Cash transfer value from DB scheme

[Scott0966]

I left my previous employer 20 years ago and built up a few years worth of final salary pension. We had an cash transfer offer a few years ago which I didn't think was very good but just we've received another one. It seems the current financial climate means offers are a bit more generous. I'm just wondering if this is the moment to take advantage of the offer or not and see what others would do. We get paid for advice which will be in a few weeks time so that's no my main reason for posting, but I was just curious what others thought.
Here's the basic numbers

Accrued pension at date of leaving - £1665.58pa from 65 (I'm 49)
most of that is eligible for a CPI/RPI raise

The previous offer was about £20000. The latest offer is £65784

I know there's probably a lot of other info needed to come to a proper decision but I'm just after 'gut feeling'

[PhaseThree]

That offer represents a 40x (ish) multiplier on your pension at 65 which seems like a good offer to me. I am in the process of transfering out an old db pension based on a 33x multiple. There are a lot of things to consider but I would take such an offer seriously.

[dealtn]

You say "I..." then "we..." so it's not completely clear, but is this a pension with a spouse benefit too? And if so, what is it, and his/her age etc.

[AleisterCrowley]

Not a useful response really, but that looks very generous to me
You could put £65784 in 'an investment' and draw that pension for nearly 40 years
Obviously the 'investment' would need match/beat CPI/RPI
Perhaps I have missed something obvious? (edit: like the tax situation?)

[zico]

Very simple calculation is Lump Sum/Pension Payment which in your case gives 39 years, so on the face of it, this looks like a good offer, unless you survive more than 39 years after your retirement date of 65. (Disclosure - I've taken the cash offer on 2 pension schemes, and am happy with my decision, and will only be unhappy if I live beyond age 120.)

The decision really boils down to more personal factors.

1. Do you trust yourself with the money and have the willpower to keep it safely and sensibly invested? Would you invest the £65k wisely in a SIPP and drawdown sensibly each year, or would you be tempted to hand it over for a new Lamborghini or to any kids you may have so they could buy a new Lamborghini? For your particular case, substitute as appropriate "Lamborghini" for helping kids get on the housing ladder, lending to a trusted friend, supporting someone's exciting new business venture, etc. etc. There are a lot of uses that other people can think of for a large pot of money that you don't immediately need!

2. Variant of point 1 - would you be happy deciding how much effective "pension" you get in each year (which you'd achieve by withdrawing appropriate lump sums) or would you worry, be overly cautious, and reluctant to drawdown the amount, ending up with more than you can spend when you're 90 years old? This is either a benefit or a problem, depending on your attitude, as the money is under your control, so you could choose to take a higher "pension" between the ages of 65-75, in the knowledge that you'd be happy to withdraw lower amounts from age 75+.

3. Are you comfortable that you could invest the cash amount sensibly and safely, forget about it, and not be tempted to move it around for better returns, or to panic and take it out of shares (for example, if there was a sudden drop in the market).

4. If you take the cash offer, then after your death, your heirs get the full amount of it (unlike with a pension), which is a particular benefit to your heirs (though not you!) if you die shortly after retirement. Is this important to you?

5. You'll need to get an independent financial advisor to approve the transfer, which will cost around £2k (which means the £65k comes down to £63, so the money only lasts an extra 37 years after retirement).

[dealtn]

That offer represents a 40x (ish) multiplier on your pension at 65 ...

Actually the OP said "Accrued Pension at date of leaving", and that event was 20 years ago, so it's not clear what the current pension is and what the multiple is (although your assumption may be correct)

[Chrysalis]

What’s the value of the accrued pension today? And does it include any pre 1997 GMP which may be subject to more favourable increases than RPI/CPI? What are the other features of the pension, spouse’s provision, death benefits, early retirement provisions etc. What is the index linking before and after retirement.
Until you know that value today, and the whole picture of the benefits, it’s hard to work out the multiple and whether it is ‘good value’.
The other thing that needs considered is what other pension provision do you and your spouse have (including state pension), what are your plans for retirement, how is your health and that of your spouse. Do you have any sources of guaranteed income apart from state pension.
DB and DC pensions are apples and pears. One guarantees you a life long income, often index linked. The other offers you a tax advantaged investment account, no more and no less.

Who is paying for the financial advice you are getting? The company? If so, why? Do you have any freedom to choose an adviser you trust? Think about whose interests are being served here. (I’m not clear from your description of the advice as ‘paid for’ who is doing the paying!). If you are paying for advice, I would shop around and be careful as there are some dodgy firms out there. Don’t choose a firm whose main motivation is to manage the resulting fund. Check online for any reviews of experiences and any FOS complaints against the firm.

