DB Pension v taking transfer amount
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I have built a micro-site including an estimation of the commercial value of a defined benefit pension and guide to issues for consideration
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Planning for Retirement - Everlake
Retirement is a life changing event requiring a professional assessment of the life you want to live and a clear strategy of how to get there.
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Dave Vanian
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I have built a micro-site including an estimation of the commercial value of a defined benefit pension and guide to issues for consideration
Planning for Retirement - Everlake
Retirement is a life changing event requiring a professional assessment of the life you want to live and a clear strategy of how to get there.
It appears that you have to register and leave your contact details with Global Wealth to access much of this content, including the calculator.
It's not really in the spirit of the forum, is it?
Hi,
If you are considering taking a transfer value, then the key question that you need to ask yourself is, how much of a lump sum would be needed in today's money, to pay you €6k pa for life.
There are various considerations, such as the future impact of inflation on your fund, what the likely annual risk free growth rate might be (after charges) and how long you expect to live for.
If I were doing a "back of an envelope" calculation, I would be suggesting that you take €6k pa and multiply it by 35 times, to get the lump sum that I would be asking for, as a transfer value. However, from what I've heard, most people are only being offered 27-30 times the annual pension - which I personally wouldn't move for.
Remember, your €6k pa is guaranteed for life, so don't give it away too cheap.
Gordon Gekko
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Hi Mr Earl,
I’d nearly always take the transfer value (once I’d exhausted all discussion about any potential top-up).
Personally, I don’t like the idea of being reliant on a promise from a company.
And I consider the succession planning aspects hugely relevant. Say I’m going to get €30k a year, with €15k a year thereafter for my surviving spouse, and then the money disappearing on her death.
I much prefer the idea of having €1m in a Buy Out Bond, taking my lump sum, having €750k in my ARF and a 4%/€30k annual distribution for me, that being maintained for my surviving spouse, and there being €750k for the kids if at least the nominal value of the ARF can be maintained.
All the best,
Gordon
(PS when I typed in the word that’s normally used to describe an increase in a transfer value, the website blocked it out; obviously what men try to do with certain parts of their body when they ‘shop online’ and what DB pension holders want their counterparty to do if their transferring are the same!)
I’d nearly always take the transfer value (once I’d exhausted all discussion about any potential top-up).
Personally, I don’t like the idea of being reliant on a promise from a company.
And I consider the succession planning aspects hugely relevant. Say I’m going to get €30k a year, with €15k a year thereafter for my surviving spouse, and then the money disappearing on her death.
I much prefer the idea of having €1m in a Buy Out Bond, taking my lump sum, having €750k in my ARF and a 4%/€30k annual distribution for me, that being maintained for my surviving spouse, and there being €750k for the kids if at least the nominal value of the ARF can be maintained.
All the best,
Gordon
(PS when I typed in the word that’s normally used to describe an increase in a transfer value, the website blocked it out; obviously what men try to do with certain parts of their body when they ‘shop online’ and what DB pension holders want their counterparty to do if their transferring are the same!)
U.K. regulator FCA position on transfers from a defined benefit pension
Risks of transferring
If you transfer from a DB scheme to a DC scheme, you:
Risks of transferring
If you transfer from a DB scheme to a DC scheme, you:
- lose the guaranteed lifetime income from your DB scheme, for you and your dependants
- lose the inflationary protections offered by your DB scheme
- have to pay a DC scheme, and investment managers, to manage your pension and the investments in it, which is deducted from your pension pot
- have to decide how to invest your money, or pay someone to do it for you
- may see your pension pot fall in value, as well as rise
- may have less income in retirement, particularly if the value of your pension pot falls
- may run out of money in your lifetime
Who is least suited to a transfer?
A transfer is probably not for you if:- this is your main or only pension
- you will rely on income from this pension throughout your retirement
- your DB pension meets your needs, so you don’t need to invest in assets that might go down in value
- you have dependants who might prefer some of the DB pension features, such as a guaranteed income rather than a lump sum
- You may be less suited to a transfer if you cannot accept a lower income. For example, you may be considering a transfer because some of the features of a DC pension scheme appeal to you, such as flexibility or control of your money or better death benefits. But having these features often means having to compromise in other areas, such as the level of income you can take. This means you might struggle to achieve the retirement you want, for example if you want:
- a higher tax-free lump sum you will have to take a lower income from your pension
- to retire early in a DC scheme, you will be responsible for setting a lower level of income so that your money can last for longer
- control of your money you will need to manage your investments and pay charges which will reduce the amount in your pension pot
- You may be less suited to a transfer if there are alternative options available to achieve the goals you want to achieve. For example, if you want your family to inherit your pot on your death, you need to remember that by the time you die, you may have spent a lot of the money. Most people near retirement today will live well into their 80s, with many surviving into their 90s. If you want to protect your family financially, you could consider buying life insurance instead.
