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Guaranteed Pension V's Sipp Pot

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At 48 I have the opportunity of a £15k pension at 50.

If I leave now....the penalties for taking the pension (as a leaver) are so high that basically I then need to leave the pension until 62. I can do this but it will be £20k....so if I work a little while longer the £15k at 50 is a better option.

However I have just been offered a lump sum of £570k by the company to leave the scheme - ie the transfer value. In theory I can work until 50 and that figure may go up.....but it may also be withdrawn to a much much lower level. So it's decision time now.

I know 'personal circumstances' are key but this is more an opinion rather than advice. I have other income and can afford a risk, also the flexibility of variable income might be useful.....but trying to get a feel from an investment viewpoint.

It seems to me that this transfer value is massive. Effectively it is 35 years of pension in advance. But of course returns a really bad.....and I can touch money until 55. But I will still leave work at 59 and get by until then.

What are the thoughts out there? So my investing question is:

£15k index linked pension (with a 50% widows pension) or

£570k lump sum for a SIPP and try some serious investing.

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If this is a DB scheme that they want to buy you out from, then consider the fact that bond yields are incredibly low at the moment, so the cash equivalent of the DB promise is large. If, as many on here believe, that the day of reckoning is imminent, then interest rates will rise, bond yields fall, and the cash equivalent of your promised pension willend up being be much, much, smaller.

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Bear in mind that even if you decide you want to transfer the money to a SIPP you'll have to take regulated financial advice to do so. The existing scheme provider simply will not transfer the money, nor another provider accept it, until you can prove you have received advice from a suitably qualified and authorised adviser. It's the rules.

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There was an article in Telegraph Personal Finance about somebody in a similar position. Sorry can't find the article using Google now, but there was some discussion on The Motley Fool at the time. Basically, for the last 10 years advisers thought is was insane to encash a DB pension, but now they think the numbers mean that the advice is not so clear cut. Encashment amounts on offer are often very large, and the finances of some DB schemes are shaky. It depends what you think will happen to interest rates, and the stability of your pension scheme. If you believe interest rates can only go up, then take the cash offered, and keep it in the stock market for higher returns.

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Thoughts? Either way you're by far a luckier b*gger than most people your age or younger (me included)

I absolutely promise you that I almost put an edit to acknowledge this. Something like "also any suggestions about my diamond shoes which are too tight too"?

And joking apart I do get what you say....luckier than the younger generation behind me.

Edit: many colleagues I know in similar positions do not realise just how lucky they are and are trapped. They believe they need £30k pensions and will work until 65/70 to achieve it.

That's what I love about this site....I learn and talk to others who have different views and circumstances.

Edited by Phil321

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I absolutely promise you that I almost put an edit to acknowledge this. Something like "also any suggestions about my diamond shoes which are too tight too"

And joking apart I do get what you say....luckier than the younger generation behind me.

Edit: many colleagues I know in similar positions do not realise just how lucky they are and are trapped. They believe they need £30k pensions and will work until 65/70 to achieve it.

That's what I love about this site....I learn and talk to others who have different views and circumstances.

Well good luck to you. Just don't lose it all on the markets!

I think what astonishes me most about pensions is not that DB and DC schemes are different, but how insanely different they are. I'm the same age as you, been putting 15-20% of salary into a DC scheme most of my working life which has been on a salary about a third above national average wage all that time, and my pot is about a fifth of your DB one. What's that, about £3k a year, maybe £6k a year if I can stand/keep my job until I retire and keep contributing?

Edited by RentingForever

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Well good luck to you. Just don't lose it all on the markets!

I think what astonishes me most about pensions is not that DB and DC schemes are different, but how insanely different they are. I'm the same age as you, been putting 15-20% of salary into a DC scheme most of my working life which has been on a salary about a third above national average wage all that time, and my pot is about a fifth of your DB one. What's that, about £3k a year, maybe £6k a year if I can stand/keep my job until I retire and keep contributing?

