The Lemon Fool

Some time ago i transferred my final salary pension to a SIPP. I can now replicate the current pension entitlement via dividends obtained by investing a sum equal to half the amount i received for the pension . I have 14 years left to state pension age and, by that time i will need to increase the yearly payout by 50% to match the post tax final salary pension benefits. I currently have ISAs with sufficient funds to implement this strategy ensuring no tax is lost when i begin to live off the dividends. In the early years i would reinvest all dividends until i bridge the 50% gap and then take a view on whether to reinvest or build a reserve. Has anyone implemented a similar strategy and, if so, have you any advice or pitfalls to consider? TIA

smicker wrote:I can now replicate the current pension entitlement via dividends obtained by investing a sum equal to half the amount i received for the pension . I have 14 years left to state pension age and, by that time i will need to increase the yearly payout by 50% to match the post tax final salary pension benefits.

Maybe I'm being dumb but I'm not sure what this means. So you say half the lump sum they gave you in the SIPP is all you need to invest to get dividend payments to match the final salary income. You then say that in 14 years you will need to increase the dividends by 50% to match the final salary after tax. I don't really understand how these two things can both be true. I think I misunderstood you somewhere. Could you clarify?

The last statement i have re the pension, which came from my ex employer, states i had a pension at that point of slightly below 10K with a prospective pension at NRA of 22.9k. This was just after i left employment a number of years ago. The documentation i received at the time of transfer stated that the benefits i could expect at retirement from the existing pension were approx 21k which would be 17k ish net due to tax. From this, i am targeting over 10k now and a 50%ish increase to around the 17K figure as i would hold the pot via an ISA to eliminate the tax cost.

I'm baffled. The logical thing to do is work out how much to withdraw from a pension according to how much you'd like to live on.

I can't see any merit in looking at the hypothetical future payout of a pension you no longer own.

smicker wrote:The last statement i have re the pension, which came from my ex employer, states i had a pension at that point of slightly below 10K with a prospective pension at NRA of 22.9k. This was just after i left employment a number of years ago. The documentation i received at the time of transfer stated that the benefits i could expect at retirement from the existing pension were approx 21k which would be 17k ish net due to tax. From this, i am targeting over 10k now and a 50%ish increase to around the 17K figure as i would hold the pot via an ISA to eliminate the tax cost.

NRA - what does this mean? First hit on google is National Rifle Association? I'll assume it's salary at retirement. I assume that would have been in 14 year along with state pension? Lots of details I feel are missing here.

OK, so it's the other way around. All the SIPP cash can get you £10k dividend income. I think the strategy all depends on how much you have in the SIPP and how much you have in the ISA. These numbers are vital but missing from your posts. If your SIPP is invested in an 8% yielding portfolio it's probably a lower chance of growing its dividends enough than a 4% yielding portfolio. Also the £22.9k salary you would have got in 14 years would probably have been adjusted up with inflation perhaps? So your SIPP dividends need to grow by more than just the £11k.

When you withdraw from the SIPP you get 25% tax free so that should help on the tax front.

nmdhqbc wrote: NRA - what does this mean?

For a DB pension it's Normal Retirement Age

smicker wrote:Some time ago i transferred my final salary pension to a SIPP. I can now replicate the current pension entitlement via dividends obtained by investing a sum equal to half the amount i received for the pension . I have 14 years left to state pension age and, by that time i will need to increase the yearly payout by 50% to match the post tax final salary pension benefits. I currently have ISAs with sufficient funds to implement this strategy ensuring no tax is lost when i begin to live off the dividends. In the early years i would reinvest all dividends until i bridge the 50% gap and then take a view on whether to reinvest or build a reserve. Has anyone implemented a similar strategy and, if so, have you any advice or pitfalls to consider? TIA

The pitfall is consideration of whether you are taking the same level of risk in your SIPP as your previous defined benefit pension which was a 100% nailed on certainty.

Had you invested 2 weeks ago, you might be sitting on a 20% capital loss by now with some of your dividends at risk, whereas you would still have 100% of your defined benefit pension.

My existing pension scheme was funded at something like 65% and the company had previously been in private equity hands who had paid themselves a dividend from borrowings which would have cleared the pension deficit. Many schemes have also changed how they calculate future benefits and any valuations i had, specifically state that the potential benefit amounts were not guaranteed and only projections.

I'm trying to get some advice from those who are not trying to maximise or protect downside of their pension just produce a specific outcome. I see this as a process moving from HYP to a less HYP over the period in question. I'd probably try to more aggressively achieve the eventual pension sum in the early years, maybe via tobacco, financials, miners currently, then replace those holdings with the Unilevers, Diageos etc.

Anyway, i've begun the process over the past few days via a large slug of oil and financials and a dabbling of miners.