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(Post Link) post #1 of 23 Old 1 Week Ago Thread Starter
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Pension dilemma

Hi All

Years ago I used to work for a large British PLC and was in the company final salary pension scheme whilst employed, it was then frozen when I left. Its not life changing but significant, basically when I'm 60 I can take £11 000 a year or £7500 and £50 000 tax free lump sum. I could take it earlier but the benefits would obviously be reduced.
This week they wrote to me offering £373 000 to leave the scheme, I would have to put this money in my own private personal pension.
I have been playing around with some online pension calculators and the offer seems to good to be true.
If I put the £373 000 in an Income Drawdown scheme then at the same age of 60 I could have a pension of £18 000 a year with a tax free lump some of £108 000. This would last until I was 83.

With the company pension it is guaranteed for life ( assuming the scheme doesn't go bust ) and linked to inflation, the private scheme will be at the whim of the stock market like most other pensions. The private pension is a lot more flexible in that I can take as much or little as I want after the age of 55 ( I'm now 53 )

I always was of the opinion that final salary pensions were the gold standard and you should never leave them but in this case it appears too good an offer to turn down. It seems final salary pensions which were offered in the 90s are costing companies so much they are desperate to reduce their future pension liabilities and are offering silly money to opt out.

On top of the company pension I would also be entitled to the state pension at 67 and I also already have a small private pension.


I'm taking professional advise on the matter soon but would appreciate any advise people can offer.
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(Post Link) post #2 of 23 Old 1 Week Ago
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How much would you need to live on per year after you have retired? This is going to depend on your personal circumstances - mortgage/rent, kids, other dependents, debts etc. What were your retirement plans previous to this offer?

Is the income drawdown scheme guaranteed or is that an estimate? What would happen when you were 83? Presumably, it is all gone and you have to get by on whatever else you have coming in?

It does sound a very good offer but there must be a reason why they are offering it to you. Presumably, they believe that providing you with the fixed benefit over your lifetime is going to cost them more than £373k otherwise why would they make the offer?
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The big question is this: do you know what date you are going to die? Last year I lost two friends, one at 92, the other at 96. Both were active and out and about to the last, but if their income had collapsed at 83...

The reason pensions schemes are often handled by insurance companies is they are covering a "risk." The risk is that you'll live too long and need more money to fund your drink, women and Alfa Romeos. The way insurance (and therefore a pension scheme) works is by speading the risk. Everyone's in one fund, and an actuary can pretty much estimate when the average member will die, taking into account the spread of people, changing mortality rates, and so on. Nobody can do that for one person.

You and Pud have both raised the question as to why they are offering this. Why would it cost them more to keep you in than get you out? Answer: because the average punter will get more out of the guaranteed scheme than out of the non-guaranteed draw down.

You would be better off taking the offer if you die young, worse off if you live as long as the average.

Here's another thought from Sterzo the Prophet of Doom: be slightly wary of professional advisers. It's obvious from your post you're perfectly capable of thinking this through yourself (sorry if that sounds patronising!) so a professional adviser might be a good source of information, but I wouldn't rely on his judgement.

To reveal myself: I worked in financial services but on building and IT projects, not as a financial expert. Asked a friend about this recently and she said: "Of course drawdown is wonderful. All you need is the expertise of an actuary plus that of an investment fund manager, and you'll be fine."
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There's nothing inherently worse about having a larger income from age 60 to age 83 and then a smaller income from there onwards than there is having the same income from age 60 to age whatever-you-get-to. At age 60 you will probably be more active and therefore need more money and probably more likely to have kids starting their own families who you could be in a position to help. The downside being you'll probably pay more tax 60-83 and then not make full use of your personal allowance at 83 onwards. But then perhaps at 83 on reduced income you'll get more state help. If you know how to use Excel you could spreadsheet a few scenarios and see the total received under different pensions living to different ages, might help sway your decision.
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Thanks for comments so far...
I understand that the offer is there because pension fund managers have calculated it's cheaper to pay me off rather than guarantee my pension indefinitely because investment returns are so low.
My gut feel is that I would rather have the money when I can enjoy it, so early in retirement rather than later. Accepting the offer and taking an Income drawdown would give me that option.
Of course the only way to know you are making the right decision is if you know when you will die, but I have seen too many friends and family die before they had a chance to spend their money.
I have no kids, mortgage is paid off and no loans so the only thing at risk is running out of money in my late 80s if I make that long. By then I maybe in a care home anyway and if had too much money left it would only be used to fund that.
I will wait until I have spoken to an advisor before making a decision but I'm in no rush as the offer is valid till October.
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Quote:
Originally Posted by Navlet View Post
Thanks for comments so far...
I understand that the offer is there because pension fund managers have calculated it's cheaper to pay me off rather than guarantee my pension indefinitely because investment returns are so low.
My gut feel is that I would rather have the money when I can enjoy it, so early in retirement rather than later. Accepting the offer and taking an Income drawdown would give me that option.
Of course the only way to know you are making the right decision is if you know when you will die, but I have seen too many friends and family die before they had a chance to spend their money.
I have no kids, mortgage is paid off and no loans so the only thing at risk is running out of money in my late 80s if I make that long. By then I maybe in a care home anyway and if had too much money left it would only be used to fund that.
I will wait until I have spoken to an advisor before making a decision but I'm in no rush as the offer is valid till October.
In your situation I would take the offer. At 83 if you're still going strong, you could get an equity release from your house to keep you going another while longer. Unless you are planning on leaving money to some good cause or other family, you might as well aim to spend it all and enjoy it.