You're right. And that's driving me to consider taking the cash. My friend was an Financial Director and I imagine he earned at least double what I did and has just retired at 60. He has a SIPP and I 'imagine' he will have a huge pot.....but my modest 30 years 8% contributions have created a lump sum rubbing shoulders with his.

I pay another 25% into a DC scheme....but as you say very average return on that.

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Was it this article?

Telegraph Link

Useful. Values are massive due to yields being so low. Good problem for me to have but I don't think I will have long to make a decision.

IFA in place but they use formulas.

This feels more like a decision from the heart and down to what I think interest rates will do in 10 years time. The thread on that seems to steer to low rates for a long time.

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Well good luck to you. Just don't lose it all on the markets!

I think what astonishes me most about pensions is not that DB and DC schemes are different, but how insanely different they are. I'm the same age as you, been putting 15-20% of salary into a DC scheme most of my working life which has been on a salary about a third above national average wage all that time, and my pot is about a fifth of your DB one. What's that, about £3k a year, maybe £6k a year if I can stand/keep my job until I retire and keep contributing?

I know the feeling. I have been contributing about 70% of my above average salary to mine for the past four years (and about 10-15% at least a decade before then). And while it's decent size compared to most, it's nowhere near the OP's potential pot. Definitely falls into the category of a nice problem to have!

For the OP I guess a couple of things I would be taking into consideration. Do you actually want to work until 55? Would a 25% lump sum be useful to you at 55 or later? Do you/your family have any health problems? Is the £15K index linked?

Edited by StainlessSteelCat

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I know the feeling. I have been contributing about 70% of my above average salary to mine for the past four years (and about 10-15% at least a decade before then). And while it's decent size compared to most, it's nowhere near the OP's potential pot. Definitely falls into the category of a nice problem to have!

For the OP I guess a couple of things I would be taking into consideration. Do you actually want to work until 55? Would a 25% lump sum be useful to you at 55 or later? Do you/your family have any health problems? Is the £15K index linked?

Am leaving at 50. The last 30 years saving have been to ensure money buys me the one thing I wanted....time. So between 50 and 55 I will rely on savings if I take the cash.

Lump sum not factored in. Provided for by my seperate DC scheme which is an AVC.

No health problems. £15k is index linked. Guess it's what £570k will get me. Unbelievably it struggles to earn £15k....but that SIPP cash is then mine not the company's who keep moving the goalposts every 6 months.

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£15k index-linked at 50 would cost you north of a million (unless you've got a life-limiting condition like cancer or a stroke). If there's a widow's pension it's worth even more.

The cash alternative they're offering is not more than half the actual value of the pension. Though it's probably also what your pension would've cost them if we hadn't had all that QE to rob pension pots. And of course the actual choices could be the cash lump sum vs a promise from someone who's gone bust because of QE.

Edited by porca misèria

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£15k index-linked at 50 would cost you north of a million (unless you've got a life-limiting condition like cancer or a stroke). If there's a widow's pension it's worth even more.

The cash alternative they're offering is not more than half the actual value of the pension. Though it's probably also what your pension would've cost them if we hadn't had all that QE to rob pension pots. And of course the actual choices could be the cash lump sum vs a promise from someone who's gone bust because of QE.

Thanks. This is a really useful contra view to my own 'feeling' in terms of the offer value itself, it felt generous to me....and that what I wanted, a bit of a view from others. Easy to be wooed by a big number.

It illustrates (and going back to the main forum subject about saving and investment returns) just how poor a return people can currently expect on their investments.

I was hoping decision would be made easier by company making the pension terms worse (again)....but the next change is a month after I leave.

You are all correct....will take away my 'problem' and ponder the 2 very comfortable options to decide which suits me best.

Thx.

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I was in an identical position last year when I was offered 45x pensionable income to leave a scheme. At the time most offers were around the 20x level although they have gone up since I believe with the fall in bond yields. I am single, have no dependents and have other assets so I accepted.

I also accepted because the lump sum being offered, then anyway, would have allowed me to buy an annuity around 30% higher than the pension income so it seemed a bit of a no brainer, and still does.

