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DB pension transfer cost

85 replies

Amboseli · 23/08/2023 13:08

I've got a very small local government DB pension worth just over £1kpa with a lump sum of £6k.

The transfer value is just over £30k. I'd like to transfer it to my DC pot.

It seems you have to have expensive regulated financial advice in order to transfer a DB pot over £30k. Mine is £30,800. Could I opt out of advice and transfer either to my workplace L&G scheme or vanguard SIPP?

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BorgQueen · 05/09/2023 13:30

Have you been able to initiate a transfer with them?
There are a few dozen people on MSE who would love to know.

Amboseli · 06/09/2023 10:35

It would have been possible but it's not cost effective for me. If interest rates go up my transfer value should go down, hopefully below £30k and then I can transfer without paying for unnecessary expensive advice.

I wouldn't have been classified as an insistent client anyway as I have sufficient other pension income that easily covers my outgoings. £800pa is a drop in the ocean. Not trying to make out I'm wealthy but £800pa is not going to make any difference whatsoever.

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Amboseli · 06/09/2023 18:23

@Express0 I just checked the transfer value today and it's gone down slightly but still above £30000.

Will it go down as interest rates rise? That's what I was told by one IFA.

If I check it and it's £30k should I immediately initiate a transfer before it goes up again?

I've asked my workplace pension scheme if they'll accept a DB transfer and Investigate how to do the transfer so I'm ready to go if it hits £30k.

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Express0 · 07/09/2023 11:59

Amboseli · 06/09/2023 18:23

@Express0 I just checked the transfer value today and it's gone down slightly but still above £30000.

Will it go down as interest rates rise? That's what I was told by one IFA.

If I check it and it's £30k should I immediately initiate a transfer before it goes up again?

I've asked my workplace pension scheme if they'll accept a DB transfer and Investigate how to do the transfer so I'm ready to go if it hits £30k.

If your IFA is suggesting that the transfer value is linked to interest rates then I suggest you find another one.

Amboseli · 07/09/2023 12:17

@Express0 why would it have gone down since I last checked which was in June I think?

I've read that bond prices go down when interest rates go up. I know DB pensions are heavily invested in bonds so it makes sense that the value goes down when bond prices go down.

I think there's going to be 2 more interest rate rises. I'm going to check the value after the next rise and I think that will give me an indication if value is linked to interest rates.

I don't know why it all has to be so complicated.

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BinturongsSmellOfPopcorn · 07/09/2023 12:59

I know DB pensions are heavily invested in bonds so it makes sense that the value goes down when bond prices go down.

No. A defined benefit pension is exactly that - defined benefit. The value is not related to the underlying investment - you get the amount of pension you have qualified for, whatever the underlying fund does. That is how they differ from defined contribution schemes.

But the transfer value relates to how much it would cost to get the same value* *from a non-defined-benefit scheme. That can be calculated in various ways but generally relates to the cost of an annuity that would pay out the same as the DB scheme.

Annuity costs are linked to interest rates. As one goes up the other goes down.

hopeornot · 07/09/2023 13:14

@Amboseli this was the point I was making at the start of the post, but I don't think this was correct.

I am an actuary so familiar with setting assumptions to calculate transfer values, but my experience is in private sector DB pensions and not public sector.

In private DB schemes, the transfer value assumptions are set by the actuary to be consistent with how the DB scheme invests the assets. Generally, the discount rate would be linked to bond prices (interest rates) because pension schemes tend to invest in bonds. The assumptions are then generally updated monthly, or sometimes less frequently like quarterly. If interest rates go up (all else being equal) the transfer value would then go down.

However, from the information others have given below about the LGPS, the assumptions don't seem to work like this. I have no experience of this but from looking at the links people have below, it looks like the discount rate is set in line with inflation and fixed for a longer time period. I'm assuming this approach reflects the fact that public sector schemes are generally unfunded and so this is a better estimate at the cost of providing the pension. If I've understood this correctly, this would explain why others have said your transfer figure won't change from month to month.

That's a long winded way of saying perhaps the IFA you spoke to was thinking of private sector transfer values rather than understanding the nuances of the LGPS, like I was doing at the outset.

My only other comment is to please be very careful if you do decide to transfer as there are unscrupulous products out there willing to "help" customers who can't find any other way to transfer. If in doubt, contact the Government's Pensions Wise service (the website is called Money Helper).

Amboseli · 07/09/2023 13:32

@BinturongsSmellOfPopcorn Thank you for this explanation, it's a bit clearer now in my mind.

So if interest rates continue to rise the transfer value goes down. If I bought an annuity with a lower transfer amount, because of higher interest rates I could achieve the same level of income?

Mine is a local authority pension and on their website I can generate and download a CETV. Is this sufficient to initiate a transfer? Or do I need to ask them to produce one for me?

