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I've had my Defined Benefit pension statement recently along with the Cash Equiv Transfer Value so that I can look at other options for my 'pot'.
The CETV has come out at 38 times my DB pension. This coupled with the potential to take twice the tax free lump sum of the DB pension has had me wondering about getting a DC pension, probably a draw down type. We have income from other investments so we are happy to draw down funds only when needed.
Has anyone any experience of this situation and any pitfalls to look out for? My IFA wants £2250 to get us to the point where we have our options detailed and can make our choice then. If we go DC then there is a 0.95% of CETV set up fee then annual fees of 0.5%.
The simple rule of thumb is, if you are one of the last remaining individuals lucky enough to still be in a DB scheme stay with it.
The only reason to switch would be if your DB scheme was severely underfunded so you were concerned that there might not be money there to pay your pension when you retire.
What do you mean by 38 times your DB pension?
And when do you retire?
Its 38 times the annual income I can get now from my DB pension. I am 59 and plan to retire now.
I’m not quite where you are but not far away. The main problem is that you will be going from a position where you have little or no risk, to a position where you are taking all the risk - this is very difficult to factor into a set of numbers. There is nobody who will categorically tell you if this is right or wrong as it depends on your circumstances, but MOST people would probably be better off staying DB.
The main thing is to get proper advice, and prob worth shopping around for that too if you can..
On the surface that is a simple equation no? It would mean you need to get a guaranteed 2.6% return on the lump sum you get to equal the DB scheme.
EDIT plus the costs of the DC set up. My hunch is that this isn't worth it, but I'm not a financial advisor.
The things that attract me to the DC pension is the doubling in size of the tax free lump sum and more importantly the potential to pass on money to my son.
Can you choose which provider you’ll hold your CETV pot in? 0.5% annual fee seems high for what I’m guessing is a significant pot of money.
There are flat fee SIPP providers (see telegraph and monevator websites for comparison tables) that should provide far batter value on a large pot.
% based platform providers are generally better value for small pots (obviously)
Some clever people who do this for a living have worked out that they won't lose money on this deal.
"guaranteed 2.6% return"
Depends how long the OP is intending to live for!
Or you can get a 21x annuity and do something else with the rest. The wide disparity suggests I've done the sums wrong, or the OP's pension pot/lump sum is wildly different to my assumption.
"38 times my DB pension"
Which is scary reading for the rest of us who have to self-fund pensions because the OP's generation borrowed against our earnings.
Is the attraction the opportunity to give an increased lump sum now to your son? If so does this outweigh the risk that your future income could be very substantially reduced from what it would have been? The point is nobody guarantees anything under DC, other than that the managers of your funds will get their charges paid.
If you want to help your son, is there another option ie take the DB and use some of it to subsidise his mortgage for the next however many years.
Again take proper advice but IMO you’d have to be pretty desperate for cash to swap a GUARANTEED income for taking a punt on the global economy over the next few years...
Im a qualified pension transfer specialist dealing in this type of transfer on a daily basis.
There are many reasons that people want to transfer including flexibility of income and death benefits but you need to weigh up exactly what you are giving up as the guarantees offered by your DB scheme are very valuable and expensive to replace. For a lot of people this is the biggest financial decision that they will make in their life.
CETVs usually are in the region of 25-30 timed the pension given up, 38 seems really high, are you sure that this isnt the deferred pension at the date of leaving scheme?
Charges will impact on the value of the fund in the future and you also need to factor in the ongoing advice charge (usually 0.5%-1% per annum) as the FCA recommend that annual reviews are carried for the lifetime of the contract.
Other factors to consider are the spouse's pension you would be giving up, your capacity and tolerance to loss i.e. how much could you afford to lose before your standard of living was affected? and how much loss cold you actually handle?, the fact that death benefit flexibility could be potentially fulfilled with a life assurance contract and whether the scheme offered partial transfers so you could gain some flexibility whilst retaining a core guaranteed income.
As I'm assuming the CETV is over £30k, you will need to seek financial advice and the fee quoted is ballpark what we would charge for a £100k transfer so you can determine whether yours repsesents good vfm or not.
I was in the same position and decided to keep the DB pension, which was fully funded. I also had other savings, so the mixture of a fairly well guaranteed basic income, plus other income from savings (including lump sum), seems most future proof. My brother, on the other hand, is in a DB scheme with very marginal funding, and he's planning to cash in and drawdown.
The 38x doesn't take your total pension pot over the lifetime limit (1.03 million) does it?
If I take my pension now and do not take the tax free lump sum then the factor is 36.5 times the income, not 38. Finger trouble on the calculator!
I'm just thinking of my son being able to inherit my pension pot.
Plop pants sounds better but I assume there is a considerable reduction in place to draw benefits early? If you could live on your other investments now, deferring drawing benefits till the normal retiremnet age of the scheme could considerably increase the pension offered.
