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    • tichtich
    • By tichtich 16th May 18, 12:44 PM
    • 41Posts
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    tichtich
    Why is Reassure offering me such a low transfer amount?
    • #1
    • 16th May 18, 12:44 PM
    Why is Reassure offering me such a low transfer amount? 16th May 18 at 12:44 PM
    Hi. I'd be grateful for any help with this question.

    I've just reached the retirement age for a small fixed pension plan with Reassure. As an alternative to the guaranteed fixed annuity defined by the plan, they're offering me a transfer amount. If the transfer amount was good enough, I'd quite like to transfer to a market-based investment, which would give me some protection against inflation (in case the inflation rate increases significantly in the future). However, the transfer amount they're offering is rather low in relation to the amount of the annuity. It's about half of what it would cost to buy the same annuity on the open market. The letter from Reassure even says as much. They compare the plan annuity side-by-side with the "annual income you could receive today if you buy a retirement income from another provider", and the latter is almost exactly half as much. I've done a quick check on the web, and this seems about right. Given that, I don't think it's worth transferring.

    I can't understand why they don't offer me a better transfer amount. Reassure doesn't provide annuities themselves, so, if I take the annuity, they will have to buy it for me, and it will presumably cost them nearly twice the transfer amount they're offering (even if they can get a better annuity rate than I could get myself). I'd be happy to split the difference with them: if they offered me a transfer amount that was half-way between what they're currently offering and the amount it will cost them to buy me an annuity, I'd probably take the transfer, and it would save them a lot of money.

    The letter from Reassure describes the transfer amount as "the current value of your pension pot". Given that it's a defined-benefits policy, I don't understand what "pot" they're talking about. Could this be my share of the relevant investment pool?

    I would appreciate any thoughts as to what this pot is, why Reassure doesn't offer me more, and whether you think there is any chance of persuading them to offer me more, given that it's in their own interests to do so. Or feel free to tell me that I've misunderstood something.

    Some additional facts that may or may not be relevant:
    - The policy was originally a buy-out plan with Guardian Assurance, dating from 1985.
    - The pension was mostly fixed, but with bonuses on part of the amount. I think the fixed part was for GMP. The bonuses have been negligible for the last couple of decades.

    Richard.
Page 1
    • tichtich
    • By tichtich 16th May 18, 12:56 PM
    • 41 Posts
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    tichtich
    • #2
    • 16th May 18, 12:56 PM
    • #2
    • 16th May 18, 12:56 PM
    P.S. I suppose my "pot" could be the amount that was paid for the buy-out plan, plus interest.
    • dunstonh
    • By dunstonh 16th May 18, 2:12 PM
    • 95,754 Posts
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    dunstonh
    • #3
    • 16th May 18, 2:12 PM
    • #3
    • 16th May 18, 2:12 PM
    I'd quite like to transfer to a market-based investment, which would give me some protection against inflation (in case the inflation rate increases significantly in the future).
    How long would it take for that to catch up with an annuity with Reassure?

    However, the transfer amount they're offering is rather low in relation to the amount of the annuity. It's about half of what it would cost to buy the same annuity on the open market. The letter from Reassure even says as much.
    All quite common and expected. With S32 buy out bonds with GMP, the provider has to pay the GMP whether the fund has made enough money or not. it was a risk that insurer took and it didn't pay off for them. So, they have to honour the terms. If you transfer it elsewhere you just get the fund value.

    I can't understand why they don't offer me a better transfer amount.
    Why would they?

    Reassure doesn't provide annuities themselves, so, if I take the annuity, they will have to buy it for me, and it will presumably cost them nearly twice the transfer amount they're offering (even if they can get a better annuity rate than I could get myself).
    They have a commercial arrangement that is more profitable to them than offering the in-house annuity option. They also bought the insurance company book taking into account the guarantees cost.

    If you do the annuity with them, then itis already cost in. If you don't do the annuity with them then they win out of it.

    Given that it's a defined-benefits policy
    No it's not. (not on what you have said). Its a section 32 buy out bond with GMP. These have fund values.

