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My wife is about 17 months away from taking her DB pension.
She's just had an update and had the details of transfer value, yearly payout, and yearly payout with 25% lump sum options.
Now the lump sum figure stated only works out to 15% of the transfer value.
Can someone please explain what I'm missing?
Thanks
Yes there's a different way of working out the lump sum which as youve found out isn't 25%Quote:
Originally Posted by Nigel306
Do you know her commutation factor ?
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Defined benefit works out differently because the benefit is defined. Therefore if she takes the lump sum its not like a traditional pension scheme where an amount of money is assigned to the rest. Yes the benefit is reduced but it's still a much better deal than the equivalent annuity so it's transfer value is increased due to the company wanting to get off the hook for the defined benefit which will cost them more.
We'd quickly read through the notes with it but didn't see that.Quote:
Originally Posted by RD200
We'd just assumed the lump sum value would be 25% of the pot.
More reading required I think.
Ok thank you.Quote:
Originally Posted by jjgreenwood
Not as straightforward as we'd imagined.
I would look at the figures very carefully, and consider getting advice or at least speaking to someone knowledgeable before taking the lump sum on a DB if you aren't sure.
It can be confusing but a DB pension doesn’t have a “pot”. You will have been quoted a CETV (Cash Équivalent Transfer Value) and IF you were to transfer in lieu of a DB pension (generally not a good idea) then you can take 25% of that CETV once transferred to a SIPP or personal pension. Taking the transfer is not a good idea for most and if it is over £30000 you need to take advice from a suitably qualified IFA.Quote:
Originally Posted by Nigel306
Thanks Craig, she wasn't going to transfer, just weighing up if to take the lump sum or not.Quote:
Originally Posted by craig1912
The difference between lump sum or no lump sum yearly pension figures, would take 26 years to make up.
Pity it wasn't 25% of the CETV, it would have been a no brainer to have the lump sum.
Thanks.Quote:
Originally Posted by Omegamanic
Really only just started looking at this and found it initially confusing, but we'll get there.
If you know the commutation factor the rough equation isQuote:
Originally Posted by Nigel306
Annual pension × comm factor ÷ ( 0.15 × comm factor +1)
ie a salary of £20,000 and comm factor of 20 works out at £100,000 tfls
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A massive and incorrect generalisation.Quote:
Originally Posted by craig1912
As it's a generalisation, it's correct some of the time!!Quote:
Originally Posted by Skyman
Many thanks for that.Quote:
Originally Posted by RD200
We're not at home till next week but will look once back.
Appreciated.
It’s not and if you aren’t aware of the facts perhaps you shouldn’t comment with such certainty.Quote:
Originally Posted by Skyman
The FCA is looking at transfers and it’s doesn’t look a good picture. There are already huge amounts of compensation being paid to people who have been persuaded to transfer from a DB scheme. Giving up certainty of increasing income is not a good idea for most people.
I said most people not all and you’ll find that there aren’t many advisors around who will actually offer advice on transfers any more and if they do will charge a high amount due to PI insurance costs.
I did a transfer by the way and am happy but it really is only suitable for a minority of people.
It's fair to say that traditionally the golden rule was never to transfer your DB scheme, however with Pension freedom things have changed.
For some people it is right whether it be flexibility, death benefits, higher tax free cash, taking control not risk adverse etc.
Another thing to consider is a vast number of DB schemes are underfunded so we have seen Trustees enhancing transfer values to off load long term liabilities.
As has been said take advice, let someone run the figures and factor in why you may want to transfer.
I didn't see anything wrong with your post.Quote:
Originally Posted by craig1912
You stated that the op would need to see an IFA who specialises in final salaries if the pension is worth more than 30k.
Also you said it wouldn't suit everybody and I'm in that bracket as although the sum is big it isn't massive.
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It’s pension freedoms that have caused the problem as previously you couldn’t transfer a DB scheme.Quote:
Originally Posted by nick67
The FCA insist advisors start with the premise that a transfer would be unsuitable and for the majority of people this is correct.