Remember the income from the scheme is guaranteed for life and is very likely inflation proofed with no risk to you. As an example for an increase of 2.5% per annum a £10k pension becomes £12.8k after 10 years and £16.5k after 20 and £21.5 at 30 years. If you are in good health with a history of longevity in your family, inflation proofing is an even more valuable benefit.
If you plan to draw heavily on the fund, there may be little to nothing left to pass on to your son when you die, a lot of people dont appreciate just how much they will take over their lifetime, just seeing the headline figure as a legacy. Conversely, if you were single or in poor health, transferring for death benefits makes more sense.
If I take my pension now I'll be on 80% of the deferred benefits at normal retirement age.
edit:
my dad is 84 and fit so I'm hoping I take after him, but as I'm still racing I'm not sure how much bashing my old body can take! :0)
I've been looking at this recently with an IFA. They advised that the watchdog had recently issued new guidelines[?] for advising on these types of transfers. Basically the assumption is now that it is a bad idea to transfer out unless shown otherwise.
E.g. A pension is there to provide an income for life, not a tax free lump sum or a nest egg for spouse/kids.
If you want to leave your spouse/kids money, then take out a policy that pays out on your death. It's not what pensions are for.
Be wary of advisors who tell you otherwise and steer you to their products and ongoing advice. They might not be acting in your best interest.
Plus remember, if you do transfer out to a DC scheme, you don't need to stick with the advised and charged product from your advisor.
I ended up transferring out [special circumstances]. The advisor would not approve the transfer to one of my existing SIPPs as they had not conducted due diligence on them, so I specified that the scheme they transferred my fund to had to have no exit penalties or lock-in period, and no bid/offer spread, so that I could immediately transfer out the full value to my SIPP, which I did.
Be careful out there.
@plop-pants I think you said you’re 59 and in good health, so you could easily have 25-30 years ahead of you - never in your life up to this point has anyone said I will guarantee your income for the next 30 years, and if you opt out they never will again, so if it were me my mind would be made up...and I think bigdugs just sealed it for me.
As I say I’d be thinking about how to use the income to help your son over the longer term if that’s feasible.
Ps - only on stw would you get plop-pants and bigdugsbaws discussing pension transfer values 😂
If we go DC then there is a 0.95% of CETV set up fee then annual fees of 0.5%.
I've just read that bit. Are those percentages of the CETV? Since I don't know your numbers I'll work on a pension of £10kpa, so 38x is £380k. If you can get a annuity at £3k pa per £100k, that would give £11.4k per year - which is more than your pension. BUT 0.5% of CETV (if that's what it is) for the fees is £1.9k per year, so you're back to £9.5k which is less than you started with. And no widows pension unless you go for a joint life annuity which will pay about 10% less.
Thank you very much everyone for your help with this. You have helped me make my mind up. I don't think I could cope with the worry of the variability and unknown longevity of a DC pension. We have enough worries over our stock market investments as it is. Despite our IFA being a good chap he will obviously prefer us to transfer as he'll earn from it, so from that point of view we might not get the impartial advice we need.
The .95% setup charge is based on the cetv. The management charges are .5% of the value of the DC pension pot (cetv less the tax free lump sum). The vagaries of the stock market and the amount of the annual charges do worry me.
38x is a very generous offer. The norm is 20 times. Are they trying to get you off the defined benefit scheme to limit their future liabilities? I’d be sorely tempted because you could spend half on an annuity that would provide a similar benefit and keep the other half which can then be spent or passed down in your estate. See at least one financial advisor.
The management charges are .5% of the value of the DC pension pot
Somebody makes a nice living out of other people's pensions. The management fees on my SIPP are fixed not %, but work out at .125% per year. I'm unsure whether reasons for the legal requirement to get IFA advice for a transfer is to protect pensioners or support the IFA 'industry'.
Unless in poor health, the scheme pension will generally always be higher than the annuity income that you could purchase on the open market.
I’m unsure whether reasons for the legal requirement to get IFA advice for a transfer is to protect pensioners or support the IFA ‘industry’.
They are there to protect the consumer, as I said this is usually someones largest and most life changing financial decision
Somebody makes a nice living out of other people’s pensions. The management fees on my SIPP are fixed not %, but work out at .125% per year.
Management fees are unrepresentative of total cost of a SIPP as the underlying investments in the SIPP will mostly have further annual charges. 1.5% p/a is more realistic total.
I'm a little surprised by the trend being towards staying in.
Assuming you can attain an interest rate that's approximately equal to inflation, then isn't it just a case of if you're expecting to live >38 years, it's better to stay in, and if <38 years, it's better to shift out?
Management fees are unrepresentative of total cost of a SIPP as the underlying investments in the SIPP will mostly have further annual charges. 1.5% p/a is more realistic total.
You're not doing IFA's reps any favours here. If I was transferring to a SIPP I'd be choosing Vanguard funds with fees of c. 0.1-0.3% annum. Combined with platform charges they would be a long way off 1.5%...