It has a transfer amount plus lots of other information such as transfer factors and conversion factors. But it says it's an estimated figure and if I do want to transfer I need to download it and send it to my pension provider which will be my workplace pension scheme.

I suppose I could do that and see what they say.

@hopeornot this is a local government scheme which is believe is funded. Maybe the IFA did think it was a private DB as opposed to LG, I'm sure I mentioned it was a LGPS.

I find this whole thing ridiculous for such a small amount. I can understand it for much larger sums but it's OTT for this size of pot.

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Express0 · 07/09/2023 13:57

I would contact your Fund and ask them for a properly calculated CETV, not one generated online.
As I have explained previously the only things which affect LGPS transfer values for deferred are the pension increasing in April and when a member goes past the birthday as a different factor will be used. That’s it. No interest rates. No bonds. No annuity factors. No stock markets.

Amboseli · 07/09/2023 14:22

@Express0 yes I've done that. Let's see what they come back with.

Thanks everyone, I've done as much as I can on this. Will just have to see how things pan out.

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BinturongsSmellOfPopcorn · 07/09/2023 14:57

So if interest rates continue to rise the transfer value goes down

For most DB pensions. As @Express0 explains, local government pensions have their own rules.

Amboseli · 08/09/2023 09:26

@BinturongsSmellOfPopcorn yes thanks. They do have their own rules which I have no chance of ever understanding!

I'm thinking now if the value keeps going up every year (rising with inflation?) I might be better off waiting to transfer until closer to when I am planning to retire and then the fee for advice might be more cost effective in proportion to the pot.

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BorgQueen · 08/09/2023 10:16

The only issue of that is if you die in the meantime, will the pension will only pay half for a spouse/dependent?
I suppose you could take out life insyrance to cover the other half - that’s what we’ve done as DH gets a military pension in 2025 and if he dies I only get 50%, so he took out life insurance at 50 until age 75 for £150k that will provide me a replacement income for a good few years,
written in trust so it’s outside his estate too.
£30 a month seems a reasonable price to pay for peace of mind.

Amboseli · 08/09/2023 12:29

@BorgQueen yes DH gets half if I die. But as it's worth so little there's no point in taking out insurance and DHs DC pension pot is very healthy so he certainly won't need the tiny amount he'd get from my DB pension.

This whole exercise has shown to me that whilst DB pensions are very generous and have many plus points, a big disadvantage is the inflexibility and that they will never beat inflation which is achievable with a DC pot.

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BorgQueen · 08/09/2023 12:45

That’s why I transferred my lgps pension last year, £700 a year at 67 ( in 10 years) is neither use nor ornament so I transferred it to my Sipp and took the £8500 as a ‘small pot’ tax free while I wasn’t earning.
They were awful though and took over 6 months to actually send the cash.

Amboseli · 08/09/2023 14:39

@BorgQueen how did you transfer it though? Did you have to take "advice"? I have to as nobody will accept a transfer without it 🙄

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Amboseli · 08/09/2023 14:41

I'm not sure when I can access mine. Will investigate. I'm under 55 and I think that's the earliest possibly.

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Express0 · 08/09/2023 17:12

What are you actual service dates and current amount of pension and automatic lump sum?

BorgQueen · 08/09/2023 19:56

I didn’t need advice, it was only £8500.

Amboseli · 09/09/2023 13:06

@Express0 the dates I worked there were June 2000 to June 2002.

The lump sum is variable as I can take a bigger lump sum and lower annual income or vice versa. If I took the maximum it would be approx £6500 with an annual income of £1k.

The current CETV value is £30500. It's so infuriating that it's only just over £30k! If only I'd looked at it last year it probably would have been below £30k.

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Amboseli · 11/09/2023 14:18

@Express0 I've found out some more information about the pension. I can take it from 55 but if I do it will be reduced. I'll get the full amount if I wait until 60 which is when I would take it as I'm planning on working until then.

It goes up every April generally in line with inflation like the state pension. It went up by 10.1% last year. So I could wait until just before I retire and then look to transfer as the CETV value will have gone up and might make it more cost effective. Apparently the government are looking at potentially increasing the threshold for needing advice so that could also go up.

Once inflation reaches BoE target of 2% it will barely rise at all which is why I want to transfer it to my DC pot, you can achieve returns of 7%pa depending on how it's invested.

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wellhelloagain2 · 23/09/2023 20:19

You’re assuming that you’re going to get guaranteed returns from a DC scheme. How would you feel if your pension pot fell to £18k within a few months of transferring?

mauveiscurious · 28/09/2023 19:11

If it's a government scheme it's classed as unfunded and there is a notional value but you can't transfer

ChessieFL · 29/09/2023 17:29

@mauveiscurious that’s not completely correct. The Local Government Pension Scheme, which the OP is in, is funded and you can transfer out after getting appropriate advice. Other public sector schemes, such as Teachers, NHS and Civil Service, aren’t funded and do have transfer restrictions.