I took a transfer as you point out there are some quite generous CETV out there but for the majority of people they are better off staying where they are with a guaranteed pension that increases every year
Wife’s just retired and she took what lump sum she could with a reduced ongoing pension. The lump sum will pay for lots of holidays and things we want to do over the next 10/15 years whilst we are in good health to do them.Quote:
Originally Posted by Nigel306
I like that.Quote:
Originally Posted by craig1912
Its all about how many years of good health and quality of life we'll enjoy, to me.
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I did a partial transfer out of a DB pension. For me the key decider was flexibility. An indexed escalating "final salary" pension doesn't suit my plans so I took roughly half as a transfer into a drawdown scheme and the other half is still in the DB scheme pending my retirement.
The transfer enabled me to release a large wad of tax free cash which I used on a building project and doubled my money in two years and put back into my own property. The drawdown will be used to top up my DB pension to around 70/80% of current income when I retire (I'm still working) and fill the gap of £8,800 pa until the state pension kicks in. The drawdown can then be reduced by that amount and then in more advanced years reduced as my need for cars, boats, watches reduces.
I've also had a major health scare recently (the big C) so flexibility in pension is even more important.
I also intend to downsize my property once the market is back in shape, that will release more money to enjoy (which was originally fed from my tax free cash).
A straightforward DB scheme would not have suited my needs, the backstop of a reduced DB and state pension with a flexible top up from a drawdown pot is perfect for my needs.
Ideally at some time in the future I'd like the doctor to tell me I have a week to live at the same time my financial consultant tells me I've run out of money!
This is something I am keeping a very close eye on even though I am 7 years off 55. I too am in a DB pension but am trying to plan for the future. For every year I retire under 65 i lose 3% so, leaving at 55 I'll lose 30%. When I look at the predicted pension at 55 (25k) my CETV (875k) so 35 times my pension which essentially means I would need to live until 95 to 'break even'. I think it far better currently to convert my reduced DB pension to a CETV and manage myself. I doubt very much later years in life I'll need as much so would taper the drawdown accordingly. Another factor is I too had had a serious health scare (lymphoma, 4 months hospital based chemotherapy) but now all clear so would much prefer to keep a hold of the cash as otherwise my spouse would get a reduced pension and ultimately the money disappears after she dies. These are all current projected figures on my pension but (at the moment) I can only see the CETV increase.
This way we have control of a sizeable pot of money which we control and can be inherited. That's my current thoughts but happy to have things pointed out if i've missed.
Don’t forget the effects of inflation and the fact your DB pension will increase each year.
I’m not saying CETV is not the way to go (I took one at 58) but you may wish to look at a partially transfer as broxie has done which gives the best if both worlds- a guaranteed pension and some flexibility. If you have had health issues an impaired life annuity maybe another option.
Whatever you think, you will need to pay for professional advice and this could cost roughly 3% of your CETV and finding someone to take you own won’t necessarily be easy. Less and less advisors are wanting to do DB transfers due to the increases in PI insurance andFCA spotlight.
As an active advisor practicing in the area, as simple or indeed difficult as it may seem, the most important consideration is always your aspirations or objectives this can be challenging to objectify but there is far too much subjective consideration of the numerical 'value' provided by DB options.
Everyone will be different.
Still reading about this, but difficult at moment as only limited internet access.
I can understand the majority say not to transfer from DB pension.
But the difference between taking 25% of the DB pension, compared to transferring the CETV figure and then being able to take 25% of that, almost doubles the lump sum figure.
Unless I'm missing something again that's a massive incentive for transfer..... But I'm still researching.
The TFLS from my final salary was just over half of the amount I'd get if I transferred out and then took the TFLS, based on my last CETV quote.Quote:
Originally Posted by Nigel306
Yes there's a big difference.
