Defined Benefit Pension sense check
Discussion
Could someone give me a sense check on the numbers below please
My wife turns 60 soon and a very old DB company scheme has written to her saying that she is not eligble for her DB payments with no increase in denefits if she chooses to wait.
The numbers are as follows
Transfer value £453k
Annual pension £15.3k rising 5% per year (no more and no less)
Half goes to spouse on death (I am 55)
So roughly we are looking at 3.3% per year on the pot .. does not seem great value?
Taking tax free lump sum out of £69.7k then reduces annual pension to £10.42k per year so yield then drops to 2.7%.
So taking tax free lump sum seems madness as it drops the annual pension by so much
I think I could do better in a mixed fund or an i underestimating the value of the guranteed annual 5% increase in annual pension per year?
I should say that this is not her only pension. The other pension comes to only approx £400k fund value at moment and is defined contribution SIPP.
thanks in advance
My wife turns 60 soon and a very old DB company scheme has written to her saying that she is not eligble for her DB payments with no increase in denefits if she chooses to wait.
The numbers are as follows
Transfer value £453k
Annual pension £15.3k rising 5% per year (no more and no less)
Half goes to spouse on death (I am 55)
So roughly we are looking at 3.3% per year on the pot .. does not seem great value?
Taking tax free lump sum out of £69.7k then reduces annual pension to £10.42k per year so yield then drops to 2.7%.
So taking tax free lump sum seems madness as it drops the annual pension by so much
I think I could do better in a mixed fund or an i underestimating the value of the guranteed annual 5% increase in annual pension per year?
I should say that this is not her only pension. The other pension comes to only approx £400k fund value at moment and is defined contribution SIPP.
thanks in advance
There is no 'pot' with a DB scheme so there's no 'yield'.
DB pensions are a committment by the pension to pay an annual pension, with capped inflation increases along with a spouse's pension entitlement.
The transfer value relates to how much the pension company will pay your wife to release themselves from that committment, however it is next to impossible to enact because it requires a positive recommendation from an IFA to do so and there is huge regulatory risk around that.
Generally DB tax free lump sums are bad value although many taken them because they need the money or haven't done the sums. Losing £5k per year for a £70k lump sum doesn't sound great.
DB pensions are a committment by the pension to pay an annual pension, with capped inflation increases along with a spouse's pension entitlement.
The transfer value relates to how much the pension company will pay your wife to release themselves from that committment, however it is next to impossible to enact because it requires a positive recommendation from an IFA to do so and there is huge regulatory risk around that.
Generally DB tax free lump sums are bad value although many taken them because they need the money or haven't done the sums. Losing £5k per year for a £70k lump sum doesn't sound great.
A lot of DB schemes work on around one twelfth of the tax free lump sum as a reduction in yearly payments (eg give up 5k per year for a 60k lump sum). Your figures look more like a fourteenth so not quite so generous.
If you then take into account the fixed 5% annual increase the tax free lump sum looks even less appealing. A 5% increase will mean the income figure doubles every 14 and a bit years.
The only reasons I'd consider taking the tax free lump sum at those figures.
a) You've something you want to spend it on right now.
b) You consider the tax savings worth it, depending on other income/future income and the amount of tax you'll be paying.
c) You're in poor health and unlikely to be here in 14 years.
If you then take into account the fixed 5% annual increase the tax free lump sum looks even less appealing. A 5% increase will mean the income figure doubles every 14 and a bit years.
The only reasons I'd consider taking the tax free lump sum at those figures.
a) You've something you want to spend it on right now.
b) You consider the tax savings worth it, depending on other income/future income and the amount of tax you'll be paying.
c) You're in poor health and unlikely to be here in 14 years.
Royal Jelly said:
The transfer value suggests to me you can take that DB income indefinitely from a SIPP, and never lose the 450k principal.
And that's why you're not a financial adviser...You're not just taking £15.3k each year to match the scheme income. Every year you're taking 5% more than the last year! With a 5%pa net return you'd be depleted by 30 years.
jfdi said:
A lot of DB schemes work on around one twelfth of the tax free lump sum as a reduction in yearly payments (eg give up 5k per year for a 60k lump sum). Your figures look more like a fourteenth so not quite so generous.
Your post is correct on the whole. However, a higher commutation factor is better. Getting £14 one off is better than getting £12 for £1 of lifetime annual income that's commuted.Most public sector schemes are 12:1 but on the private ones they're usually higher. 14 is miserly, especially considering what you're giving up with a 5%pa compound increase.
PeterTTT said:
So roughly we are looking at 3.3% per year on the pot .. does not seem great value?
...am I underestimating the value of the guranteed annual 5% increase in annual pension per year?
Yes, you are....am I underestimating the value of the guranteed annual 5% increase in annual pension per year?
See earlier post about there not being a pot as such.
It might be 3.3% initially but if you get an average 5%pa return on your original transfer value then by year 10 you're having to take over 5% from it to match the scheme income and by year 20 it'd be over a 10% draw on what's left to match the DB income.
