TRW Pension Plan - Transfer Value

RISKYM · 19 October 2016 at 7:52AM

I was fortunate enough to be part of the Lucas pension scheme for a number of years when I first started work. The pension reached a value of around £131k in July 2014 but in November 2014 I was made an offer (like many others) by TRW. The offer amounted to £160k which, on the face of it seemed like a good deal. I subsequently met with a financial advisor and he said that I should leave the money in (and he was right!).

At the end of August this year I received my annual statement and the transfer value had increased to £194k. I looked on line yesterday and this had increased to an incredible £221k (£27k increase in less than 2 months!). I assume that this was either because of the fall of the £, shrewd investments or because they've decided to increase the value to try to persuade more people to leave the scheme. I don't know how this value is set or if they can arbitrarily change the figure.

My nominal retirement date is 2025 and that would provide me with a pension of £6,900 / year or a lump sum of £34k + £5.200 / year.
I am 55 next year to adjusted the retirement date and the pension drops to £5,500 / year or a lump sum of £29k + £4,350 / year.

I am looking at potentially retiring next year but may work part time at a later date. What I would really like to know is if I should take the £221k and run! It would seem to me that if I transferred this pension into my SIPP, I could effectively take £55k of it as a lump sum next year then, even if I drew the remainder out on an annual basis it would still provide me with 30 years of money at £5k / year and that assumes no return on investment. That would take me to 85. My health is good and I am aware that I could live beyond 85 but my heart is saying that the lump sum (if taken from the transfer amount) is much larger and 30 years at £5k is pretty good.

Is the £221k transfer value really good? Taking a naive view, it does appear to be. If I leave the money in there for another 6 months to a year is the transfer value likely to increase? I don't know how this value is set. Does it always go up or are there circumstance where it can decrease?

Thanks in advance for your help.

mgdavid · 19 October 2016 at 2:49PM

£5500 (if taken next year) for the rest of your life, and with indexed increase every year, is guaranteed, with no work on your part.

Taking a transfer into your SIPP introduces all sorts of risks and other downsides:-
How will you bridge the gap in income? (£5k instead of £5.5k)
what if your investments go down instead of up (they can, and do). What about trading costs?
What about the time and work involved in deciding your investment strategy and then implementing it?
What will you live on after the age of 85?
etc

Why do you think they are offfering increasingly large sums for you to transfer? They are not a charity, they are not doing it for your benefit!!

RISKYM · 20 October 2016 at 12:23PM

Thanks very much for the quick reply.

Although I completely understand what you are saying, the comparison that you are making is slightly incorrect. If I were to accept the £221k transfer value and retire next year I could take a lump sum of £55k and the arbitrary figure of £5k / annum. This would have to be compared to taking the lump sum of £29k and £4,350 / annum directly from the TRW pension. I realise that the TRW annual payment is index linked but hopefully if the remainder of the transfer amount (£166k) were invested in a range of managed funds, some return on investment would be realised.

There must be a point where the amount being offered as a transfer value equates roughly to what would be offered if one remained in the scheme. The additional lump sum is appealing as this is money that can be spent whilst I am still able to enjoy it.

mgdavid · 20 October 2016 at 2:26PM

RISKYM wrote: »

Thanks very much for the quick reply.

Although I completely understand what you are saying, the comparison that you are making is slightly incorrect. If I were to accept the £221k transfer value and retire next year I could take a lump sum of £55k and the arbitrary figure of £5k / annum. This would have to be compared to taking the lump sum of £29k and £4,350 / annum directly from the TRW pension. I realise that the TRW annual payment is index linked but hopefully if the remainder of the transfer amount (£166k) were invested in a range of managed funds, some return on investment would be realised.

There must be a point where the amount being offered as a transfer value equates roughly to what would be offered if one remained in the scheme. The additional lump sum is appealing as this is money that can be spent whilst I am still able to enjoy it.