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See S.32Quote:
Originally Posted by craig1912
Yep I forgot about those (I did have one at one time) but to be fair they weren’t anywhere near as prolific (although I’m sure there were was a lot missold) and did ensure they paid out at least the GMP so there was some element of guarantee.Quote:
Originally Posted by Tifa
S.32 ?Quote:
Originally Posted by Tifa
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That is all agreed, however from experience of two transfer cases in the last year, advisor rate is between 0.8 and 1.3%. Typically they work on a sliding scale. These rates are based on a high six figure and a seven figure CETV respectively.Quote:
Originally Posted by craig1912
Thanks very much guys lots of food for thought. I will follow this with interest over the coming years. I know of folk in work with on similar salaries but with more service so would expect the CETV value to be closer to 1.25-1.5m in 8 years. For the drawdown I anticipate a pessimistic investment return of ~2% and anything above that a bonus.
Finally another factor at the moment is the advertised change in pensionable age increasing to 57 in 2028. I turn 55 in 2027 so depends whether the change will be tapered or a hard cutoff but I know what I'm hoping for!
I need to do this, 35 years in Uni pension & 55 next year.Quote:
Originally Posted by Omegamanic
Wonder what CETV values would be like......?
Yep fair enough - think i paid about 0.4% on a large six figure sum. But rates can only be going up and definitely a reduced choice of advisor offering a service to transfer.Quote:
Originally Posted by Skyman
Current final salary dependant and the terms of your scheme. At £75k pa, say £1.25m, but that is corporate world not academia.Quote:
Originally Posted by g40steve
As you rightly say, advisor rates have doubled (and plus) during that period and indeed some have withdrawn from the market completely owing to increased FCA governance and PI related costs.Quote:
Originally Posted by craig1912
I'm still doing limited research on this, but overwhelming opinion seems to be don't transfer out of a DB pension.
But reading on the matter for taking CETV would be way increased 25% lump sum which would make life much easier as she now has to wait till 67 for state pension.
Pension pot could then be passed on through family if unfortunate enough not to make it through to old age, against losing it all in the DB.
More thoughts appreciate please.
My CETV value has gone up 22% in 12 months apparently due to the returns on gilts. Last year the advice was not to transfer out but how much do CETV values have to increase by before this stops being the default point of view? My CETV is 36x my current pension so definitely seems worth considering.
there’s no level where the cetv makes it worthwhile to transfer. It’s all down to individual circumstances which is why you need professional advice. It may well be worth considering but you also need to find someone that will help you at a reasonable costQuote:
Originally Posted by Maris
Mine went up by about a 1/7 and the multiple is up to about x36.Quote:
Originally Posted by Maris
Hopefully the next CETV quote I get will be similar.
Anybody any ideas on what effect a no deal Brexit will have on CETV's, if any ?
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The wife's is at about x36 as well, seems to be a trend.
Will have to keep an eye on it.
Some have been up to 60x but 32x is more the norm.Quote:
Originally Posted by Nigel306
Fingers [emoji1696]
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Just an update on this.......
CETV value dropping significantly over the last 2 months on my wife's pension.
Contacting a couple of transfer specialists the fees to transfer out were 2.85%, the other 3% which I think it's a total rip off.
Reading the pension contact, says CETV can not be taken once the last year before NRD begins, so she's got 3 months at most to take it, otherwise CETV is out of the question anyway.
Tideway charge 1% but this is contingent on them managing your money once transferred, they use the AJ Bell platform but charge about 1.8% PA all in which is quite high. The FCA are looking at stopping contingent charging next year so there’ll probably be even less DB advisors and those that are willing to advise will probably charge 3% which you’ll have to pay upfront, not out of the pot once transferred like you can do now.Quote:
Originally Posted by Nigel306
Thanks, just gone on their site and like you say 1% transfer and 1.7% ongoing fees. Also sliding scale exit fees for 6 years to stop exiting once transfer completed.Quote:
Originally Posted by Maris
Looking ideally at a reasonable priced positive or even a negative from a transfer specialist, as AJ Bell will accept either.
When I looked at their charges the sliding scale exit fee was for an expensive competitor. They say you can move without significant cost but don't actually say what that cost is.Quote:
Originally Posted by Nigel306