another pension question

[covmutley]

My first job was with a Council. I was on a low wage back then and paid into the pension scheme for just over 2 years. My pension is currently at about £800 per year with a lump sum of £2,400.

I was looking to transfer it and another old private pension into a SIPP, just to consolidate. The transfer value is currently £10,400.

I have read that it is generally not a good idea to take money out of public pension due to their low risk and protection against inflation. But given the amount is so small, that is not really an important consideration.

My question, which I cant find the answer to specific to my small pot, is how much is the pension pot going to grow compared to if i put it into funds?

I have at least 25 years to retirement so if these averaged 6-8% the pot could grow to £45-68k, which would probably buy a couple of holidays a year, or pay for food if things dont go to plan for us! Plus the capital could be passed to my kids (or the nursing home).

Any thoughts please?

[otherman]

That pension has much higher value than 10k, id leave it alone. You wont make 7 percent year in year out. Factor in a couple of minus ten percent years and see how it looks.

[covmutley]

Yes, i forgot to mention that the transfer value doesn't look generous. But still, what will happen to the pension over 25 years. Will it only match inflation, or will it grow?

[JulianPH]

Is this the current transfer value today and is the lump sum/income the value today or a projection of the value in 25 years time?

These factors are very important.

[covmutley]

The letter says both the pension and lump sum are current amounts

[CountZero23]

It's a DB pension, no point cashing out as you'll lose considerably - depending on how long your draw your pension for and how lucky you are on the markets.

Public sector pensions are pegged to inflation so it will still be worth having when you come to claim it.

[sidicks]

covmutley said:

My first job was with a Council. I was on a low wage back then and paid into the pension scheme for just over 2 years. My pension is currently at about £800 per year with a lump sum of £2,400.

I was looking to transfer it and another old private pension into a SIPP, just to consolidate. The transfer value is currently £10,400.

I have read that it is generally not a good idea to take money out of public pension due to their low risk and protection against inflation. But given the amount is so small, that is not really an important consideration.

My question, which I cant find the answer to specific to my small pot, is how much is the pension pot going to grow compared to if i put it into funds?

I have at least 25 years to retirement so if these averaged 6-8% the pot could grow to £45-68k, which would probably buy a couple of holidays a year, or pay for food if things dont go to plan for us! Plus the capital could be passed to my kids (or the nursing home).

Any thoughts please?

I assume that the pension is the amount you've earned which will be payable when you retire (age 65 or scheme retirement age, if different).

I believe that deferred pension will increase at CPI until you retire, so £800 per year might be circa £1,300 per annum if CPI averages 2% over the period. The lump sum would be closer to £4k.
Assuming this is a standard public sector scheme, the pension payments would be linked to inflation,
Under current longevity, interest rate and inflation assumptions, that pension would be worth around £52,000 (factor of 40x annual pension) with the lump sum making £56k in total.

If you assume that you can earn 7% per annum from now until that time, a transfer value of circa £10,300 would be fair.

7% is quite aggressive, but on the other hand you'd expect interest rates to be higher in 25 years' time, hence you might be able to buy an annuity more cheaply. With the DB scheme you have minimal risk. With the Transfer value you have all the investment risk, all of the inflation risk, all of the interest rate risk and all of the longevity risk. That could work for or against you.

Overall, in the absence of any additional information, a transfer value of around £10k is broadly 'fair' for the benefits that you have earned.

Remember that if you take the transfer value you can't just spend the money on holidays etc!

Edited by sidicks on Tuesday 17th October 20:40

[sidicks]

CountZero23 said:

It's a DB pension, no point cashing out as you'll lose considerably - depending on how long your draw your pension for and how lucky you are on the markets.

Public sector pensions are pegged to inflation so it will still be worth having when you come to claim it.

Not really true at all!

As explained above, you might lose or might win depending on how investment returns, interest rates, inflation and longevity evolve over the period. What is clear is that you are talking all of the risks if you move from DB to DC.

A quick assessment suggests that the transfer value is broadly fair on the basis of sensible assumptions.

[covmutley]

Thanks, that is useful.

