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Hi
I have a couple of defined benefit pensions from old jobs, I recently went to see an independent financial advisor who suggested it might be worth pulling them as they are frozen until retirement and its more than 20 years before I start collecting them, his argument was with so much time I should be able to do better, he suggested over 47 it would probably be safer to leave them
He didn't try to sell anything, His suggestion was a self directed account invested with big dividend paying companies that might out last me, so for instance the first thing he said is avoid oil companies
so wwstwd?
then as a side note with the markets all being high is it true with time on your side there's no point. trying to time the market?
thanks in advance
Unless they're worth less than £30k you can't transfer them to a SIPP without an IFA recommendation, which they are getting less and less keen to do as pension miss-selling is probably the next big finance scandal. E.g. if you do transfer and mess it all up with bad investments, your IFA (or rather his insurer) is potentially on the hook for bad advice...
As a general rule of thumb, don't cash out defined benefit policies as they are normally very good investments.
Leave them. Valuation is 30x annual income you’ve earned from them compounded by inflation rate. Everyone is trying to get you to move your pension assets around, in and out of funds. See Facebook. Honestly, defined benefit pensions will be carefully managed by large organisations that are not trying to make short term gains. Just leave alone and enjoy them in 20 years time.
Now if you’d said defined contribution we might have had a different discussion.
Valuation is 30x annual income you’ve earned from them compounded by inflation rate
can you explain that please?
as I understand todays value is the value they will be in 25 years time?
rough figures say 60k combined, they pay 600 pm at 65, which with inflation means worth a lot less than 600 pm is worth now
I’d leave them. You’d be swapping a GUARANTEED income for something which may or may not be better. If you have 20 years to go you should be able to build a decent additional buffer by starting again putting a decent amount into self-directed investments..
If the adviser called them 'frozen', I would be wary - that’s the sort of emotive term used in the '80s when everyone was being encouraged to transfer out. Also not sure what deserter means by “Valuation is 30x annual income you’ve earned from them compounded by inflation rate” - you’re clearly not going to get an income from them for some time.
The transfer value from a defined benefit scheme will be calculated as the amount of money they think they need (now) to provide your entitlement, so depends on your preserved benefits and, importantly, the scheme's funding assumptions (inflation, investment etc).
What’s the £600pm? Is that the preserved benefits at the date you left the schemes, or an estimate now, or a projection. If the first, then it will be 'revalued' (a limited inflation proofing) between the date you left and the date they become payable; the second would probably have had the revaluation to date included, but there’s still the future revaluation; if the third, then it will include assumptions about future inflation. Whichever £600 is almost certainly not what you’ll get.
Whether you should transfer depends on lots of things, including your view of the future, appetite for risk, personal situation etc. The reason you must have had advice for 'larger' (£30k+) transfers is partly because it’s not simple.
You worked for a company for six years and left five years ago on a salary of 30k. Assume each year accrued 1/60 of your final salary. You have earned a pension of 3K per annum from the date you draw your pension. Of course it is not 3k, it will be compounded up to the date you retire.
For valuation, the fund is worth a pot of 30x3k = 90k. It’s probably compounded as well, but I’d have to check details. Say that after the five years it’s now actually 3.25K and the pot is worth 97.5K. You have a lifetime pot of £1M before you have to start paying tax on pension contributions.
Hope that makes sense. Your bet is really that whatever you transfer is going to grow at a rate faster than the compound rate for the defined benefit of 3k per year.
Leave it and put more aside from your current job.
Thanks for the advice guys, just for clarity I got a statement when I left saying I can take 60k now and put it in a private pension or it will pay out 600 pm when I’m 65, the advisor just said to me at 65 when I retire it’s still at 60k as it doesn’t grow between now and then
I like the idea of having a guaranteed income and suppose as long as I live more than 10 years I’ll be alright
I've never seen a defined benefit scheme that wasn't indexed or have a fixed rate of uplift - you should read the scheme docs yourself rather than rely on the adviser. And if you find that your pension is indeed growing with inflation or just above, find another adviser because this one either didn't know his job or is deliberately lying to you.
