Keep the final salary or venture forth?

jamesd

taktikback wrote: »

We have standard wills so the survivor, then the kids get what's left when we pop it.

You might want to change that so that say 3/4 goes to the kids in trust with the survivor the trustee and the remainder to the survivor. Perhaps capped at £15k per year until each kid reaches 23 for the per-kid amount.

The reason for this change is to protect the children. Say your spouse dies. You inherit it all. You remarry then get hit by a bus and your new spouse inherits from you. They might be inclined to give priority to their own children from another relationship rather than those they got via you. Of they could remarry and their new spouse do so. Or their new spouse might get it all if they too die.

If the money is placed in trust for each child the trust survives each of these changes with the money still required to be used for the benefit of the child.

jamesd

taktikback wrote: »

One further question for Jamesd - you mention using the lump sum for additional contributions. If I did as you say, and take the maximum lump sum at 55 from all pension arrangements - and then went on to increase my contributions from salary by say another 20k per year - is that counted as recycling even though the contributions didn't come directly from the lump sum?

Yes. However contributions from you into a pension for a spouse are not counted as recycling so that is one possible workaround for a household.

Or just be patient and wait until the five year window has expired, which it will do after the end of the second tax year following the tax year in which you take the lump sum. Stay within the 30% more rule for the increase in your own contributions until then. So say:

2016/12 2nd year before, 7500 or 30% cumulative limits apply
2017//18 1st year before, 7500 or 30% cumulative limits apply
2018/19 take lump sum, 7500 or 30% cumulative limits apply
2019/20 1st year after, 7500 or 30% cumulative limits apply
2020/21 2nd year after, 7500 or 30% cumulative limits apply

2021/22 3rd year after, all lump sum related limits are gone, can recycle as much as you like from the 2018/19 lump sum

The larger the lump sum the easier it is to stay within the 30% limit, particularly given the annual 40k contribution cap (though carry-forward of unused allowance is allowed to increase that).

jamesd

kidmugsy wrote: »

The case for buying annuities - which is the same case as for keeping that pension - is made here.
http://www.fa-mag.com/news/substituting-income-annuities-for-bond-funds-in-retirement-21923.html?section=47&page=3

There's a big catch in that. Wade Pfau is a US researcher and does not consider the ability to defer the state pension and get an increase in payment that way. This currently is expected to pay something like twice what an inflation-linked annuity would pay at normal retirement ages, making it a far better buy for the money.

I think that the certainty of the 5.8% CPI-increaseing extra state pension from deferring is a good deal compared to staying invested but whether it beats staying in the defined benefit pension is the question that we can only resolve when we know the CETV.

kidmugsy

jamesd wrote: »

There's a big catch in that. Wade Pfau is a US researcher and does not consider the ability to defer the state pension and get an increase in payment that way.

He has written elsewhere on that very topic: Americans can do well out of deferring taking their "Social Security" until they are 70, rather than taking it at the first opportunity at 62. It's a policy he recommends. For example:-

http://www.forbes.com/sites/wadepfau/2014/04/01/delaying-social-security-what-an-investment/

jamesd

Thanks. Interesting to see that in the US deferring is capped at only 4 years but you get 8% increase per year of deferring from the normal state pension age there of 66 until 70. So I assume that he'd be recommending deferring in preference to the annuity for the higher income for the money.

That's probably way better than any standard lifetime you could buy there, just as for our deferring.

kidmugsy

jamesd wrote: »

Thanks. Interesting to see that in the US deferring is capped at only 4 years.

It's capped at 4 from the standard age (66), but 8 from the earliest permitted age (62). As he says: "A lot of people claim their Social Security benefits at the earliest possible age of 62. Social Security Administration data which I’ve worked with showed that 50% of beneficiaries in 2004 had done this".

It's the old business of people being keen to grab it and run, a.k.a. "the annuity puzzle" i.e. the common irrationality about annuities.

jamesd

Sure but I was thinking of deferring benefit, not the benefit of not taking it early, since that's not comparable to the can't take it early UK setup.

