Transferring from a closed defined benefit scheme to a SIPP

[skinnyman]

Howdy financial gurus,

I work for a FTSE aerospace company. I've been in their defined benefit pension scheme for the past 17 years, they closed the scheme to further contribution shortly after Covid struck. They've since replaced it with a defined contribution scheme, which I've enrolled in. The closed DB scheme will now increase by RPI, to a maximum of 2.5% pa, until retirement. Alternatively, I can transfer my pot into a personal pension. I need to seek professional advice from an FCA accredited advisor, as per the rules, but before I do so, are there any downsides to transferring out? I plan to put the money into a SIPP, and continue to make further contributions, with the money spread across various funds & FTSE companies.

I want to transfer out because:
1 - I feel I can achieve better results than 2.5% pa (remember that's the maximum increase, not minimum)
2 - I can access 25% of the pot @ 55, if left with my employer I cannot access any until I leave the company or retire
3 - Were I to die prior to retirement the full amount goes to my wife, if held in a SIPP. If held with my employer she only gets half

Feedback welcome, I'm sure I'm not the first person to have done this.

[55palfers]

Will your company pay for the required financial advice? They closed the scheme after all.

[markiii]

the obvious concern is that if you leave it won't go down. if you invest it in the market it might,

for me its all down to the size of the transfer amount they offer you. I have known some companies offer 7 times value to get you to move it.

[supersport]

I have recently looked into this.

The non paid for advice, and I have seen this in other places, is to leave it in place until reasonably close to your retirement.

The benefit of moving it out, is that you get freedom of how you access it, it can be inherited etc.

However, it is possibly safer left where it is until you actually get close to needing it. I was also told that the transfer value can often increase significantly the closer to retirement that you get.

[skinnyman]

I will have to pay for the financial advice, the company would rather us leave our money in their pot, than transfer it out into our own.

I feel its fairly low risk as come retirement it won't be my only pension, I'll also have the defined contribution pension that replaced it.

The transfer value currently stands @ £300k. I'm 35, so 20-30yrs from retirement.

If left with my employer, and it gains 2% pa then @ say 60 that's £492k, if I can achieve just 4% in a SIPP it becomes £800k, significantly better.

[Mazinbrum]

skinnyman said:

I will have to pay for the financial advice, the company would rather us leave our money in their pot, than transfer it out into our own.

I feel its fairly low risk as come retirement it won't be my only pension, I'll also have the defined contribution pension that replaced it.

The transfer value currently stands @ £300k. I'm 35, so 20-30yrs from retirement.

If left with my employer, and it gains 2% pa then @ say 60 that's £492k, if I can achieve just 4% in a SIPP it becomes £800k, significantly better.

Are you sure the transfer value goes up by 2%? it's usually the pension that goes up by that amount while the transfer out value is calculated by actuaries and varies according to predicted life expectancies and gilt yields etc. Saying that at your age I'd transfer out and stick it in a low cost global tracker, its easier said than done getting this advice now though, think I read somewhere that Fidelity give this advice.

[LeoSayer]

With respect OP, I don't think you understand what a DB pension is.

The DB % increase relates to the amount you will get paid as a guaranteed index-linked (within limits) annual pension from your retirement date until you die. All the risk of providing that sits with your employer.

With a DC scheme, there is no such guarantee, you are entirely at the risk of market movements.

Having both a DB and DC scheme gives you the best of both worlds and you are young enough to save plenty before you to retire without needing to touch your DB.

It's easy to get seduced by the numbers but the FCA feels that, for the majority of people, DB transfers are not in people's best interests:
https://www.pensionsage.com/pa/FCA-publishes-DB-tr...

[PorkInsider]

Mazinbrum said:

skinnyman said:

I will have to pay for the financial advice, the company would rather us leave our money in their pot, than transfer it out into our own.

I feel its fairly low risk as come retirement it won't be my only pension, I'll also have the defined contribution pension that replaced it.

The transfer value currently stands @ £300k. I'm 35, so 20-30yrs from retirement.

If left with my employer, and it gains 2% pa then @ say 60 that's £492k, if I can achieve just 4% in a SIPP it becomes £800k, significantly better.

Are you sure the transfer value goes up by 2%? it's usually the pension that goes up by that amount while the transfer out value is calculated by actuaries and varies according to predicted life expectancies and gilt yields etc. Saying that at your age I'd transfer out and stick it in a low cost global tracker, its easier said than done getting this advice now though, think I read somewhere that Fidelity give this advice.

I agree.