It’s the 600pm which baffles me - surely that’s only for 100 months until the funds run out? Also I’d be careful about what you can pay in. A private SIPP has a limit of £40k pa, which should you be earning over 100k tapers downward to 10k (roughly speaking, it’s complex). Should the £60k be treated as additional income by HMRC it’s possible you’d fall foul of that.
To get a pension of 600/month, or £7200/year, you will need a pension pot of £150000.
Are you confident you can turn £60000 into £150000 over20 years?
Final salary pensions are closing because they put the risk on the company, and are expensive. I don’t think this looks like a good deal personally.
onewheelgood is right - you could do with finding an adviser that knows what he or she is talking about; neither the £600pm, nor the £60,000 are fixed - both will change over time. You have the right to a CETV calculation on request (the statutory right is once a year, but not all schemes apply that limit - some charge for a second CETV some don't).
TiRed's "30x" is simply wrong; no valuation is that simple - if nothing else you're completely ignoring the effect of age (or remaining term to retirement, if you prefer); the amount of CETV for the same amount of pension varies between schemes because they use different methods and assumptions.
Kryton - £600pm is the defined benefit and, currently, it's up to the scheme to work out how to fund it (at retirement); the CETV is what they estimate they need now to do that. There's no limit on what you can pay into a pension arrangement (SIPP or otherwise), but tax relief stops when you hit the £40,000 "input" limit (tapered to £10,000 for high earners). A CETV, as it comes from a Registered Pension Scheme and goes into another is not a Pension Input so does not count in this respect.
It will be index linked, so it will be more than £600/month when you retire....
So you'd have to do turn £60000 into £150000 in *real terms* over 20 years ie accounting for inflation.
The 30x is what HMRC apply when considering the effect on on your lifetime allowance. In this case it is exactly that simplistic. The actual cash equivalent transfer value is another matter altogether, and won't be as simplistic.
While we're on lifetime allowances, someone up there said that if you exceed it it will make a difference to your contributions. This isn't correct, exceeding the allowance will mean that money you take from the pension may be taxed at a higher rate. Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%. Any amount over your lifetime allowance that you take as a regular retirement income – for instance by buying an annuity – attracts a lifetime allowance charge of 25%, on top of any tax payable on the income in the usual way. So you could end up paying 65% tax on part of your pension.
There are some instances where it is prudent to withdraw from final salary schemes (although this doesn't sound like one) They offer a guaranteed return which is good however sometimes that return can be beaten. I wouldn't move from one without being very clear what you are giving up.
There are good and bad IFA's but the most important thing is learning about how these things work yourself
Also the references to how much this pension would be worth are based on annuity values. Other options exist such as drawdown so I would advise reading up on the subject.
The 30x is what HMRC apply when considering the effect on on your lifetime allowance.
HMRC valuation factor is 20x....
https://adviser.royallondon.com/technical-central/pensions/benefit-options/lifetime-allowance/
There are some instances where it is prudent to withdraw from final salary schemes (although this doesn’t sound like one)
I withdrew from one of mine, but the situation was different. The parent company went bancrupt with an under water pension scheme, which then fell into the Pension lifeboat and then exited with reduced benefits (10% haircut and in my case no index linking as my contribution were before the cut off date). So it was no longer a defined benefit, it was a 'vague benefit dependant upon inflation'. Hence I took a chance (and it is a chance) that I could do better myself.
onewheelgood - there is no 30x multiplier. For Annual Allowance purposes, the pension part of a defined benefit uses a multiplier of 16 and for Lifetime Allowance purposes the multiplier is 20. In both cases, any cash benefit is taken at face value.
deserter - I suggest you post a simple question here about a subject on which you know a lot (particularly if it's a complex subject). Then read the answers and realise that asking an internet forum is going to get you a range of answers and you'll find it really difficult to work out which are right and which aren't.
For Annual Allowance purposes, the pension part of a defined benefit uses a multiplier of 16 and for Lifetime Allowance purposes the multiplier is 20.
Apologies, you're right. I should have checked. I'm not an FA, but having just turned 60 and started receiving a DB pension, while still working and having a couple of DC schemes, I have had to do quite a lot of reading about it. Obviously at 60 my memory is getting flaky too.