Wonder if you can barter with them, see if they can add another £10k to the offer or something.. Worth a phone call.
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Originally Posted by Pud237 View Post
There's nothing inherently worse about having a larger income from age 60 to age 83 and then a smaller income from there onwards...
I think that's right, and as you say, Equity release is also something of a safety net. It depends partly on what proportion of total pension we're talking about, and whether the total of all pensions is enough for a comfortable lifestyle. It's one thing to take a risk with the bulk of your pension, another to do so with a portion.
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It depends entirely on your personal circumstances.

If you have zero assets and (say) are renting your house, then a guaranteed income is a valuable thing. You have certainty of having cash coming in through the door, no matter what happens. Other than the fund going bust, which is a risk for some large PLCs, which in several cases are in fact a pension fund with a business on the side.

Your health is also a factor. If (at one extreme) youíve smoked 60 a day all your life, then spend it while you can. If there is nothing (forseeably) wrong with you, then you would be more cautious.

Do you have to retire? If no, then you can defer the day when you start pulling down your pension. If your skills are such that you can go contracting or similar, this is another option, even if only part time.

What is your current debt position - is the mortgage paid off and the house fully maintained? (Re-reading, I see youíre fine here).

Overall - buying an annuity (which is what the PLC fund is effectively doing) is a crap deal at the moment. Your income drawdown is essentially capping the liability, so it can offer you far more. And it may be more risky, as you say.

IMO this comes down to your assets and potential working life. The more you have to play with here, the more risks you can afford to take. If you are living in something you can downsize to release cash, and your skills allow you to work part time for longer, then the income drawdown is pretty attractive.

Illustrating with my position. As long as my brain is intact, I can do my job, and my job is in great demand. If my brain is not intact, then I donít care. So Iím not planning to go anywhere near annuities - I have a money purchase pension, and I will turn the lump sum dials to 11 when I pack it in. My plan would be to go part time (probably 6 month contracts, then 6 months off), and as such probably wouldnít need to go near a pension until Iím over 65. If I make it past 90, theníll Iíll flog the house and move into something more sensible.

And all this depends on the macroeconomic landscape. Say Corbyn gets in. There is a reasonable chance that after 5 years of that, 11 grand will buy you a loaf of bread and you wonít own your house either. Nothing is certain in this world.
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£373,000 in an Income Drawdown scheme with a pension of £18,000 a year and a tax free lump some of £108,000.... sounds like it would pay off a lot of any debts and give you enough pension to have a pretty comfy retirement.

After 83 might be more interesting... but having more cash earlier is always better than having more cash later which you might not need (RIP) or might not be able to use.


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£373,000 in an Income Drawdown scheme with a pension of £18,000 a year and a tax free lump some of £108,000.... sounds like it would pay off a lot of any debts and give you enough pension to have a pretty comfy retirement.

After 83 might be more interesting... but having more cash earlier is always better than having more cash later which you might not need (RIP) or might not be able to use.


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We heard you the first time Ralf
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In your situation I would take the offer. At 83 if you're still going strong, you could get an equity release from your house to keep you going another while longer. Unless you are planning on leaving money to some good cause or other family, you might as well aim to spend it all and enjoy it.

Wonder if you can barter with them, see if they can add another £10k to the offer or something.. Worth a phone call.
At 83, you are probably going to be Ga - Ga! Certainly your health is not going to be improving. And I know, I'm not going to make it and there is an increasing chance, you won't either. I think you should explore "Equity Release". It may give you enough funds now, to enjoy your relative good health and defer the question of what is being offered. There is no down side to having more money than you need - Now!
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But these predicted figures rely on average growth of funds. If like me some of your drawdown is in Neil Woodford's fund it might not last as long as predicted.

Oh, and the Br...t farce is not helping at the moment either.
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At 83, you are probably going to be Ga - Ga! Certainly your health is not going to be improving.
Some people I know:

96 year old lady, partially sighted since birth, travelling regularly across London to attend government, private sector and public sector committees where she advises on accessibility for the blind. (Heard the bus stop announcements on London transport buses? That was her influence).

92 year old ex-Wehrmacht soldier and PoW, now local to me, recently got his autobiography published. Great fun, good bloke, enjoys a beer.