38x pensionable income sounds like a reasonable offer. Family position matters.

A SIPP is easily enough managed if one is sensible about it. Some people are more bullish but you should be able to withdraw 2.5% to 3% of the capital value each year without running ever running out of money from a 60/40 portfolio. Retirement Investing Today is a good blog and Lars Kroijers' book is very good too. Mug up if you need to.

You need to get a financial advisor to sign off a transfer of that size - statutory requirement. So expect that to cost up to 1%.

Hope that helps.

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At 48 today you are expected to have an average life expectancy of 81, so retiring at 50 would give you 31 years of retirement. A £570k pot divided over 31 years gives you £18.4k a year. That's only a little bit more than the £15k a year index linker you are being offered, you would need to be able to grow the pot very close to the value of inflation to end up better off. For most people (90%+), I think they'd be better off going with the pension. Most people don't want to know about investing and there's a chance if they took the transfer value, they would end up being fleeced through investing con-men or by investing in garbage. Also, if you're 80, do you really want to be worrying about the stock market?

However, there would be circumstances where it might be better to take the lump sum.

1. How is your health, what is your family longevity like? If it's not great, then I would be inclined to take the lump sum now. On the other hand, if you are healthy, your family has a history of long life, then you'd tend to lean further towards the pension.
2. What is your expertise in investing? If you've got no experience, then really you need to be looking at the pension. However, if you know about investing already, and have done well in the past, I think you could grow the £570k faster than drawing it down via a pension.

Personally, it'd be lump sum all the way for me. In the last 11 years I have annually returned just over 5% in excess of inflation. If I had a £570k pot, I could pull nearly £30k a year from it to live on, with the rest increasing with inflation. Also, I am one of those exceptions where I would be perfectly happy to be following the stock market at 80 and managing my own money.

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Thanks. This is a really useful contra view to my own 'feeling' in terms of the offer value itself, it felt generous to me....and that what I wanted, a bit of a view from others. Easy to be wooed by a big number.

It illustrates (and going back to the main forum subject about saving and investment returns) just how poor a return people can currently expect on their investments.

It sounds generous to me, too. The comparison to an annuity cost just shows how expensive annuities have become. They make a house in Westminster look like good value.

That's why defined benefit pension schemes are in so much trouble. And no doubt why they'd like to buy you out. They might very well be bust if you refuse to be bought out.

Another way to evaluate the lump sum is to consider how much it would generate in an Equity Income portfolio, or what the Motley Fool calls a HYP. A lot of folks reckon you can get around 4% rising to keep pace with inflation and with low risk. Using that calculation, the lump sum looks much better value!

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At 48 today you are expected to have an average life expectancy of 81, so retiring at 50 would give you 31 years of retirement. A £570k pot divided over 31 years gives you £18.4k a year. That's only a little bit more than the £15k a year index linker you are being offered, you would need to be able to grow the pot very close to the value of inflation to end up better off. For most people (90%+), I think they'd be better off going with the pension. Most people don't want to know about investing and there's a chance if they took the transfer value, they would end up being fleeced through investing con-men or by investing in garbage. Also, if you're 80, do you really want to be worrying about the stock market?

However, there would be circumstances where it might be better to take the lump sum.

1. How is your health, what is your family longevity like? If it's not great, then I would be inclined to take the lump sum now. On the other hand, if you are healthy, your family has a history of long life, then you'd tend to lean further towards the pension.

2. What is your expertise in investing? If you've got no experience, then really you need to be looking at the pension. However, if you know about investing already, and have done well in the past, I think you could grow the £570k faster than drawing it down via a pension.

Personally, it'd be lump sum all the way for me. In the last 11 years I have annually returned just over 5% in excess of inflation. If I had a £570k pot, I could pull nearly £30k a year from it to live on, with the rest increasing with inflation. Also, I am one of those exceptions where I would be perfectly happy to be following the stock market at 80 and managing my own money.

Thx. Leaning more to lump sum snd this helps.

