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Pensions, Annuities and Drawdown


MrXxx

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Done a bit of reading this weekend on RIT site (thanks Harley!) and have a few questions:-

1. Is a DB pension not just the same as buying an annuity?

2. What is involved in transferring a DC pension into a SIPP, advantages/disadvantages, and can it be done anytime?

3. In DD of a DC pension you are restricted by a fixed % using the GAD table (never realised this, just assumed...), is the annual sum before the initial 25% tax-free sum of after?

The more I learn/read, the more I realise I don't know!

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Democorruptcy
50 minutes ago, MrXxx said:

Done a bit of reading this weekend on RIT site (thanks Harley!) and have a few questions:-

1. Is a DB pension not just the same as buying an annuity?

2. What is involved in transferring a DC pension into a SIPP, advantages/disadvantages, and can it be done anytime?

3. In DD of a DC pension you are restricted by a fixed % using the GAD table (never realised this, just assumed...), is the annual sum before the initial 25% tax-free sum of after?

The more I learn/read, the more I realise I don't know!

Try here https://www.dosbods.co.uk/topic/8912-switching-over-a-pension/

 

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Frank Hovis
12 hours ago, MrXxx said:

Done a bit of reading this weekend on RIT site (thanks Harley!) and have a few questions:-

1. Is a DB pension not just the same as buying an annuity?

Yes - minor differences between them all depending upon how they inflate but essentially the same.  May be diffs on death benefits to spouse.

2. What is involved in transferring a DC pension into a SIPP, advantages/disadvantages, and can it be done anytime?

As I understand it you need to pay for advice - dem's the rules as people have lost their pensions through recklessness - and then get a transfer value (simple valuation in this case) and ask to transfer it into a SIPP.  Advantages - lower fees and if you think you can manage it better than they can.

3. In DD of a DC pension you are restricted by a fixed % using the GAD table (never realised this, just assumed...), is the annual sum before the initial 25% tax-free sum of after?

Don't know but interested to know when you find out!

The more I learn/read, the more I realise I don't know!

 

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15 hours ago, MrXxx said:

Done a bit of reading this weekend on RIT site (thanks Harley!) and have a few questions:-

1. Is a DB pension not just the same as buying an annuity?

2. What is involved in transferring a DC pension into a SIPP, advantages/disadvantages, and can it be done anytime?

3. In DD of a DC pension you are restricted by a fixed % using the GAD table (never realised this, just assumed...), is the annual sum before the initial 25% tax-free sum of after?

The more I learn/read, the more I realise I don't know!

1. Yes in so much as it's a guaranteed income, with an annuity you can "shape" it to suit your circumstances - so do you want it indexed, spouses benefits and guaranteed payment period - those choices will impact the amount of annuity offered.  With a DB pension you will be held to the scheme rules so it will likely be indexed whether you want that or not for example.

2. A SIPP is still a DC pension - so no advice is required as its a DC to DC transfer. You need to compare the charges and that will depend on what you are investing in with the SIPP. Keep it to insured funds, generally cheap or stick in shares, commercial property etc - costs will increase.

3. GAD tables only apply to capped drawdown and no new ones could be started from 2015. Now you have flexible drawdown - up to 25% as tax free lump sum and then you take whatever income you like - if the fund runs out it runs out.

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sleepwello'nights
7 minutes ago, Dipsy said:

1. Yes in so much as it's a guaranteed income, with an annuity you can "shape" it to suit your circumstances - so do you want it indexed, spouses benefits and guaranteed payment period - those choices will impact the amount of annuity offered.  With a DB pension you will be held to the scheme rules so it will likely be indexed whether you want that or not for example.

 

https://www.moneyadviceservice.org.uk/en/guaranteed-income-for-life/quotes

Get an indicative quote for an annuity using the link above. I just did for a laugh (I've done it before). Your better off with a footsie 100 tracker. You'll get a higher income and get your capital back.

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2 minutes ago, sleepwello'nights said:

https://www.moneyadviceservice.org.uk/en/guaranteed-income-for-life/quotes

Get an indicative quote for an annuity using the link above. I just did for a laugh (I've done it before). Your better off with a footsie 100 tracker. You'll get a higher income and get your capital back.

I work for an annuity provider, the rates are shocking unless you can get a health underwritten one and you have something horribly wrong with you, of course you just have to hope you can beat the actuaries. I'll be opting for drawdown when I take my benefits.

