Move DB Pension to SIPP?

Move DB Pension to SIPP?

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Original Poster:

39,686 posts

195 months

Monday 26th June 2017
quotequote all
I'm sure there's a flaw in his thinking somewhere but here goes...

A friend of mine has a Final salary DB pension scheme. The transfer value of his fund is quite high because (AIUI) it's based on current gilt yields or something which are ridiculously low and therefore the TV necessary to generate his pension needs to be quite large. He thinks he can get a better return by transferring the money into a SIPP and investing in equities and get a reasonable 4-5% income (obviously there would be more risk).

The other benefit of this would be that, should he pop his clogs, the SIPP transfers to his wife and she continues to get the same income (and then when she passes on it can be left to the kids). Whereas the DB scheme pays 50% of his pension to his wife and then nowt for the kids.

What are the downsides?

PurpleMoonlight

22,362 posts

156 months

Monday 26th June 2017
quotequote all
He only achieves 1% return and lives to be 108.

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Original Poster:

39,686 posts

195 months

Monday 26th June 2017
quotequote all
PurpleMoonlight said:
He only achieves 1% return and lives to be 108.
Fair point. But when he dies at 108 his wife (who will only be 95 at that stage) carries on receiving 1% and (after she passes on the kids get it....). basically it's a worst case scenario of 1% ad infinitum compared to 2/3% for between 1 month - 25 years.

Gilt rates (or however the yield is calculated) are only going to go up which will reduce his TV. That's why he's thinking "it's now or never...."

Gareth1974

3,408 posts

138 months

Monday 26th June 2017
quotequote all
Countdown said:
I'm sure there's a flaw in his thinking somewhere but here goes...

A friend of mine has a Final salary DB pension scheme. The transfer value of his fund is quite high because (AIUI) it's based on current gilt yields or something which are ridiculously low and therefore the TV necessary to generate his pension needs to be quite large. He thinks he can get a better return by transferring the money into a SIPP and investing in equities and get a reasonable 4-5% income (obviously there would be more risk).

The other benefit of this would be that, should he pop his clogs, the SIPP transfers to his wife and she continues to get the same income (and then when she passes on it can be left to the kids). Whereas the DB scheme pays 50% of his pension to his wife and then nowt for the kids.

What are the downsides?
This situation was discussed at length on the Radio 4 Moneybox programme last night - it should be available on iplayer. The pro's and con's were talked about, so it might be worth having a listen?

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Original Poster:

39,686 posts

195 months

Monday 26th June 2017
quotequote all
Gareth1974 said:
This situation was discussed at length on the Radio 4 Moneybox programme last night - it should be available on iplayer. The pro's and con's were talked about, so it might be worth having a listen?
Cheers - will take a look thumbup

ATG

20,480 posts

271 months

Monday 26th June 2017
quotequote all
If the TV is calculated fairly, then by definition remaining in the scheme or transferring out will be equally attractive to the average member. So one would need to check if the TV did indeed look fair and then consider the specific circumstances of the individual pension scheme members. Are they healthy? Do they have dependents? What's their risk appetite? Have they hankered after hookers and coke?

PurpleMoonlight

22,362 posts

156 months

Monday 26th June 2017
quotequote all
Countdown said:
Fair point. But when he dies at 108 his wife (who will only be 95 at that stage) carries on receiving 1% and (after she passes on the kids get it....). basically it's a worst case scenario of 1% ad infinitum compared to 2/3% for between 1 month - 25 years.

Gilt rates (or however the yield is calculated) are only going to go up which will reduce his TV. That's why he's thinking "it's now or never...."
Could he afford to live on 1% though?

The main benefits are flexibility and the possibility of a lump sum to leave to his children.

The disadvantage is the risk and the possibility of less income.

If the TV is over £30,000 he must seek independent financial advice before proceeding and may have to pay a fee for that. If the likelihood of that advice is not to transfer he will struggle to get the advice at all. The ceeding scheme will want the IFA to certify that advice has been given.