"Assuming you can attain an interest rate that’s approximately equal to inflation, then isn’t it just a case of if you’re expecting to live >38 years, it’s better to stay in, and if <38 years, it’s better to shift out?"
The benefit of staying in is certainty. A lot can happen financially in several decades. Will your investments keep up with inflation if it returns to 1970s levels? If that coincides with a stock market crash?
I took my pension 9 years ago. If I live to the same age my dad did I'll be drawing it for another 33 years. Certainty is good.
I did, after a lot of thought, take the max lump sum. So I have the pension index linked to provide security plus had a lump sum to invest. Most of the lump sum is still there 9 years on but in the meantime it has paid for numerous holidays and the last lump of my mortgage etc.
There is an argument that taking a proportion of a pension as a lump sum is worthwhile because most people will have more expensive lifestyles in their immediate retiral years than in their 70s or later. Plus after 67 the OAP pension kicks in.
There is an argument that taking a proportion of a pension as a lump sum is worthwhile because most people will have more expensive lifestyles in their immediate retiral years than in their 70s or later. Plus after 67 the OAP pension kicks in.
Surely unless they end up needing to pay for a care home which if you want to be able to choose a decent one is going to be scarily expensive?
A colleague of mine retired early at the back end of last year, opted to go for CETV, signed up for it, all paperwork done. About 2 weeks before he was due to go, got a letter saying they'd got his numbers 'slightly wrong' and that he'd actually get 150k less than they originally told him. I believe it's only an estimate until the actual transfer, though someone on here will probably know better!.
He still took it right enough.
I think a lot depends on your health and circumstances, he'd had *a lot* of health issues and reckoned he mibbe won't get 30 years anyway, and preferred the idea of his kids getting some money, rather than his pension dying with him and his wife - she's a heavy smoker so possibly won't be about too long either.
May I ask a slightly different question - I am on a DB pension scheme and have been paying into for near on 10 years. If I were to change jobs and presumably go onto DC pension scheme, how would I calculate the what contributions would be required to match my current deal?
how would I calculate the what contributions would be required to match my current deal?
You wouldn't, not exactly. The whole point of DC schemes is that risk (arising from the investments the pension scheme makes with your money) sits with you - you don't buy a definite amount of pension (a 'defined benefit') with your contributions to a DC scheme.
Rather, I think all you can ask is that - is the DC scheme I'm joining a good one? And this boils down to (assuming they are contracting out to Scottish Widows or Standard Life or whover to actually run the pension, which most do now) what % of your salary your employer will contribute to the scheme, and if you decide to pay extra contributions, what they'll match these up to - e.g. if you pay 5%, your employer pays 5%; if you pay 10%, your employer pays 10%; if you pay 15% your employer still only pays 10%, etc.
how would I calculate the what contributions would be required to match my current deal?
Very roughly if you determined the benifit you would have gained in a year (1/60th of your salary?) then multiply that by around 40 given the annuity rates these days and that’s the total annual contribution you’d need including the employers. Basically you’re unlikely to be able to afford it.
If I were to change jobs and presumably go onto DC pension scheme
You'll quickly come to the conclusion that you won't be able to afford to change jobs. Roughly multiply your annual 1/60th salary by 20 (or more, but 20 is the valuation for lifetime allowance), this is what you would need to put away (including contributions from your new employer. As mentioned, you're unlikely to be able to afford it.
You earn £30K gross, you accrue £500 per annum pension. You'll need to put away £10K to be in a similar place - that's about a third of your income. Which is why DB schemes are closed to new members and/or closing to existing ones.
Well that's useful to know, thanks
I’ve been looking at this recently with an IFA. They advised that the watchdog had recently issued new guidelines[?] for advising on these types of transfers. Basically the assumption is now that it is a bad idea to transfer out unless shown otherwise.
Yep, getting very hard to find an IFA who will agree to write a recommendation saying you should transfer from DB to DC (because in most cases it's not a good idea).
If I was transferring to a SIPP I’d be choosing Vanguard funds with fees of c. 0.1-0.3% annum.
But you need an IFA to recommend that specifically as the DB scheme will only let you transfer out to a fund explicitly recommended by the IFA. Why would an IFA recommend a fund they have no control over and get no commission from as they assume all the risk (of you suing them down the line).
My work-provided IFA did just this - from the financial company he was working for. But as he said, the 48x valuation of the DB pension they offered and his more than 20 years contribution made it very hard not to accept. To be fair, he did not recommend it to anyone else.
Management fees are unrepresentative of total cost of a SIPP as the underlying investments in the SIPP will mostly have further annual charges.
As mentioned, if you invest in things like Vanguard funds they are not large. I don't expect the charges paid for transferring to the CETV are the only ones the OP would be paying, either.
My work-provided IFA did just this
How long ago was that? The regulator has been tightening up on it over the last year and I expect them to continue to do so...
He said it was a few years ago and most likely well before the current regulations.