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Thread: Pension tax free lump sum.

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  1. #1
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    Pension tax free lump sum.

    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

  2. #2
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    Quote Originally Posted by Nigel306 View Post
    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%
    Do you know her commutation factor ?

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  3. #3
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    Quote Originally Posted by RD200 View Post
    Yes there's a different way of working out the lump sum which as youve found out isn't 25%
    Do you know her commutation factor ?

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    We'd quickly read through the notes with it but didn't see that.
    We'd just assumed the lump sum value would be 25% of the pot.
    More reading required I think.

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    Quote Originally Posted by Nigel306 View Post
    We'd quickly read through the notes with it but didn't see that.
    We'd just assumed the lump sum value would be 25% of the pot.
    More reading required I think.
    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.

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    Quote Originally Posted by craig1912 View Post
    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.
    Thanks Craig, she wasn't going to transfer, just weighing up if to take the lump sum or not.
    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.

  6. #6
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    Quote Originally Posted by Nigel306 View Post
    Thanks Craig, she wasn't going to transfer, just weighing up if to take the lump sum or not.
    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.
    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.

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    Quote Originally Posted by craig1912 View Post
    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.
    A massive and incorrect generalisation.

  8. #8
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    Quote Originally Posted by Skyman View Post
    A massive and incorrect generalisation.
    As it's a generalisation, it's correct some of the time!!

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    Quote Originally Posted by Skyman View Post
    A massive and incorrect generalisation.
    It’s not and if you aren’t aware of the facts perhaps you shouldn’t comment with such certainty.

    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.

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    Quote Originally Posted by Nigel306 View Post
    We'd quickly read through the notes with it but didn't see that.
    We'd just assumed the lump sum value would be 25% of the pot.
    More reading required I think.
    If you know the commutation factor the rough equation is

    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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  11. #11
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    Quote Originally Posted by RD200 View Post
    If you know the commutation factor the rough equation is

    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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    Many thanks for that.
    We're not at home till next week but will look once back.
    Appreciated.

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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.

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    Quote Originally Posted by jjgreenwood View Post
    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.
    Ok thank you.
    Not as straightforward as we'd imagined.

  14. #14
    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's just a matter of time...

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    Quote Originally Posted by Omegamanic View Post
    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.
    Thanks.
    Really only just started looking at this and found it initially confusing, but we'll get there.

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    Quote Originally Posted by Omegamanic View Post
    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.
    I need to do this, 35 years in Uni pension & 55 next year.
    Wonder what CETV values would be like......?

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    Quote Originally Posted by g40steve View Post
    I need to do this, 35 years in Uni pension & 55 next year.
    Wonder what CETV values would be like......?
    Current final salary dependant and the terms of your scheme. At £75k pa, say £1.25m, but that is corporate world not academia.

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    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.

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    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.

  20. #20
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    Quote Originally Posted by Nigel306 View Post
    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.
    Yes there's a big difference.

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    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.

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    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.

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    Quote Originally Posted by Maris View Post
    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 cost

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    Quote Originally Posted by Maris View Post
    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.
    Mine went up by about a 1/7 and the multiple is up to about x36.

    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.

  26. #26
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    Quote Originally Posted by Nigel306 View Post
    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.
    Fingers

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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.

  28. #28
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    Quote Originally Posted by Nigel306 View Post
    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.

  29. #29
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    Quote Originally Posted by Maris View Post
    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.
    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.
    Looking ideally at a reasonable priced positive or even a negative from a transfer specialist, as AJ Bell will accept either.

  30. #30
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    Quote Originally Posted by Nigel306 View Post
    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.
    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.

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