50% so 2/3rds in your wife's case is even better. Most DB pensions also ensure the spouse's pension is based on the full pension even if you were to take the lump sum. So check your pension scheme rules - I think you'll find that if you took the lump sum, when you die your wife would still get 2/3rds of full pension of 36k, adjusted for inflation to when you died. Therefore she would still have your 180k lump sum which when taken could have been invested for extra income. That might be a better solution than the stress of transferring the full pension, especially as these figure show that in your case the commutation factor for taking the lump sum is 20 - meaning you get 20 of lump sum for every 1 of pension you give up. That's a fairly good commutation factor so definitely worth considering.
    • jsinc
    • By jsinc 22nd Aug 19, 5:10 PM
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    jsinc
    If you assume that the DB pension of 36K is what it will pay at 60, then if he took it early ( say for sake of argument at 55) it would be significantly less, which gives a rather more striking multiple.
    According to expert opinion on another thread this is strictly how the multiple should be calculated .

    On the other side another poster was right to point out that some of the gloss could come off , due to incurring LTA penalties . especially as he already has a DC pot .
    Originally posted by Albermarle
    Maybe although in this case they have a view to retire at 60 anyway. Could also take the reverse perspective of DC assessment at 60 - which incorporates assumptions about interim returns and/or drawdown. My personal opinion is that many transfer decisions seem predicated on extrapolating overly optimistic returns and risk appetite/ongoing investing interest in older age.

    But I should probably have emphasised the appeal of 36k risk free income vs expenditure over the multiple.
    • Mick70
    • By Mick70 23rd Aug 19, 12:33 PM
    • 121 Posts
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    Mick70
    [QUOTE]
    How do you quote a previous post ?
    • Albermarle
    • By Albermarle 23rd Aug 19, 2:58 PM
    • 1,582 Posts
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    Albermarle
    How do you quote a previous post ?
    You highlight the relevant part by clicking and dragging your mouse across it . Then copy this by right clicking on it and selecting copy .
    Go to your new post . rightclick and select paste .
    Highlight again in your post and then click on the icon on the right above , next to the letter symbol.
    • Mick70
    • By Mick70 23rd Aug 19, 7:28 PM
    • 121 Posts
    • 10 Thanks
    Mick70
    Mick 70 you have an even much higher CETV , even though the pension is lower, so an exceptional situation and an easy decision.
    Normally, like in this case it is probably a bit more 50:50, and depends on personal circumstances and personality . I had an offer of 475K for 16 K ( RPI linked 2/3rds spouse ) and turned it down although it was tempting. ...
    Originally posted by Albermarle
    And to be fair Im in 2 minds myself which route to take my friend , the OP has a better DB than me but less CETV , he should definitely stick in my humble opinion .
    • ffacoffipawb
    • By ffacoffipawb 23rd Aug 19, 8:56 PM
    • 2,921 Posts
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    ffacoffipawb
    Mick 70 you have an even much higher CETV , even though the pension is lower, so an exceptional situation and an easy decision.
    Normally, like in this case it is probably a bit more 50:50, and depends on personal circumstances and personality . I had an offer of 475K for 16 K ( RPI linked 2/3rds spouse ) and turned it down although it was tempting. ...
    Originally posted by Albermarle
    I was quoted a 396k CETV at age 55 for an early retirement pension of 9,500 with a 2/3rds widows pension and RPI on the non GMP element. The GMP element is a minuscule amount.

    That is a multiplier of over 40.

    I decided to take a PCLS of about 49k and a reduced pension of 7,500 with an unchanged / unreduced spouse pension.

    The pension starts next month.

    The early retirement is also a no brainer. I would have to live to 88 to be worse off taking the early pension (though a lower age of about 82 at higher inflation assumptions).

    NRA is 62 and the early retirement factor is 3% per annum compound (months counted as part year).

    At least this amount of pension income is immune to moronic tweets.
    Retired: Financial Independence achieved in June 2019.

    Cofiwch Dryweryn
    • jsinc
    • By jsinc 23rd Aug 19, 10:09 PM
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    jsinc
    And to be fair Im in 2 minds myself which route to take my friend , the OP has a better DB than me but less CETV , he should definitely stick in my humble opinion .
    Originally posted by Mick70
    But yours is from age 50 so not comparable as just p/a amount
    • Audaxer
    • By Audaxer 23rd Aug 19, 10:10 PM
    • 1,883 Posts
    • 1,181 Thanks
    Audaxer
    I was quoted a 396k CETV at age 55 for an early retirement pension of 9,500 with a 2/3rds widows pension and RPI on the non GMP element. The GMP element is a minuscule amount.