The annuity puzzle isn't really a puzzle, it's just the lousy value for money that annuities offer in the real world at normal retirement ages. As the US case shows, deferring Social Security beats annuity purchase much as deferring the state pension beats annuity purchase here. A rational person will take the lump sum instead of the annuity then use the lump sum to defer and get more income for their money. That will confound the narrow-minded annuity as only secure choice theorists but not those who live in the real world.

kidmugsy

jamesd wrote: »

The annuity puzzle isn't really a puzzle, it's just the lousy value for money that annuities offer in the real world at normal retirement ages.

Not so. It's been true over many years, whatever the annuity rates on offer, and whatever the life expectancies at retirement age. Here's a quotation: "For nearly 50 years, financial economists have scratched their heads wondering why more people, at least those without significant bequest motives, didn’t buy annuities.

They provide higher income than bonds and protect against the risk of outliving one’s wealth. Why people would refuse to feast on what may be the only free lunch economics offers—higher consumption and elimination of risk at the same time—has so bothered academics that the question has its own catchy nickname: “the annuity puzzle,” which legions of aspirants have sought to solve."


It's from a site that refers to some American work that claims to explain the puzzle - they say it's to do with the risk of huge medical bills in retirement. But that seems to me to be a bogus explanation, because the same 'puzzle' appears in countries like Britain where you expect the taxpayer to meet your medical bills.

Of course, partly the problem is that economists often study such problems using pretty foolish models. For instance, any study that claims that a retiree should spend all his capital on buying an annuity is evidently bonkers. Nonetheless, the disparity between the economic attractiveness of annuities and people's reluctance to buy them (whatever the annuity rates on offer) sticks out. It's worth googling if you are interested. Or revisiting the recent thread discussing a study of that concluded that the explanation is that so many people are really stupid about money. "Cognitive limitations" was the phrase of choice, if memory serves. Or even just look at the comments of all the lamebrains who opine on threads, showing they just can't grasp the advantage of deferring a state pension - at a reward of 10.4% p.a., index-linked, for heaven's sake: they are clearly emotionally reluctant to consider the proposition rationally.

P.S. The link in that Father Abraham thread leads eventually to a paper containing this revealing point:

"The figure shows that most respondents were only willing to buy the $100 annuity when the price was very low. The median price they were willing to pay was $3,000 – an amount they would recoup in monthly payments in just two and a half years."

jamesd

Re the Father Abraham thread on cognitive limitations, yes, I read the paper and that point. About a week before he mentioned it, expecting that he'd probably post it here when he noticed it. If I recall correctly it had been mentioned in the FT a week earlier.

In the UK there is the possibility of bills that are huge in relation to typical pension pot sizes: care needs later in life, whether due to dementia or frailty and other medical conditions. Regardless of standard or enhanced annuity rates I'm likely to preserve money in drawdown to provide for such possible needs even though I have no bequest motive at all.

Agree re deferring the state pension. I do actually agree that there is some annuity puzzle, but also think that a lot of it is just pro-annuity bias by researchers ignoring the alternatives, or under-valuing flexibility perhaps even without being aware of the resulting bias. A lot isn't the same as all, though - people clearly really are reluctant to spend capital to buy income. Or borrow to get capital to buy income that is greater than the borrowing cost, for that matter.

kangoora

kidmugsy wrote: »

It's capped at 4 from the standard age (66), but 8 from the earliest permitted age (62). As he says: "A lot of people claim their Social Security benefits at the earliest possible age of 62. Social Security Administration data which I’ve worked with showed that 50% of beneficiaries in 2004 had done this".

It's the old business of people being keen to grab it and run, a.k.a. "the annuity puzzle" i.e. the common irrationality about annuities.

Thanks, didn't know this. My 3 years worth of US social security payment will now be delayed until 66 (assuming good health). This will be 1 year before my UK pension. I'll probably start looking into it at 65 though, not having much faith in their systems, it'll probably take a year to get it put into payment