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Frank Hovis
9 hours ago, sleepwello'nights said:

https://www.moneyadviceservice.org.uk/en/guaranteed-income-for-life/quotes

Get an indicative quote for an annuity using the link above. I just did for a laugh (I've done it before). Your better off with a footsie 100 tracker. You'll get a higher income and get your capital back.

 

9 hours ago, Dipsy said:

I work for an annuity provider, the rates are shocking unless you can get a health underwritten one and you have something horribly wrong with you, of course you just have to hope you can beat the actuaries. I'll be opting for drawdown when I take my benefits.

That's because of the current shockingly low interest rates.

This is why I am trying to swap my existing annuities, as in DB pensions, for capital sums in order to fix in those rates.

Then when interest rates return to decent levels, as they surely must sometime in the next fifteen years, then I turn that capital sum back into an annuity.

If it goes to plan then I finally, finally, have found a way of directly benefiting from low interest rates.

Well see but I'm hoping for something like 50x out and then in fifteen years' time 25x back in.  So £10k income stream from a DB becomes £500k and then in fifteen years' turns back into an income stream but this time at £20k so doubling the pension (gnoring inflation and capital return).

If there is no return to those rates then I have, as @Dipsy says, the drawdown option.

 

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Frank Hovis
9 hours ago, sleepwello'nights said:

https://www.moneyadviceservice.org.uk/en/guaranteed-income-for-life/quotes

Get an indicative quote for an annuity using the link above. I just did for a laugh (I've done it before). Your better off with a footsie 100 tracker. You'll get a higher income and get your capital back.

'Kinell.

I'm not old enough to put my real DoB (not that I would, though I'd put in my similar "internet" DoB) but did it so retiring now at 55.

RPI inflation.

£1m pot (makes the numbers easier)

The starting annual income is the grand sum of £17,833, or £1,486 a month.  1.8% return.  Some funds charge fees higher than that.

So you can be both a millionaire and poor at the same time.

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sleepwello'nights
3 hours ago, Frank Hovis said:

'Kinell.

I'm not old enough to put my real DoB (not that I would, though I'd put in my similar "internet" DoB) but did it so retiring now at 55.

RPI inflation.

£1m pot (makes the numbers easier)

The starting annual income is the grand sum of £17,833, or £1,486 a month.  1.8% return.  Some funds charge fees higher than that.

So you can be both a millionaire and poor at the same time.

Makes you realise how generous the state pension is. I've clients whose state pension is higher than that. I haven't worked through their employment pension to see how their additional state pension is so high. I'm a bit envious as my additional state pension is not very generous, having been self employed during my working N.Insurance'able years. 

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Frank Hovis
42 minutes ago, sleepwello'nights said:

Makes you realise how generous the state pension is. I've clients whose state pension is higher than that. I haven't worked through their employment pension to see how their additional state pension is so high. I'm a bit envious as my additional state pension is not very generous, having been self employed during my working N.Insurance'able years. 

I remember this coming up about additional state penison before. I'm just on the basic which is £168.60 per week or £8,767 per year.  I've got two years to make up to get to that full one.

It's not quite equivalent to the annuity I cited as that was retring at 55 but at the moment it is still roughly equivalent to the annuity that £400k will buy you.

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6 hours ago, Frank Hovis said:

I remember this coming up about additional state penison before. I'm just on the basic which is £168.60 per week or £8,767 per year.  I've got two years to make up to get to that full one.

It's not quite equivalent to the annuity I cited as that was retring at 55 but at the moment it is still roughly equivalent to the annuity that £400k will buy you.

The problem is that a lot of us are some way off from getting the SP. Unlike the financial companies that have to abide by the laws the government make them, and so can change the T&Cs after you have paid, and before you collect I.e maybe the SP will become means tested before you reach the official SP age!

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Frank Hovis
56 minutes ago, MrXxx said:

The problem is that a lot of us are some way off from getting the SP. Unlike the financial companies that have to abide by the laws the government make them, and so can change the T&Cs after you have paid, and before you collect I.e maybe the SP will become means tested before you reach the official SP age!

I'm sixteen years off receiving it!

I meant two more years, including the current one, to get to the full contribution level.

It gets included in my pension report but I'm not making myself reliant upon it as I don't trust the government either.

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  • 2 months later...
On 29/05/2019 at 09:12, Frank Hovis said:

 

That's because of the current shockingly low interest rates.