    That is a multiplier of over 40.

    I decided to take a PCLS of about 49k and a reduced pension of 7,500 with an unchanged / unreduced spouse pension.

    The pension starts next month.

    The early retirement is also a no brainer. I would have to live to 88 to be worse off taking the early pension (though a lower age of about 82 at higher inflation assumptions).

    NRA is 62 and the early retirement factor is 3% per annum compound (months counted as part year).

    At least this amount of pension income is immune to moronic tweets.
    Originally posted by ffacoffipawb
    Like you I would also take guaranteed income from the DB pension rather than rely totally on the markets for income. However looking at the figures, I think some people would have opted to transfer. If you had transferred and got 396k, and taken out 49k as a tax free lump sum, that would leave you with 347k to invest for income drawdown. A fairly safe drawdown rate of 3% pa increasing with inflation, would give you an income of 10,410 per year.
    Last edited by Audaxer; 23-08-2019 at 10:13 PM.
    • ffacoffipawb
    • By ffacoffipawb 23rd Aug 19, 10:33 PM
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    ffacoffipawb
    Like you I would also take guaranteed income from the DB pension rather than rely totally on the markets for income. However looking at the figures, I think some people would have opted to transfer. If you had transferred and got 396k, and taken out 49k as a tax free lump sum, that would leave you with 347k to invest for income drawdown. A fairly safe drawdown rate of 3% pa increasing with inflation, would give you an income of 10,410 per year.
    Originally posted by Audaxer
    I would have to pay an LTA charge on pretty much half that TV unfortunately when I crystallise whereas all the DB keeps me just about under LTA.

    I have previously crystallised 70% LTA from a SIPP in June and have a small future DB elsewhere that I want LTA charge free so saving 10% LTA for that.

    This knocks 12% off the TV which reduces the drawdown to about 9k which is more marginal.
    Last edited by ffacoffipawb; 23-08-2019 at 10:36 PM.
    Retired: Financial Independence achieved in June 2019.

    Cofiwch Dryweryn
    • jamesd
    • By jamesd 24th Aug 19, 12:38 AM
    • 23,455 Posts
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    jamesd
    People traded on this premise in the 80's and then paid for it dearly. And now the same thing is happening again.
    Originally posted by jimi_man
    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.
    • jimi_man
    • By jimi_man 24th Aug 19, 10:30 AM
    • 179 Posts
    • 211 Thanks
    jimi_man
    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.
    Originally posted by jamesd
    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.
    • jsinc
    • By jsinc 24th Aug 19, 11:38 AM
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    • 99 Thanks
    jsinc
    ...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.
    Originally posted by jimi_man
    Personal circumstances are important but I generally agree. DB to DC transfer risks are horribly asymmetric. If you don't transfer income is known and risk free, with potential for unlimited upside loss from the decision. If you do transfer income is unknown and risky, with potential for 100% downside loss from the decision.

    Add in the information asymmetry between individuals vs schemes/financial or tax specialists, fees and pensioner general inability to correct shortfalls later by working. I'm not so sure most individuals and advisers are correctly valuing the risk transfer.
    • jamesd
    • By jamesd 25th Aug 19, 8:35 PM
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    jamesd
    he is now taking his pension in an increased tax environment since he's now breached the LTA. That just seems daft!
    Originally posted by jimi_man
    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.

    increased tax environment
    Originally posted by jimi_man
    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
    • By jimi_man 26th Aug 19, 3:10 PM
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    jimi_man

    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.
    Originally posted by jamesd
    Not at all, I mentioned the tax effect once in passing - when I referred to the LTA. I don't really call that 'over egging it'. I think you may have got my post confused with someone else's - it's quite common, there are quite a lot of threads like these and I know you helpfully provide a lot of detailed information for people so it's easy to get confused.

    But you're right, I don't understand the finer intricacies of the LTA which was probably why I didn't go too much into it and only mentioned it in passing. Thank you for the explanation.

    However the numbered points were the main thrust of my post, rather than the tax issue, hence why I concentrated on them. I was just giving my thoughts.

    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.
    • jamesd
    • By jamesd 26th Aug 19, 7:46 PM
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    jamesd
    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.
    Originally posted by jimi_man
    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.
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