PistonHead007 said:
Yes, you are.
See earlier post about there not being a pot as such.
It might be 3.3% initially but if you get an average 5%pa return on your original transfer value then by year 10 you're having to take over 5% from it to match the scheme income and by year 20 it'd be over a 10% draw on what's left to match the DB income.
Your 450k pot will also be invested, and in all likelihood, growing while withdrawing from it. See earlier post about there not being a pot as such.
It might be 3.3% initially but if you get an average 5%pa return on your original transfer value then by year 10 you're having to take over 5% from it to match the scheme income and by year 20 it'd be over a 10% draw on what's left to match the DB income.
I’d also sacrifice the income security for the prospect of not losing 50/100% off the value when death occurs. If you’re generating a 5% return, you can draw 4%, and increase by 5% each year indefinitely without touching the principal.
Or, another way, with a 450k pot at 6% return, you can draw down a fixed 2850 a month from age 65-90. Thats 34k a year. So you can save and reinvest the 19k difference to the 15k DB starting point.
I’m not suggesting anything (ignoring the difficulty in the even finding an IFA to do it) but to my mind, a healthy CETV is my preferred option. That’s based on my circumstances.
Edited by Royal Jelly on Friday 13th September 10:49
Edited by Royal Jelly on Friday 13th September 10:51
PistonHead007 said:
Your post is correct on the whole. However, a higher commutation factor is better. Getting £14 one off is better than getting £12 for £1 of lifetime annual income that's commuted.
Most public sector schemes are 12:1 but on the private ones they're usually higher. 14 is miserly, especially considering what you're giving up with a 5%pa compound increase.
Yep, Logic fail on my part. It's Friday that's my excuse Most public sector schemes are 12:1 but on the private ones they're usually higher. 14 is miserly, especially considering what you're giving up with a 5%pa compound increase.
Agreed the 14 is miserly, that fixed 5% increase makes a lot of difference, especially when inflation is well below it.
Royal Jelly said:
Your 450k pot will also be invested, and in all likelihood, growing while withdrawing from it.
Or, another way, with a 450k pot at 6% return, you can draw down a fixed 2850 a month from age 65-90. Thats 34k a year. So you can save and reinvest the 19k difference to the 15k DB starting point.
Then you're not comparing like for like. One's a guaranteed risk free income that you can keep on taking with 5% more each year, the other is open to loss and running out. If you're minted and can take a lot more risk then maybe you'll win, maybe you won't. Certainty and security come at a cost. Or, another way, with a 450k pot at 6% return, you can draw down a fixed 2850 a month from age 65-90. Thats 34k a year. So you can save and reinvest the 19k difference to the 15k DB starting point.
b
hstewie said:
hstewie said: Outside of some very specific personal circumstances how is any reputable advisor going to sign off transferring that?
They won't reccomed it, been there, got the Tshirt, the book, the DVD.
The Trustees of the DB scheme may also advise against it.
As regards the TFCS, the reduction in pension is £4.88k per year, thats roughly £400 a month pre tax, not a hugh amount.
If it were me, take the £69.7k and enjoy it whilst your still young.
£400k is a fairly healthy fund. Mine is currently £590, in the last year I've had a net gain of £50k, that's taking into account fees etc and withdrawing £30k income. These are in "low risk" investments
Some people on here don't like IFA's for whatever reason, I'm more than happy with mine
LeoSayer said:
There is no 'pot' with a DB scheme so there's no 'yield'.
DB pensions are a committment by the pension to pay an annual pension, with capped inflation increases along with a spouse's pension entitlement.
The transfer value relates to how much the pension company will pay your wife to release themselves from that committment, however it is next to impossible to enact because it requires a positive recommendation from an IFA to do so and there is huge regulatory risk around that.
Generally DB tax free lump sums are bad value although many taken them because they need the money or haven't done the sums. Losing £5k per year for a £70k lump sum doesn't sound great.
Agree with this. They are expensive to run, which is why most private sector ones disappeared decades ago. That transfer amount will be far more than she would have gotten paying the same into a DC scheme.DB pensions are a committment by the pension to pay an annual pension, with capped inflation increases along with a spouse's pension entitlement.
The transfer value relates to how much the pension company will pay your wife to release themselves from that committment, however it is next to impossible to enact because it requires a positive recommendation from an IFA to do so and there is huge regulatory risk around that.
Generally DB tax free lump sums are bad value although many taken them because they need the money or haven't done the sums. Losing £5k per year for a £70k lump sum doesn't sound great.
What you get paid annually is based on years service and final salary only.
If you work all forty years and retire on £60k, you will get 40/60ths of your final salary. £40k PA
However, if you only work 20 years and your salary upon leaving the scheme early was £30k you’ll get 20/60ths of that. £10k. I
Royal Jelly said:
Your 450k pot will also be invested, and in all likelihood, growing while withdrawing from it.
I’d also sacrifice the income security for the prospect of not losing 50/100% off the value when death occurs. If you’re generating a 5% return, you can draw 4%, and increase by 5% each year indefinitely without touching the principal.