This is why I am trying to swap my existing annuities, as in DB pensions, for capital sums in order to fix in those rates.

Then when interest rates return to decent levels, as they surely must sometime in the next fifteen years, then I turn that capital sum back into an annuity.

If it goes to plan then I finally, finally, have found a way of directly benefiting from low interest rates.

Well see but I'm hoping for something like 50x out and then in fifteen years' time 25x back in.  So £10k income stream from a DB becomes £500k and then in fifteen years' turns back into an income stream but this time at £20k so doubling the pension (gnoring inflation and capital return).

If there is no return to those rates then I have, as @Dipsy says, the drawdown option.

 

Hi FH, 

how did the transfer go, any tips/pointers?

A comment on the other thread regarding negative rate Govvies (and the legal requirements of pension providers to have a % of their capital in such) got me thinking that doing a DB transfer may not be such a bad idea...at least once you have control of the pension sum YOU can decide what to invest in, even if you resort to putting some into an annuity!

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5 minutes ago, MrXxxx said:

Hi FH, 

how did the transfer go, any tips/pointers?

A comment on the other thread regarding negative rate Govvies (and the legal requirements of pension providers to have a % of their capital in such) got me thinking that doing a DB transfer may not be such a bad idea...at least once you have control of the pension sum YOU can decide what to invest in, even if you resort to putting some into an annuity!

Not fully completed yet but it went similar to how the advisor suggested it would from the start:

DC scheme - he was happy that their charges were low and there was no reason to transfer (they would have received fees on the transfer so to not recommend it reinforces their being a decent company)

Private DB scheme - big transfer value, transferring

Public DB schemes - much lower transfer values, leaving to mature

 

All told very worth doing. It set out where I stood and also allowed me to lock in the benefits of low annuity rates by turning an annuity into capital.

The fees are quite chunky, will be a bit over £4k, but without the review I would not have been able to make the transfer as you require professional advice to effect it.

Had I not, however, had the likelihood of that big DB transfer it maybe would not have been worth doing but with that it has been a success and achieved my aim and the fees look cheap for what I've gained.

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13 hours ago, Frank Hovis said:

DC scheme - he was happy that their charges were low and there was no reason to transfer

Same for me, my employer covers the running costs so I am getting free Alpha, only advantage is that it would open up access to all shares rather than a range of approx 10 lifestyle options that can be mixed as percentages.

13 hours ago, Frank Hovis said:

Private DB scheme - big transfer value, transferring

Public DB schemes - much lower transfer values, leaving to mature

Why the difference in transfer values, or is it just representative of the time that you were employed in each sector?

13 hours ago, Frank Hovis said:

 

All told very worth doing. It set out where I stood and also allowed me to lock in the benefits of low annuity rates by turning an annuity into capital.

The fees are quite chunky, will be a bit over £4k, but without the review I would not have been able to make the transfer as you require professional advice to effect it.

Had I not, however, had the likelihood of that big DB transfer it maybe would not have been worth doing but with that it has been a success and achieved my aim and the fees look cheap for what I've gained.

Mmm this is what I was going to ask...4k from a DB/final salary may be quite a sum if its not massive, especially when you consider the relative security of a regular sum that it offers and the ease of not having to run your own portfolio (especially important as we age and lose our `sharpness`)...so what sort of figure do you think it is worth making a transfer at OR what level would you not bother at?

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12 minutes ago, MrXxxx said:

Same for me, my employer covers the running costs so I am getting free Alpha, only advantage is that it would open up access to all shares rather than a range of approx 10 lifestyle options that can be mixed as percentages.

Why the difference in transfer values, or is it just representative of the time that you were employed in each sector?

Mmm this is what I was going to ask...4k from a DB/final salary may be quite a sum if its not massive, especially when you consider the relative security of a regular sum that it offers and the ease of not having to run your own portfolio (especially important as we age and lose our `sharpness`)...so what sort of figure do you think it is worth making a transfer at OR what level would you not bother at?

He did say in advance that public sector funds offer lower transfer values. I guess it's because they don't act commercially because they know that they will be bailed out by higher contributions if they hit problems.

It was £1.5k for the full report and then 1.8% on anything transferred which I thought very reasonable.  Have a look at what some funds, particulalry multi manager funds, charge each and every year.

As to managing my own portfolio - I'm probably going to just bung it all in some Vanguard funds and forget about it.