81 year old, runs a local charity, drives everything along and keeps us all on our toes.

90 year old cycling club member, Honda scooter rider, non-stop jokes and good humour, computer and smartphone user, works at said charity.

Ga-ga they ain't.
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Some people I know:

96 year old lady, partially sighted since birth, travelling regularly across London to attend government, private sector and public sector committees where she advises on accessibility for the blind. (Heard the bus stop announcements on London transport buses? That was her influence).

92 year old ex-Wehrmacht soldier and PoW, now local to me, recently got his autobiography published. Great fun, good bloke, enjoys a beer.

81 year old, runs a local charity, drives everything along and keeps us all on our toes.

90 year old cycling club member, Honda scooter rider, non-stop jokes and good humour, computer and smartphone user, works at said charity.

Ga-ga they ain't.
So thatís four! Of course Dementia and Alzheimer risk decreases with age? Whilst there are those that ďBuck the SystemĒ, it really is a lottery as to is fortunate enough to do so.

Still no bad thing to have more than you need and if you are lucky enough to have all your marbles at 83 and are active, then that is a bonus.
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I was made a similar offer a few years ago, when I was around 60. The offer was an amount that would buy an annuity giving the equivalent defined benefit (incl 50% widow's pension and index linked), plus 25% as an incentive to take it. My gut feel, and back of envelope calculations, and professional advice, all said "take it". So I did.

The further advantage, of draw-down from a private pension fund, is that, on death, any remaining in the fund is not lost, but may be inherited free of death duties (under current rules). For me personally, plans to downsize the house and sell other property will release enough cash to live on, allowing the converted fund to remain intact until the rules say it has to be used (currently age 75).

It might sound too good to be true. But the US company's UK workforce has shrunk by 90% since the 1980s, leaving the UK Pension trustees with a very big liability, and rather little fresh input. Having got it well-enough funded to shed a load of that liability - make some offers - they made the offers. I was pleased to help.


Edited afterthought - On matters like this: bad idea to decide it on 'what I saw on an Internet forum'; better to take professional advice.

Last edited by ChrisH77; 6 Days Ago at 08:19.
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I think 83 is a bit young to assume you've lost it - some people clearly do, and that is very unfortunate. My father dropped dead very suddenly at 82 (pulmonary embolism, best way to go according to the GP), 2 months prior to that he was lugging a chainsaw all over a very steep sided valley in Wales doing forestry clear up. Mother is now 88, and does mad things like getting on a 'plane to Greece with the bare minimum of planning and booking into some random series of hotels on the spur of the moment.

What is true is that the cash burn falls away - her holiday to Greece was about £70 for the flights, as she could pick some random time that was utterly inconvenient to non-retired people.
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Agreed 83 is not always Ga Ga land but my spending will be less. I would still have equity release and other smaller savings / investments for real old age.
Im also slightly concerned this offer is being made now to reduce pension deficit liabilities prior to the company being sold it might be better to take it whilst the money is on the table.
Just wish Brexit was sorted one way or the other as last thing I would need is a stock market crash after putting it in a private pension. But thats a different thread.
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I have recently gone through this scenario at the age of 59. I transferred everything to a SIPP, took the 25% tax free lump sum which I have been transferring to my ISA gradually. The SIPP drawdown is so flexible that I can just draw enough not to pay tax and the rest of my income is dividends from my ISA which is all tax free. It works for me as I like the flexibility with my income.
It is worth talking to a professional, I was already a Hargreaves Lansdown client, but I learnt much after a 3 hour meeting with them.
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Only bit of advice I would give is ,
In retirement you probably won't spend as much as you do now so budget accordingly.


(or go spend it on wine, sexual partners (as I will not assume your preferences due to PC correctness), and drugs)
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Quote:
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Agreed 83 is not always Ga Ga land but my spending will be less. I would still have equity release and other smaller savings / investments for real old age.
Im also slightly concerned this offer is being made now to reduce pension deficit liabilities prior to the company being sold it might be better to take it whilst the money is on the table.
Just wish Brexit was sorted one way or the other as last thing I would need is a stock market crash after putting it in a private pension. But thats a different thread.
You don't need to necessarily invest the money in stocks or even UK-based assets if being in GBP is a concern. Although stocks globally are overextended in my opinion, particularly in the USA, but there's no reason they can't continue to move higher if the Fed eases (which is now priced in to some extent with this week's continuing rally).

Perhaps that is why they are making you the offer now, with GBPUSD sitting at the lows, if the fund is in dollars, it makes it much cheaper for them to buy you out now rather than have commitments payable in GBP if they expect the direction of travel for the exchange rate to go back into the 1.30s or 1.40s.
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I'm wondering if my live fast and die young strategy might mean that I have the last laugh, if I retire early.
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I'm wondering if my live fast and die young strategy might mean that I have the last laugh, if I retire early.
Grimace, more like! Either way, if you have the funds - go early.
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