The idea that £1m is a cap on huge pensions , beyond which we pay penal tax rates, is ludicrous. In answer to a question on this blog, I did some simple sums. Here first is the answer
Nicholas, a pension of £25,000 is not huge, but if you transfer it at 40:1 you use 100% of your lifetime pension allowance. The PPF set the limit for “ordinary pensions at other £36,000. which works out at a 40:1 CETV conversion rate at around £1.5m. A 2/3 final salary promise paid in full for someone on £60k is £40,000 pa.
You can see from this that it is not just the super-rich who are getting million pound pay outs , the £2.5m CETV could result from a final salary of less than £100,000
While this is not “just getting by” territory, it is not beyond the expectations of many retiring at the moment.
Here is the question which I was responding to, which brings me to the main issue
So, you’re 55 or thereabouts and are now in receipt of a “not huge” DB pension but which had a transfer value of £2.5m? You declined to take PCLS despite being, presumably, a higher rate tax payer and you resent paying £2,000 or so for regulated financial advice. Interesting. What was it Oscar said, “…he knows the price of everything but the value of nothing…”
You forgot the fourth option btw, transfer and enter into phased drawdown so that most of your early income is tax-free; target a balanced natural yield from bonds & shares to avoid unit encashment. And your family could have benefited from what’s left of your pension pot in the event of your early demise.
I’ve no idea who Nicholas is, but I’m grateful for his comment as he is absolutely correct. His numbers are wrong but the principal is right. The PCLS (pension cash lump sum), I turned down could have saved me about £50k of income tax at transfer but it would have lost me about 30% of my pension and I took a view that I would outlive the short term tax-impact (and the loss of freedom to spend this money when I wanted).
He is also right that I resent having to pay an adviser to tell me what is good for me. The only freedom, the only choice I had, was not to pay for advice. Fortunately, I had worked out for myself that I was not best off taking a transfer before I got to writing a cheque. The typical cost of a certificate telling trustees that I’d taken advice is 2% of the assets, though £2,000 is a minimum cost for most advisers. My friend was quoted £10,000 for a certificate because his CETV was so big that it impacted the adviser’s Professional Indemnity premium (or so I was told by an adviser).
He is also right that I resent having to pay the fees for a phased drawdown policy that are variously quoted as between 1.5% and 3.5%. Had my transfer value been £2.5bn , that would have been £37,500 and £87,500 in costs and charges each year for the rest of my life (or until my money ran out).
Frankly the pension I would be paying my advisers and their retinue of managers, would have been as much as the pension I would have paid myself.
How do we manage the baby boomer pensions?
Let us be clear, the cost of managing these funded pensions is huge. The PLSA were quoted last week
Since 2015, the mean running cost of DB schemes has increased by 37 per cent from £400 to £546 a member, according to the PLSA’s latest annual survey of members.
This is largely driven by increases in fund management and custody costs, which are up 32 per cent over the past year.
Smaller schemes – those with 5,000 or fewer members – have seen the greatest increase in running costs with an average increase of 63 per cent, to £787 a member.
However, compared to the 1.5-3.5% costs of managing drawdown within a SIPP, these costs are nugatory.
I took the view that I would rather benefit from my occupational pension scheme’s offer to not only pay me a fixed pension , but to pick up all the costs and charges of doing so, than take my chances with the market.
I suspect that some people will take that chance either because they feel more competent than me, or because their health or family circumstances are different or because they are simply emotionally attached to self-investment, freedom and choice etc.
But I know for sure that the worst that can happen to my defined benefit is that it can be constrained by the PPF (and in payment the pension is not much constrained). The risk of getting things wrong within a SIPP, certainly under my control, are considerably higher.
The choices facing me were binary.Either I went it alone – albeit with a fabulous transfer value (which may never be so high again) or I left my money with my trustees. I chose to leave my money with my trustees and I chose against the tax free cash.
In the final analysis
I am an optimist, I expect to live a long time, there is a good chance I will live to 90 and a fair chance that I will live to 100. If I die earlier, I have provision for my dependents but I am more concerned not to be a burden on them if I live.
The drawdown route – phased or otherwise- does not provide me with the certainty I need to plan around living happily and independently for another fifty years.
In my opinion, the majority of financial advice around CETVs is not optimistic, it focusses on the here and now and the first stages of retirement and hopes for the best if longevity sets in.
I don’t call that financial planning, I call that opportunism on behalf of the financial services industry that panders to people’s short term desire for freedom and choice and neglects the bigger and more difficult questions to do with insurance against living too long.
I do not see annuities as the answer right now, though they may become an answer again. I am more than ever convinced that we need a third way product that gives us a choice between complete freedom and choice and the certainty I currently enjoy.
That third way choice could provide property rights akin to those enjoyed by those in freedom and choice and collective insurance akin to what I get from my scheme pension. It is not too hard to imagine that product, but unless the financial services industry shakes itself from today’s self-interested torpor, it is very hard to see it realised.
Postscript; as I was publishing this blog, the BBC were publishing a very similar article with an identical conclusion from Steve Webb.
You can read the BBC blog here http://www.bbc.co.uk/news/business-38267306