Derek Chevalier

3,942 posts

172 months

Monday 26th June 2017
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PurpleMoonlight said:
If the likelihood of that advice is not to transfer he will struggle to get the advice at all.
What makes you say that?

PurpleMoonlight

22,362 posts

156 months

Tuesday 27th June 2017
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Derek Chevalier said:
What makes you say that?
I work in financial services,

Derek Chevalier

3,942 posts

172 months

Tuesday 27th June 2017
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PurpleMoonlight said:
Derek Chevalier said:
What makes you say that?
I work in financial services,
Congratulations, but still not clear to me. Why would a fee based IFA not give advice?

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Original Poster:

39,686 posts

195 months

Tuesday 27th June 2017
quotequote all
PurpleMoonlight said:
Could he afford to live on 1% though?

The main benefits are flexibility and the possibility of a lump sum to leave to his children.

The disadvantage is the risk and the possibility of less income.

If the TV is over £30,000 he must seek independent financial advice before proceeding and may have to pay a fee for that. If the likelihood of that advice is not to transfer he will struggle to get the advice at all. The ceeding scheme will want the IFA to certify that advice has been given.
He could live on 1% but let's be honest, that's a "worst case scenario". A half-decent vanguard tracker should give him 2-3% income with capital growth (famous last words..... biggrin )

The main thing is the big age gap between him and his wife and the feeling that he could get an equivalent income to his DB pension with the added benefit of leaving money to his family. And it's a fairly large capital sum so even though he's not that bothered about the income, to lose several hundred K capital if he pops his clogs 1 month after retirement would be a tad annoying biggrin

Ginge R

4,761 posts

218 months

Tuesday 27th June 2017
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There are possibly, a dozen or so pretty good reasons to transfer/not to transfer. Leaving money to the family isn't at the top of the list marked 'safe reasons'. If used in splendid (semi) isolation, if bequeathing was that important, the Ombudsman would simply ask, 'Ok, did you advise life insurance'?

And the reason for that is that for the vast majority of people, a pension exists to provide a steady income stream, not a wedge of cash that can cause as many problems as it is intended to alleviate, unless handled correctly. All philosophical arguments about transferring must stem from that. I'm agnostic when it comes to the merits, or otherwise, of transferring.

But the overarching principle has to be Primum non nocere. First, do no harm.

FredClogs

14,041 posts

160 months

Tuesday 27th June 2017
quotequote all
I moved a DB into a personal pension and then into a SIPP, against advice, I believe I did the right thing,

a) because the sums of money involved were pretty small, it was from my first employer out of uni, I was there 5 years on a small salary so was entitled to 5/60ths of 25k a year assuming the company and pension scheme was still around, as the company was wound up and the mother corporation have shrunk it wasn't clear to me at the time quite how secure the fund was. And besides the £2k a year or whatever it was is not going to keep me in tartan blankets and wurthers originals, I was always going to need to do something else!

b) The transfer value was nearly £20k which is equivalent to about 10 years on the final salary but I figured I had nearly 30 years to grow that money through a more aggressive investment tactic, say I can triple that capital before I'm 65 (which is feasible) I should have the same equivalent cash to see me to 95, my family history on longevity is chequered.

PurpleMoonlight

22,362 posts

156 months

Tuesday 27th June 2017
quotequote all
Derek Chevalier said:
Congratulations, but still not clear to me. Why would a fee based IFA not give advice?
In one simple word, well three actually, professional indemnity insurance.

PI insurers are not keen on advisers providing negative transfer advice where the likelihood is that will enable the client to act contrary to the advice given.


Derek Chevalier

3,942 posts

172 months

Tuesday 27th June 2017
quotequote all
PurpleMoonlight said:
Derek Chevalier said:
Congratulations, but still not clear to me. Why would a fee based IFA not give advice?
In one simple word, well three actually, professional indemnity insurance.

PI insurers are not keen on advisers providing negative transfer advice where the likelihood is that will enable the client to act contrary to the advice given.
Interesting, thank you.