OP, the 2.5% increase means that if, for example, your DB pension is currently due to pay you £15k per year in retirement then that £15k will increase by 2.5% per year.

It's not the transfer value that's guaranteed to increase by 2.5% per year.

[5pen]

A similar thing happened to me (DB scheme closure, that is).

I think you’ve misunderstood the RPI (capped and 2.5%) increase. Usually, this is applied to the preserved benefit, not the transfer value. This effectively aims to index-link the annual income you have accrued.

By transferring out, you would effectively be taking on all of the risk of your investments within the pension performing well enough to achieve a certain level of income. By leaving it, on part of your pension, that risk remains with your employer.

I chose to leave mine as I liked the idea of a hybrid DC pot and a DB ‘annuity’. Personally I think it gives me a good deal of flexibility (I plan to draw from the DC pot at 55 and take the DB income from 60).

There are other factors of course. I don’t have any children, so inheritance is not a primary concern of mine. Also, the spouse benefit of continuing payments after my death (at a 50% rate) is more likely to be of benefit as my wife is younger than me.

It still might be worth doing, but what you have is very valuable as it is and from what I understand it is difficult to find practitioners able to complete the transfer in any case.

Edited by 5pen on Wednesday 7th April 18:41

[timberman]

skinnyman said:

I will have to pay for the financial advice, the company would rather us leave our money in their pot, than transfer it out into our own.

I feel its fairly low risk as come retirement it won't be my only pension, I'll also have the defined contribution pension that replaced it.

The transfer value currently stands @ £300k. I'm 35, so 20-30yrs from retirement.

If left with my employer, and it gains 2% pa then @ say 60 that's £492k, if I can achieve just 4% in a SIPP it becomes £800k, significantly better.

What's your annual deferred pension?,
that's the figure you should have been given along with your transfer value and should give you an idea of how generous the offer is.

the deferred pension is what will increase every year until retirement,

the cetv is calculated to give you a fair transfer value based on the annual increases ( the 2% PA ) + the benefits you have built up in the scheme and is affected by your age, retirement date and things like gilt yields.

once you receive a transfer value there is generally a time limit on when the transfer needs to complete, after which you will have to wait another 12 months before you can get another cetv without having to pay.


the FCA keep changing the rules in order to protect people and with the increasing cost of indemnity ins a lot of IFA's are no longer prepared to offer advice, so you may find it difficult to get anyone to help.

[skinnyman]

Annual deferred pension of £9233.

@ the max cap of 2.5% that would equal £19366 @ 65
@ an average of 1.75% that would equal £15537 @ 65

If I somehow managed to reach 95 I'd need a pension pot of around £600k to achieve £19k/yr from 65 to 95. A £300k pot now that achieved 4%/yr would hit that £600k mark within 18yrs, by the time I'd be 53. 4% growth/yr from now till 65 would equal £973k from an initial £300k, which would give me £32k/yr from the age of 65 to 95.

So, leaving my pension with my employer can hit a MAX of £19k/yr at 65.

Whereas a relatively conservative growth of 4%/yr would see me have almost a £1m pot by 65. At which point I could take £25k/yr, and still continue to grow the pot.

Add in the fact that if I were to die my entire pension would pass on, this is not the case should it remain within a DB scheme.

[5pen]

A further couple of things to consider;

1 - once in payment, the annual income paid would continue to increase under the scheme rules (RPI up to 2.5% by the sounds of it), so it wouldn't be £19k (or whatever it has increased to in the meantime) for the duration of pension in payment. To further your calculations, by the time you are 80 @2.5% increase, it would be worth nearer £28k per year.

2 - DB pensions are valued very favourably for lifetime allowance purposes (for now, at least). £9,233 only consumes £184,660 (£9,233 x 20) of your allowance compared to the £300k transfer value. It may not be a concern now, but is something to be aware of.

[davidc1]

I can see where the OP is on this. A bird in the hand...
Totally see the angle to draw it and self manage it .

A DB is a nice thing to have when you also have a DC pension and property's.
By comparison i have a DB pension with a tfr value of 145k.
Wife has one with a tfr value of 260k.
Both from when working in banks many years ago.

I will doing all i can to claw money out and either take cash / place into a sipp to ringfence.

Good luck with this.

[timberman]

skinnyman said:

Annual deferred pension of £9233.

@ the max cap of 2.5% that would equal £19366 @ 65
@ an average of 1.75% that would equal £15537 @ 65

If I somehow managed to reach 95 I'd need a pension pot of around £600k to achieve £19k/yr from 65 to 95. A £300k pot now that achieved 4%/yr would hit that £600k mark within 18yrs, by the time I'd be 53. 4% growth/yr from now till 65 would equal £973k from an initial £300k, which would give me £32k/yr from the age of 65 to 95.

