Move DB Pension to SIPP?
Discussion
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?
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 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...."
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..... 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.
)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
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