I'm a couple of years off retiring and this was the final check and shuffling of the portfolio. I am grateful for some third party scrutiny which has confirmed which I pretty much knew nut given me real advantage in the transferred pension.  I'll let the non-transferred pensions roll on until they start paying at 65 and will receive the state pension at 67 (touch wood); knowing that's on the way means I can draw a higher rate off the rest of it if I wish or buy that big house.

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Democorruptcy
21 hours ago, Frank Hovis said:

He did say in advance that public sector funds offer lower transfer values. I guess it's because they don't act commercially because they know that they will be bailed out by higher contributions if they hit problems.

It was £1.5k for the full report and then 1.8% on anything transferred which I thought very reasonable.  Have a look at what some funds, particulalry multi manager funds, charge each and every year.

As to managing my own portfolio - I'm probably going to just bung it all in some Vanguard funds and forget about it.

I'm a couple of years off retiring and this was the final check and shuffling of the portfolio. I am grateful for some third party scrutiny which has confirmed which I pretty much knew nut given me real advantage in the transferred pension.  I'll let the non-transferred pensions roll on until they start paying at 65 and will receive the state pension at 67 (touch wood); knowing that's on the way means I can draw a higher rate off the rest of it if I wish or buy that big house.

Ah..... did you know you had to pay 1.8% on anything transferred when you ordered the report?

In the other thread (not sure why we need 2) when I said you were doing well to get the report for £1,500 it's because I was only paying for the report. I didn't pay anything on the money that was transferred to my SIPP last week.

My IFA's fees are

Quote

£199,995 or less £2,250

£199,995 or more 1%

Minimum Fee: For PP/SIPP Transfers (Defined Benefit)
£2,250 Fixed Fee + £1,000 for each additional scheme & £1,995 for QROPS

Minimum Fee: For PP/SIPP reviews (Defined contribution) transfers and defined contribution Switches)
£1,595 Fixed Fee + £1,000 for each additional scheme & £1,995 for QROPS

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3 minutes ago, Democorruptcy said:

Ah..... did you know you had to pay 1.8% on anything transferred when you ordered the report?

In the other thread (not sure why we need 2) when I said you were doing well to get the report for £1,500 it's because I was only paying for the report. I didn't pay anything on the money that was transferred to my SIPP last week.

My IFA's fees are

No I didn't but I didn't need to make that transfer.

I also take it in the context of what I was doing (crystallising DB when the annuity rate was on the floor) and some of the annual fees that I was paying on certain active funds before I binned them.

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Democorruptcy
8 minutes ago, Frank Hovis said:

No I didn't but I didn't need to make that transfer.

I also take it in the context of what I was doing (crystallising DB when the annuity rate was on the floor) and some of the annual fees that I was paying on certain active funds before I binned them.

Didn't need to make the transfer? You were chomping at the bit! xD

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12 hours ago, Democorruptcy said:
Quote

Minimum Fee: For PP/SIPP Transfers (Defined Benefit)
£2,250 Fixed Fee + £1,000 for each additional scheme & £1,995 for QROPS

Minimum Fee: For PP/SIPP reviews (Defined contribution) transfers and defined contribution Switches)
£1,595 Fixed Fee + £1,000 for each additional scheme & £1,995 for QROPS

Interesting to see the different price structure between DB where you cannot transfer without FA and DC where you dont.

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  • 4 weeks later...
On 20/08/2019 at 07:51, Frank Hovis said:

Not fully completed yet but it went similar to how the advisor suggested it would from the start:

DC scheme - he was happy that their charges were low and there was no reason to transfer (they would have received fees on the transfer so to not recommend it reinforces their being a decent company)

Private DB scheme - big transfer value, transferring

Public DB schemes - much lower transfer values, leaving to mature

 

All told very worth doing. It set out where I stood and also allowed me to lock in the benefits of low annuity rates by turning an annuity into capital.

The fees are quite chunky, will be a bit over £4k, but without the review I would not have been able to make the transfer as you require professional advice to effect it.

Had I not, however, had the likelihood of that big DB transfer it maybe would not have been worth doing but with that it has been a success and achieved my aim and the fees look cheap for what I've gained.

Quoting myself but all completed now.

I didn't actually make the transfers. The very clear message from the review, which is a full financial review rather than just pensions, was that I didn't need to take anything early because it would just be surplus cash that I would then need to find somewhere to invest.  The private db transfer values were good but not great so I'm happy to let them ride.