[scrumpyjack]

If the £1,665 was the accrued pension 20 years ago and it's index linked, the current figure would be about £2,830 as inflation cumulatively since 1999 is about 70%.

On that basis their offer is a multiplier of about 23, which isn't that generous on todays interest rates

[Alaric]

. We had an cash transfer offer a few years ago which I didn't think was very good but just we've received another one. It seems the current financial climate means offers are a bit more generous. I'm just wondering if this is the moment to take advantage of the offer or not and see what others would do. We get paid for advice which will be in a few weeks time so that's no my main reason for posting, but I was just curious what others thought.

There's a general process whereby Companies are "de-risking"". By that I mean that obligations with uncertain or expensive costs such as defined benefit schemes are being off loaded. If they are making unsolicited offers and paying for financial advice, it rather seems that's what they are doing. In those circumstances, the transfer offer could be on the generous side.

On the practical side, you need to know what the pension income has been revalued to and what further revaluation will take place. Perhaps you need to place this deferred pension or the investable transfer value in the context of what other wealth or pension arrangements you have accumulated for retirement.

[mc2fool]

If the £1,665 was the accrued pension 20 years ago and it's index linked, the current figure would be about £2,830 as inflation cumulatively since 1999 is about 70%.

Maybe, but good chance it's nowhere near so straightforward. The index linking of pensions usually refers to pensions in payment. Increases of pensions in deferment is usually much more complicated.

If there is a GMP component (i.e. if it was a "contracted out" pension) then that part will be revalued in deferment by either national average earnings or, for those leaving the company between 1997 and 2002, by a fixed 6.25%pa, depending on the rules of the scheme.

Clearly if it's the former then it's not possible to accurately project forward what the GMP component will be worth at GMP age (60 for women, 65 for men). However, if it's the fixed 6.25%pa then it's easy to figure and, indeed, that rate is likely to be pretty valuable both in recent years and for the next 16 years for the OP.

The "excess" pension (i.e. the non-GMP amount) will be revalued in deferment according to the rules of the scheme, subject to legislative minimums, which have changed over time but one can get the amount it has to be relvaued at least by from the most recent The Occupational Pensions (Revaluation) Order (2018). For someone leaving in 1999 it'll be 58.9% to date.

So, a full breakdown of the components of the pension, along with details of the rules of the scheme are needed.

However, having said all that, the OP said, "Accrued pension at date of leaving - £1665.58pa from 65", and it's unclear if the £1665.58pa is the un-revalued figure at date of leaving, the amount revalued to the present time, or estimated at age 65....

[Scott0966]

However, having said all that, the OP said, "Accrued pension at date of leaving - £1665.58pa from 65", and it's unclear if the £1665.58pa is the un-revalued figure at date of leaving, the amount revalued to the present time, or estimated at age 65....

Just revisiting the thread so I thought I'd clarify this as I hadn't appreciated this at the time. The 1665 figure was the value when I left the scheme in 2000. The estimated value at 65 is just over £4000 (assuming no lump sum taken). From the conversation I had today with the adviser (and given that he had more info than I shared on here) then my decision is likely to keep the DB scheme in place and not take the offer.

[Dod101]

On the whole, I think that DB pensions are undervalued and they are always free of hassle. Most beneficiaries tend to think that they can do better but often they are thrown off course by the lure of 'lots of money'. A substantial amount of sterling tends to turn the mind.

Maybe the advisor is right in this case. Sadly you will not know for a very long time.

Dod

[steelman99]

must comment on the statement that you think DB schemes are undervalued

Ive got the opposite view after seeing elderly parents getting screwed by having DB pensions

My parents are both disabled at 80 years of age and both get attendance allowance , and both get state Pension - , my dad also has a small royal mail pension of around 250 per month. they also have some savings in the bank
If my dad did not have his Royal mail pension , they would qualify for pension credits - this would mean they wouldn't pay council tax of £150 per month , so in reality my dads £250 pension is worth £100 , then there's £13 a month TV licence they will have to pay after next July , oh and they have just had a letter about some warmer homes scheme , which if it wasn't for my dads pension , they would of got £140 credit on their gas bill - was it really worth him having a DB pension ??? or would he have been better with a DC pension which he could of taken more from when they were both fit & healthy and could of enjoyed the money.

Sorry but a DB pension is only good for the care homes and government - by the time your in your 80s , you want to have spent the lot

[AsleepInYorkshire]

One possible option could be to take the cash now and reinvest it into a private pension?

AiY

[Kantwebefriends]

must comment on the statement that you think DB schemes are undervalued

Ive got the opposite view after seeing elderly parents getting screwed by having DB pensions

It's not the DB pension that's screwing them, it's the perverse incentives of our welfare state. If they spent a lifetime voting for that welfare state then they were the authors of their own problems. If they voted against then they have my sympathy.