Who is best suited to a transfer?
Most DB scheme members who would benefit from a transfer do not rely only on their DB scheme to meet their income needs and will usually have other sources of retirement income. For example, they may have other pensions and investments. Alternatively, they may be managing income for wealth or tax planning by taking it sooner or later, in a way that does not impact on their ability to meet expenditure needs throughout retirement.
If you have a limited life expectancy, you want your family to be financially secure on your death. If you transfer, you may be able to get more value from a transfer for yourself and your family than if you stay in a DB scheme. But you should also consider whether you and your dependants would be better off with the guaranteed income from a DB scheme.
There may be rare occasions when those in serious financial difficulty could benefit from a transfer. But this will generally mean sacrificing long term security for short term gain.
What to avoid- don’t make decisions about your pension quickly – take your time to make sure you understand the risks
- don't transfer just because your colleagues are doing the same
- don’t talk to companies who contact you out of the blue offering to talk about your pension options or take anonymous, uninsured well-meaning advice from online forums
- avoid scams and unusual investments, marketed by people or companies who tell you they can give you higher returns or early access to your pension
Marc’s post above accurately sums up the issues.
If the DB Pension is going to be your main income in retirement (and you are in good health), its probably not a good idea to take a Transfer Value.
If on the other hand the particular DB pension (perhaps from an earlier employment) is small and not financially significant, then a TV might be considered (depending on the multiple offered).
Unfortunately (in my opinion) there are a number of organisations encouraging DB members to take TV’s suggesting that they can earn significant returns in ARF type products (or transferring the fund to some foreign location with the promise of better taxation results). The reality for most retirees (not all) is that they tend to be “risk averse” in retirement and in the current investment world that means it’s difficult to earn a positive return after all charges.
The other issue which is often overlooked is “longevity”. For a male retiring at say age 65, their average life expectancy is c20 years (about 4 years more for females). But the chances of making it to age 90 is c 50%. So a “guaranteed DB pension (assuming the DB fund remains solvent) is a very valuable asset. Taking a TV and then having to invest the fund, take investment risk etc is more challenging than many anticipate.
Not a decision to be rushed.
If the DB Pension is going to be your main income in retirement (and you are in good health), its probably not a good idea to take a Transfer Value.
If on the other hand the particular DB pension (perhaps from an earlier employment) is small and not financially significant, then a TV might be considered (depending on the multiple offered).
Unfortunately (in my opinion) there are a number of organisations encouraging DB members to take TV’s suggesting that they can earn significant returns in ARF type products (or transferring the fund to some foreign location with the promise of better taxation results). The reality for most retirees (not all) is that they tend to be “risk averse” in retirement and in the current investment world that means it’s difficult to earn a positive return after all charges.
The other issue which is often overlooked is “longevity”. For a male retiring at say age 65, their average life expectancy is c20 years (about 4 years more for females). But the chances of making it to age 90 is c 50%. So a “guaranteed DB pension (assuming the DB fund remains solvent) is a very valuable asset. Taking a TV and then having to invest the fund, take investment risk etc is more challenging than many anticipate.
Not a decision to be rushed.
Agree with Marc (& others)
I have a DB pension from a previous job that is currently worth €12k/yr. I wanted to take the money out & merge it with my current DC pension. After talking to a friend who is in the industry, he said the cost of buying a 12k Annuity would be in the region of €300-320k. Happy Days!! So I went to pension provider to get a TV for my 12k pension. They offered me €124k -- I was shocked, what a miserable offer....
The offer was (forgetting about inflation etc) 10 years worth of pension, so not worth it.
So unless you have serious financial circumstances, don't touch it -- the numbers do not make sense.
I have a DB pension from a previous job that is currently worth €12k/yr. I wanted to take the money out & merge it with my current DC pension. After talking to a friend who is in the industry, he said the cost of buying a 12k Annuity would be in the region of €300-320k. Happy Days!! So I went to pension provider to get a TV for my 12k pension. They offered me €124k -- I was shocked, what a miserable offer....
The offer was (forgetting about inflation etc) 10 years worth of pension, so not worth it.
So unless you have serious financial circumstances, don't touch it -- the numbers do not make sense.