I understand the lure of jam today - just wanting to clarify that you are comparing Certainty with Hopefully.
If 'hopefully' goes tits up and you run out of money by, say, 80 then I wouldn't be keen on you expecting the more prudent taxpayers to bail you out. You may not want the hassle and indignity of that situation either. Hopefully.

taking_stock · 21 October 2016 at 9:38AM

there's no escaping that £221k is really a very fair CETV. Normal investment returns would see you reaping a huge benefit compared to leaving it where it is. The certainty of a DB scheme is clearly incredibly expensive.
fwiw, if you're happy with investing it yourself (and to a lesser extent, even if you're not), then I would take the £221k and run. The figure is artificially high because bond yields are artificially low.
By any historic measure, the stock market would exceed the projected income, as longs as you can bear the ups and downs along the way.

dunstonh · 21 October 2016 at 10:30AM

By any historic measure, the stock market would exceed the projected income, as longs as you can bear the ups and downs along the way.

Not quite. The defined benefit scheme has an indexed income. So, there would come a point where the drawdown pension would be eroding the capital to maintain an income level similar to that of the defined benefit scheme.

The OP is coming up to 55. So, expectation is around 40 years left to live. So, lets factor that into that £5000 drawdown income.

£5000 will have the spending power of:
year 01 - £5000
year 10 - £3250
year 20 - £2112
year 30 - £1372
year 40 - £892

So, increases in the drawdown rate are inevitable.

Year one drawdown rate is 3% of the remaining fund. So, erosion is not likely. However, lets factor in a stockmarket crash in year 1 of 20% (not going extreme like a stockmarket crash of 43% - but note that two of that level have happened in the last 15 years). So, that fund of £165750 is now worth £132,600. The £5000 drawdown rate is now 3.7%. So, you are no longer leaving much space for inflation increases. Yields are low at the moment, so you are likely to be reliant on either low growth stocks with high yields or lower yield with growth potential. The traditionally low risk side of investments is ripe for a decline. So, you are either going to have to accept that in your planning or invest in higher risk investments which are more volatile.

Capital erosion on this proposal is a high probability at some point. I havent run it through the software to see when but its not the no brainer it is being portrayed. If there are good returns, then yes it will be a good idea. If returns are poor then erosion of capital and/or income is likely.

It is whether the risk is desirable and if you can afford the risk or not.

Asher01 · 6 July 2017 at 12:10PM

Hi RISKYM, you need to request a new CETV! They are currently offering between 30 & 70% above the October 2016 level. With free advice and transfer out arrangement. Mine equates to a 56% increase on the Oct 16 value and is now double the enhanced valuation of 2015.

AlanP_2 · 17 October 2017 at 8:31PM

Poets wrote: »

I too am an ex employee of lucas and my fund has shot up too. Are these figures real? They seem very high. I have been told my transfer value is 177K. What does this mean?

No idea whether they are real, but I guess you have had your numbers from the administrators so assume they are :j

Cash Equivalent Transfer Values (CETV) have been higher than historical norms for a while now as interest rates / Gilt Yields are very low.

The CETV is a complicated calculation designed to represent the capital amount the scheme needs to invest to pay you what they estimate they will pay you in annual pension when you retire - so making overall assumptions about life expectancy for (ex)employees and their spouses.

If Gilt Yields are low they need to nominally invest more to maintain that £value you are due + annual inflation increases or wahtever the scheme TS&Cs are.

Whether you should transfer or not is open to debate and should be considered given your circumstances.

A heavy smoker & drinker might not expect to draw an annual pension for as long as a non-smoker, fit an active person of the same age.

Whether wither has dependents would alos be a factor to consider, as would overall financial and other pension situation.

There is a lot to be said for having a guaranteed level of income over and above State Pension to live on in later years without taking any of the investment risk required to generate a replacememt income.

If you do decide a transfer is what you want you will need the advice of an IFA who has the appropriate DB Pension Transfer qualification and will have to pay for the advice.

TRW Pension Plan - Transfer Value

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