I’ve been offered the chance to transfer INTO a final salary pension, should I take it? Steve Webb replies
I am 38 and I permanently moved to the UK about nine years ago. I have about seven years’ worth of pension valued at about £60,000 saved with Legal & General in a scheme offered by my previous employer.
I now work in the NHS, have been enrolled in its pension scheme since 2015, and my current salary is about £24,000 a year.
There is an opportunity to transfer my L&G pot into NHS Pensions, and I have initiated the process.
Pension dilemma: I’ve been offered the chance to transfer an old pot into the NHS final salary scheme – should I take it?
NHS Pensions is estimating the benefits will be worth the following on completion of the transfer:
Pensionable earnings credit of £255,000
Pensionable membership 5.5 years.
My question is why I am only offered pensionable membership of about 5.5 years whereas my L&G pension pot was accumulated over seven years?
As the NHS pension is ‘Career Average Revalued Earnings’ my pensionable earnings are 1/54th of £24,000 which is about £444 a year, and for 5.5 years it will be £2,444 a year.
L&G estimates my pension pot at 65 years will be worth about £120,000 assuming growth at 4 per cent, inflation at 2.5 per cent and no further contributions.
The cost of buying annual pension income of £1,000 is £45,000. It is estimating I would get an annual pension of £2,666 at 65.
I am thinking of NOT transferring into NHS Pensions as the L&G estimate gives me more pension. Also, there are better chances of my funds growing at a much higher rate than estimated as they are invested in the stock market.
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I can choose to start drawing my pension at 55 years of age and there is an option to buy an annuity using my pension pot.
Can I use my L&G pot towards Money Purchase Additional Voluntary Contributions?
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Steve Webb replies: Much of the discussion around transferring pensions is about people who are thinking of transferring out of a traditional salary-related pension into a pot of money pension, whereas you are thinking of transferring in the other direction.
Before going into detail on the numbers, it’s worth explaining why seven years of membership of your L&G pension might only buy you five or six years in the NHS scheme.
The short answer is that it is not the number of years that matters, it’s the value of the pension that you are building up.
In the case of the NHS pension what people often do not see is the large amount of money that their NHS employer is contributing to the total cost of the pension.
In a salary-related scheme you are often building up very valuable and expensive pension rights (of which more below) and a significant part of this is contributed by the employer.
The total employee and employer contribution for a year in the NHS pension scheme can easily exceed 20 per cent of pay, and I suspect this is far more than was going in for each year you were a member of the L&G scheme.
Turning now to the figures you have supplied, if it was simply the case that your L&G pension will be higher than the extra NHS pension on offer, then you might indeed wonder why to bother. But it is important to compare like with like here.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
The £2,444 figure you have been given for your NHS pension is how much it would be worth today. But you will not be drawing that pension for more than a quarter of a century.
Over that period your pension is ‘revalued’ (ie increased) by more than inflation and so the ‘at retirement’ figure will be significantly higher in real terms.
By contrast, your L&G quotation is already rolling forward to retirement and giving you a real terms value ‘at retirement’.
Taking account of the revaluation of your NHS pension, this suggests that what you are being offered for your L&G pension pot is broadly fair.
Another important thing to think about is your attitude to risk and your ability to bear losses. You are quite right that if you keep your money in the L&G pension it could go up faster than the company has projected.
But it might not do so and it might even go down. By comparison, once you have transferred into the NHS scheme you will have a guaranteed pension regardless of what happens to the stock market.
I can’t advise you on which is right for you, but you certainly need to remember that investments can go down as well as up, and you need to think through what it would mean for your retirement plans if your pot of money was much smaller than you expect.
On the other hand, there are, of course, advantages to being in a ‘pot of money’ pension, particularly following the introduction of ‘pension freedoms’ in 2015.
As you rightly say, you could access your pot at 55 and, subject to paying necessary tax on withdrawals, use it as you wish. As you are likely to get a state pension and a regular NHS pension when you retire (and assuming you continue in the NHS for some time) then having some of your pension wealth in a more flexible arrangement could be attractive.
However, just because it is permissible to access pensions at 55 it does not mean it’s necessarily a good idea.
You need to remember that even with an average retirement you could be living well into your 80s and if you have dipped into your pension savings too early then they could be long gone when you need them in your old age.
Finally, you ask about using your L&G pension to buy ‘additional voluntary contributions’ (AVCs) in the NHS scheme.
AVCs are a separate ‘pot of money’ arrangement that sits alongside a salary-related pension.
You would need to check with the NHS whether you can transfer your L&G pension into such an arrangement, but unless there is a big difference in the charges or likely performance of the AVC scheme, it is hard to think what would be gained by doing so.
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