In letting the pensions mature it means I can be a bit more cavalier in drawing money out of investments, possibly for buying a big house, because by doing that it means that I can leave myself entirely potless at 65 and then be totally comfortable when all the private pensions kick in at 65 and the state at 67.

Also in doing the review it very much provided my own focus and therefore clarity upon my own position and the financial benefits of continuing to work as distinct from the other benefits.  The former are not gpoing to make a material difference to me as compared with not working so I now only have to concern myself with the latter which is a definite step forward.

It was flagged that my fund investments were very unbalanced, which was true - they were very UK focussed - so I've switched some about and it's now roughly 45:45:10 UK equities / developed economies equities / punts which is far more balanced than it was.

That was £1,500 very well spent to my mind.

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5 hours ago, Frank Hovis said:

Quoting myself but all completed now.

I didn't actually make the transfers. The very clear message from the review, which is a full financial review rather than just pensions, was that I didn't need to take anything early because it would just be surplus cash that I would then need to find somewhere to invest.  The private db transfer values were good but not great so I'm happy to let them ride.

In letting the pensions mature it means I can be a bit more cavalier in drawing money out of investments, possibly for buying a big house, because by doing that it means that I can leave myself entirely potless at 65 and then be totally comfortable when all the private pensions kick in at 65 and the state at 67.

Also in doing the review it very much provided my own focus and therefore clarity upon my own position and the financial benefits of continuing to work as distinct from the other benefits.  The former are not gpoing to make a material difference to me as compared with not working so I now only have to concern myself with the latter which is a definite step forward.

It was flagged that my fund investments were very unbalanced, which was true - they were very UK focussed - so I've switched some about and it's now roughly 45:45:10 UK equities / developed economies equities / punts which is far more balanced than it was.

That was £1,500 very well spent to my mind.

Thanks for the update FH,

you mentioned before that the private DB transfer values were good, what x`s factor were they if you don't mind me asking, as I thought the `once in a lifetime` transfer values were your impetus?

I can understand the rationale for letting them mature, but are you not concerned that whilst they are undrawn they can be messed about with (more a concern with the private DB than the public one)?

Finally, am I right in understanding that you believe with the security of keeping the DBs (so an assured sum/safety net in retirement) you feel you can take greater risks (and so potentially greater rewards/returns) with the rest of your capital?...I never considered that, seems very logical to me.

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3 minutes ago, MrXxxx said:

Thanks for the update FH,

you mentioned before that the private DB transfer values were good, what x`s factor were they if you don't mind me asking, as I thought the `once in a lifetime` transfer values were your impetus?

I can understand the rationale for letting them mature, but are you not concerned that whilst they are undrawn they can be messed about with (more a concern with the private DB than the public one)?

Finally, am I right in understanding that you believe with the security of keeping the DBs (so an assured sum/safety net in retirement) you feel you can take greater risks (and so potentially greater rewards/returns) with the rest of your capital?...I never considered that, seems very logical to me.

The private DB was nudging 30x, the public sector DBs were lower but I had already been advised that was likely.

That really wasn't enough; I had read of 50x being common and 70x exceptionally available but I didn't get anywhere near that.  It's not a fault of the review it's down to the indvidual scheme.

Yes things can happen but I think I'm getting sufficiently close at 52 that changes in the interim will bring riots whereas screwing over the under 40s seems to go repeatedly unpunished.

The guaranteed decent income at 65 yes does allow me to be more risky in investments but also does allow me to more risky in general - live abroad for a few years, buy a big house, go away on trips all the time - without worryng that I'm eating into the capital that provides my income because I know that there's a decent pension kicking in later which will afford me a good lifestyle even if I burn through most of my investments.

Sepcifically I had intended on taking a 1 - 2% return out of the investments so that they continued to grow in real terms but I would now, post review, be comfortable that I could take a  3 - 4% return out and not worry about inflation eroding the capital value because they don't need to support me for decades; just for fifteen years (or less).  So the end product of the review is that I have doubled my income between the period 50 something to 65 because I am now comfortbale in doing that and I wasn't previously.

The review has taken a lot of effort and thought on my part, plus the £1,500, but it has very much lifted a recurring concern about future finances and how long I needed to work to secure them.  The clear answer is that I could stop work today; I don't however want to do that but it does mean that the decision no longer has a financial dimension and that is a big weight lifted.

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