And say I live 20 years after retirement (85) I will get out about £30k including lump sum.

Whereas even at less than 6% growth I should be able to get that off the capital, plus have the capital itself to use or leave to kids?

[CountZero23]

sidicks said:

Not really true at all!

As explained above, you might lose or might win depending on how investment returns, interest rates, inflation and longevity evolve over the period. What is clear is that you are talking all of the risks if you move from DB to DC.

A quick assessment suggests that the transfer value is broadly fair on the basis of sensible assumptions.

Interesting reading, I had qualified my statement but was still under the impression DB's were like gold-dust and worth hanging on to.

As you show, it's more like a question of your attitude to risk.

I'd imagine if the OP has a decent spread of investments in DC it could be worth hanging onto this pension as the ultimate low-risk part of his portfolio.

Just out of interest, are you in pensions specifically or another part of the finance sector?

[sidicks]

covmutley said:

Thanks, that is useful.

And say I live 20 years after retirement (85) I will get out about £30k including lump sum.

Whereas even at less than 6% growth I should be able to get that off the capital, plus have the capital itself to use or leave to kids?

No, the pension increases with inflation in retirement (maybe RPI, not CPI)?
Assuming inflation is 3% p.a, the pension alone would pay you £35k, plus the lump sum to get to £39k.

However, the expected lifetime for someone retiring at age 65 in 25 years time is likely to be more than 25 years, not 20.

[sidicks]

CountZero23 said:

Interesting reading, I had qualified my statement but was still under the impression DB's were like gold-dust and worth hanging on to.

It very much depends on the assumptions that are being made to produce the transfer value!

CountZero23 said:

As you show, it's more like a question of your attitude to risk.

I'd imagine if the OP has a decent spread of investments in DC it could be worth hanging onto this pension as the ultimate low-risk part of his portfolio.

Yes, that would make sense. I have a small DB pension from my first employer which I'm debating whether to take a transfer value from or whether to keep as a safe basic pension while the rest of my retirement planning has much more market risk.

CountZero23 said:

Just out of interest, are you in pensions specifically or another part of the finance sector?

It's a secret!

[Ginge R]

sidicks said:

No, the pension increases with inflation in retirement (maybe RPI, not CPI)?
Assuming inflation is 3% p.a, the pension alone would pay you £35k, plus the lump sum to get to £39k.

However, the expected lifetime for someone retiring at age 65 in 25 years time is likely to be more than 25 years, not 20.

A *very* pertinent final point!

I'd add too, Philip Hammond wants to 'restack the deck' for younger vot.. I mean, for younger savers. We've seen public sector pensions revalued at the drop of a hat, and we've seen high profile DB schemes losing big chunks of accrual entitlement. Added to that, this forgotten gem from GAD is worth a look at.

https://www.gov.uk/government/uploads/system/uploa...

The GAD revaluation factor was good for between five and ten years (back in 2010). Anyone think we'll see the annual allowance (AA) multiple factor of sixteen raised anytime soon? It's a document which makes absolutely fascinating reading now, mainly because Hammond can fine tune under the bonnet and no one will understand the nuance.

I think the killer phrase from the intro is “the actuarial assumptions should aim to deliver consistency between the treatment of defined benefit and defined contribution members”. This is patently not true any more, even if was true at the time. If we were to argue that the rules are now unfair to DC savers, the risk is that they would “level down” by raising the AA factor. It’s also a number that few outside the pension world would understand. Ditto for lifetime allowance (LTA) multiple valuations.

Finally, because the LTA increases in line with today's particular inflation figures too, it rises to £1,030,000 next year. If you're above the current £1,000,000 limit and don't have protection, the increase could cut your LTA excess tax charge by up to c.£16,500, and could boost your tax-free cash by £7,500 (scheme details dependant).

Edit: In 25 years, we'll probably be closer to 75 that 65 when retiring. Added to that, current (public sector) defined benefit deferred pension payouts are already hotwired to state pension age via secondary legislation, you might have to work ten years longer that 65, or retire with less, or set aside more in the way of significant savings now.

Edited by Ginge R on Tuesday 17th October 22:34