Longevity is a feature but I always also felt that if I outlived my money....then I should be greatful for the gift of a long life rather than see it as a negative. Glass half full.

One thing for me is a flexible income maybe useful. If I contract work I can leave the pension for next year....or if I decide to splash out and buy a car or holiday I could take more. I doubt I will work after 55 but I won't discount it.

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I was in an identical position last year when I was offered 45x pensionable income to leave a scheme. At the time most offers were around the 20x level although they have gone up since I believe with the fall in bond yields. I am single, have no dependents and have other assets so I accepted.

I also accepted because the lump sum being offered, then anyway, would have allowed me to buy an annuity around 30% higher than the pension income so it seemed a bit of a no brainer, and still does.

38x pensionable income sounds like a reasonable offer. Family position matters.

A SIPP is easily enough managed if one is sensible about it. Some people are more bullish but you should be able to withdraw 2.5% to 3% of the capital value each year without running ever running out of money from a 60/40 portfolio. Retirement Investing Today is a good blog and Lars Kroijers' book is very good too. Mug up if you need to.

You need to get a financial advisor to sign off a transfer of that size - statutory requirement. So expect that to cost up to 1%.

Hope that helps.

Technically my offer is 28 times by accrued pension (at 62). It's just I know I will take it before then so it's is effectively is 38 times my pension at 50.

I was hoping they would alter the actuarial reductions which could make it 70 times my pension at 50 (ie my pension is smaller rather than my lump sum bigger).....then I would just take the cash.

So not sure 28 times (at 62) is generous....but the fact I would grab the company scheme st 50 it makes it seem more generous.

2.5% return would do me.....I intend to spend the capital too. No point having a massive lump sum when you are dead. Always believed that if you die with wads of money in the bank it demonstrates the time spent accruing that money may have been a waste of that precious time.

I will leave a respectful amount for the kids.....but not directly from the pension.

Last cheque I write should bounce??

Edited by Phil321

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I will leave a respectful amount for the kids.....but not directly from the pension.

If you are planning on expiring before you reach 75 remember that SIPP's can be bequeathed free of IHT.

So if one has sufficient non pension assets to live on it's worth running those down first.

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If you are planning on expiring before you reach 75 remember that SIPP's can be bequeathed free of IHT.

So if one has sufficient non pension assets to live on it's worth running those down first.

Noted. That's why I inferred 'directly' but I appreciate reminder on being organised.

I actually plan on expiring on my 135th birthday. This is based on government stats for state pension calculations. ?

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On 03/09/2016 at 4:45 PM, Phil321 said:

However I have just been offered a lump sum of £570k by the company to leave the scheme - ie the transfer value. In theory I can work until 50 and that figure may go up.....but it may also be withdrawn to a much much lower level. So it's decision time now

 

See if they will increase their offer before you accept. Even then, this could be the best time in history to transfer a DB to DC.

Have a think about the lifetime limit (if that is something you were planning). The DB rules are a lot friendlier for those with big pensions.

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On 21 October 2016 at 8:57 AM, VeryMeanReversion said:

 

See if they will increase their offer before you accept. Even then, this could be the best time in history to transfer a DB to DC.

Have a think about the lifetime limit (if that is something you were planning). The DB rules are a lot friendlier for those with big pensions.

Swap rates are nudging up and 'the word' is that the company is going to give a clear indication what pensions for me will look like in 2017, 2018 and 2019. That good news because at least the goal posts will then stop moving for a while.  

So probably the boring option is if they say I get £15k @ 50 I will probably take the easy life. Saves a lot of fees and activity trying to replicate in a SIPP and the index linking is a benefit. Also means I will have pulled £75k (£15k X 5 yrs) out before I am 55 and that needs to be factored in.  

Of course when my firm goes bankrupt in 5 years and the government can no longer support pensions and I then lose my income....then I can laugh at how I almost had £570k. 

Thanks all. My action is likely to be work my last year then notice goes in and I get a final pension number V's the actual transfer value. Hoping both sides of the equation are not worse. 

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