Or, another way, with a 450k pot at 6% return, you can draw down a fixed 2850 a month from age 65-90. Thats 34k a year. So you can save and reinvest the 19k difference to the 15k DB starting point.
I’m not suggesting anything (ignoring the difficulty in the even finding an IFA to do it) but to my mind, a healthy CETV is my preferred option. That’s based on my circumstances.
Its a moot point given there would be costs involved in getting someone to asses this, even if it was signed off (cant see it happening) then costs/fees on the pot associated with migrating it then the stress of managing this pot to give at least a return that hits a 5% of annual return on pension baseline plus depletion and income drawdown after the initial transition fees.I’d also sacrifice the income security for the prospect of not losing 50/100% off the value when death occurs. If you’re generating a 5% return, you can draw 4%, and increase by 5% each year indefinitely without touching the principal.
Or, another way, with a 450k pot at 6% return, you can draw down a fixed 2850 a month from age 65-90. Thats 34k a year. So you can save and reinvest the 19k difference to the 15k DB starting point.
I’m not suggesting anything (ignoring the difficulty in the even finding an IFA to do it) but to my mind, a healthy CETV is my preferred option. That’s based on my circumstances.
Edited by Royal Jelly on Friday 13th September 10:49
Edited by Royal Jelly on Friday 13th September 10:51
Many thanks for the input from all.
My wife and I are lucky enough to be relatively comfortable financially so this is not our only source of future income by a reasonable margin.
I am used to investing in equities (occasionally bonds) and experiencing the ups and downs of valuations and possible incomes.
I can see how it would not be too difficult for a transfer value of £450k into a SIPP to provide us a better income overall for the rest of our lives that that which is being guranteed plus the potential to actually leave any left over to our children and possible grandchildren in the future.
Having said all this, all who have said good luck getting a Financial advisor that can sign off on it are 100% right .. I had heard that trasfers out of DB schemes were difficult but had thought given our reasonable overall experience and assets we might have found it easier.
Worst case scenario this guaranteed income acts as some sort of cushion against all the other assets we have in our SIPPs and ISAs that do not come with any future guarantee!
My wife and I are lucky enough to be relatively comfortable financially so this is not our only source of future income by a reasonable margin.
I am used to investing in equities (occasionally bonds) and experiencing the ups and downs of valuations and possible incomes.
I can see how it would not be too difficult for a transfer value of £450k into a SIPP to provide us a better income overall for the rest of our lives that that which is being guranteed plus the potential to actually leave any left over to our children and possible grandchildren in the future.
Having said all this, all who have said good luck getting a Financial advisor that can sign off on it are 100% right .. I had heard that trasfers out of DB schemes were difficult but had thought given our reasonable overall experience and assets we might have found it easier.
Worst case scenario this guaranteed income acts as some sort of cushion against all the other assets we have in our SIPPs and ISAs that do not come with any future guarantee!
PeterTTT said:
Worst case scenario this guaranteed income acts as some sort of cushion against all the other assets we have in our SIPPs and ISAs that do not come with any future guarantee!
This.Use the DB income for paying the bills and then spend the other stuff more freely/take more risk than you might otherwise on at least some of the investments.
PeterTTT said:
Many thanks for the input from all.
My wife and I are lucky enough to be relatively comfortable financially so this is not our only source of future income by a reasonable margin.
I am used to investing in equities (occasionally bonds) and experiencing the ups and downs of valuations and possible incomes.
I can see how it would not be too difficult for a transfer value of £450k into a SIPP to provide us a better income overall for the rest of our lives that that which is being guranteed plus the potential to actually leave any left over to our children and possible grandchildren in the future.
Having said all this, all who have said good luck getting a Financial advisor that can sign off on it are 100% right .. I had heard that trasfers out of DB schemes were difficult but had thought given our reasonable overall experience and assets we might have found it easier.
Worst case scenario this guaranteed income acts as some sort of cushion against all the other assets we have in our SIPPs and ISAs that do not come with any future guarantee!
I've got a similar situation, but with a much smaller DB pension. Too much hassle to try to transfer it to a SIPP, so we just view it as a few £K of guaranteed income a year as part of a wider portfolio. I also didn't take the tax free sum as a) I didn't need it and b) it made a big difference to the monthlies.My wife and I are lucky enough to be relatively comfortable financially so this is not our only source of future income by a reasonable margin.
I am used to investing in equities (occasionally bonds) and experiencing the ups and downs of valuations and possible incomes.
I can see how it would not be too difficult for a transfer value of £450k into a SIPP to provide us a better income overall for the rest of our lives that that which is being guranteed plus the potential to actually leave any left over to our children and possible grandchildren in the future.
Having said all this, all who have said good luck getting a Financial advisor that can sign off on it are 100% right .. I had heard that trasfers out of DB schemes were difficult but had thought given our reasonable overall experience and assets we might have found it easier.
Worst case scenario this guaranteed income acts as some sort of cushion against all the other assets we have in our SIPPs and ISAs that do not come with any future guarantee!
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