    Basically, the insurance company gambled, as did you, that if returns had been higher you and they would get more out of it. Had 1960s, 1970s and 80s returns continued, it would have done. As it happened, returns were lower and they lost that gamble but you didn't as you had the guaranteed minimum pension.
    Last edited by dunstonh; 16-05-2018 at 3:02 PM. Reason: spelling
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • woolly_wombat
    • By woolly_wombat 16th May 18, 2:56 PM
    • 594 Posts
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    woolly_wombat
    • #4
    • 16th May 18, 2:56 PM
    • #4
    • 16th May 18, 2:56 PM
    You have a Section 32 buyout policy with a Guaranteed Minimum Pension that has had fixed annual increases applied in deferment that probably didn't look like much way back in 1985, but which have become increasingly generous when seen in the light of current ultra-low interest rates.

    Fortunately for you, Reassure still have to honour the GMP.

    Celebrate your good fortune!
    • tichtich
    • By tichtich 16th May 18, 5:48 PM
    • 41 Posts
    • 17 Thanks
    tichtich
    • #5
    • 16th May 18, 5:48 PM
    • #5
    • 16th May 18, 5:48 PM
    Thanks for your answers, dunstonh and woolly_wombat, much appreciated.

    As it happens, I worked as a trainee actuary for a year, in 1979-80, before changing profession. I was working for a firm of pensions consultants, so I know a bit about pensions from back then, but things have changed a lot since! I didn't know anything about Section 32 buyouts until now, as those didn't exist in 1980.

    All quite common and expected. With S32 buy out bonds with GMP, the provider has to pay the GMP whether the fund has made enough money or not. it was a risk that insurer took and it didn't pay off for them. So, they have to honour the terms. If you transfer it elsewhere you just get the fund value.
    Originally posted by dunstonh
    Actually it's not the GMP that's determining the amount of the pension. The scheduled benefits exceed the GMP.

    It looks like the original scheduled pension amount was made exactly equal to the revalued GMP. Then some with-profits bonuses were added to that (mostly in the early years of the policy), so the amount of the pension now exceeds GMP by about 25%. On top of that, the Normal Retirement Age of the pension is 60 (compared with GMP's 65). So all-in-all the market value of the pension is more than twice the market value of the GMP (from age 65).

    I'm not certain, but I have a feeling that, when I left the occupational scheme in 1985, I was just short of the 5 years service needed to qualify for a final salary pension, and I got a buyout based on just a return of contributions plus interest. Perhaps this included employer's contributions. Anyway, it seems it was more than enough to secure the GMP, so they bought me GMP from age 60 (which was probably the retirement age of the scheme) plus with-profits bonuses on part of the amount.

    If you do the annuity with them, then itis already cost in. If you don't do the annuity with them then they win out of it.
    Originally posted by dunstonh
    Yes, but they could still do better than what's costed in, by offering me more incentive to transfer. Of course they probably can't just do that for me; they would have to offer it to everyone, and that would include people who would have transferred anyway, even without the extra incentive. So perhaps it wouldn't be a good idea, looking at the larger picture.

    No it's not. (not on what you have said). Its a section 32 buy out bond with GMP. These have fund values.
    Originally posted by dunstonh
    OK, but I'm still curious to know what this "fund value" is based on.
    • tichtich
    • By tichtich 16th May 18, 6:25 PM
    • 41 Posts
    • 17 Thanks
    tichtich
    • #6
    • 16th May 18, 6:25 PM
    • #6
    • 16th May 18, 6:25 PM
    You have a Section 32 buyout policy with a Guaranteed Minimum Pension that has had fixed annual increases applied in deferment that probably didn't look like much way back in 1985, but which have become increasingly generous when seen in the light of current ultra-low interest rates.

    Fortunately for you, Reassure still have to honour the GMP.

    Celebrate your good fortune!
    Originally posted by woolly_wombat
    Point taken. I appreciate that I've benefitted from the fact that inflation and interest rates have been much lower than was assumed in 1985 (although this has been partly offset by the low bonuses on the with-profits part of the policy).
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