So, leaving my pension with my employer can hit a MAX of £19k/yr at 65.

Whereas a relatively conservative growth of 4%/yr would see me have almost a £1m pot by 65. At which point I could take £25k/yr, and still continue to grow the pot.

Add in the fact that if I were to die my entire pension would pass on, this is not the case should it remain within a DB scheme.

So that's a cetv of approx 32 times your deferred pension which is ok and about average compared to typical offers at the moment.
I can't advise on whether to transfer or not, there are numerous good reasons for both options,

I'm not one that subscribes to the idea that transferring is almost always a bad idea,
there are far too many considerations for that to qualify as generic advice and it seems to completely ignore peoples plans for the future while just focusing on the promise of a guaranteed wage and benefits when you die of something for your spouse but nothing for kids.

I transferred and am happy with the decision so if you have a clear plan of what you want for your future and how to achieve that financially then transferring may be the right choice for you,

but at 35 you still have plenty of time in which to put things in place, so it's well worth considering your options and as others have said having a guaranteed income in place alongside the sizable dc pension you could build up between now and retirement is not to be dismissed and would give you numerous options of how you could draw your pension to suit your plans.

Your biggest challenge is probably going to be finding an IFA willing to give you advice,

If you manage to get advice and receive a negative recommendation you can still transfer as an insistent client as long as you can find someone willing to accept the transfer,

in this instance its worth speaking to your current works DC scheme provider,
because you already have a pension set up with them they will possibly be more willing to accept the transfer and you can always transfer to someone else after, (just check for any entry/ exit fees), to do this they will need proof of advice from your IFA which they might be reluctant to provide because of a fear it could come back and bite them in the ass if things don't work out the way you hope.

[CarlosFandango11]

skinnyman said:

Annual deferred pension of £9233.

@ the max cap of 2.5% that would equal £19366 @ 65
@ an average of 1.75% that would equal £15537 @ 65

If I somehow managed to reach 95 I'd need a pension pot of around £600k to achieve £19k/yr from 65 to 95. A £300k pot now that achieved 4%/yr would hit that £600k mark within 18yrs, by the time I'd be 53. 4% growth/yr from now till 65 would equal £973k from an initial £300k, which would give me £32k/yr from the age of 65 to 95.

So, leaving my pension with my employer can hit a MAX of £19k/yr at 65.

Whereas a relatively conservative growth of 4%/yr would see me have almost a £1m pot by 65. At which point I could take £25k/yr, and still continue to grow the pot.

Add in the fact that if I were to die my entire pension would pass on, this is not the case should it remain within a DB scheme.

You’re ignoring or not aware of the impact of inflation on £19k pa from 65 to 95 (your DB pension will continue to increase with inflation when it’s paid to you), this will need a pot closer to 900k.

You’ve also compared the inflationary increase on your DB pension to the investment return on a SIPP.

You’ve not mentioned the risk transfer that occurs with a DB transfer.

With respect, based on the above, I don’t think you understand what a DB scheme is - you need learn a lot more about what you currently have before making a decision on transferring.

[skinnyman]

I understand what a DB scheme is, I've been paying into one for the past 17 years. The scheme is now closed, my deferred pension is £9233PA. This will increase with inflation to a maximum of 2.5% PA.

My CETV is around £300k

So I'm trying to decide if transferring out into a SIPP to allow for further potential growth is better than remaining in the now closed DB scheme which will only keep up with inflation, up to 2.5%

[xeny]

skinnyman said:

If I somehow managed to reach 95 I'd need a pension pot of around £600k to achieve £19k/yr from 65 to 95.


.

You seem to be completely neglecting investment risk and inflation in this calculation. It looks attractive to calculate 600K/30 years means 20K/year, but providing it for certain is rather trickier.

There are reasons a DB pension is seen as attractive, and one of them is that certainty.

edit: un goatse post layout

Edited by xeny on Thursday 8th April 14:50

[skinnyman]

So just to clarify, the general consensus is its better to remain in my closed DB pension? At the age of 35, with a deferred pension of £9233, that matches RPI to a max of 2.5%, than it is to transfer out £300k into a SIPP?

[xeny]

I'm saying it is a much more complex topic than your initial post suggests. The maximum index linking uplift being so low is actually the thing I find least attractive about your DB scheme from the information available.

[JeffreyD]

Is there an up to date list on firms that will give advice on these matters?

I can't imagine there are that many.