Low Risk Pension Fund wanted

Martin_Stevens

Hi,

I will soon be getting a Defined Contribution pension. The pot is around £400K, and I'm planing to take this pension via drawdown, so I can have a flexible monthly income as needed, and gradually use up the capital through my lifetime.

My perfect pension fund post-retirement would guarantee no risk to the capital, and growth which just kept pace with inflation. I reckon that even if I can only get 1-2%, and draw an average £1000 per month, the money should last me out easily. I see no point in taking a risk with my capital when I don't need to.

What type of funds should I be looking at with these aims? Any specific recommendations would be most welcome! I know that a fixed term savings account with a high street bank/building society would be equivalent to what I want, but I'm struggling to find anything suitable in the way of a pension fund. Cash funds seem to have very low interest rates - around 0.5%.

I know this is an unconventional requirement, but any help would be appreciated!

(I also have monthly income from a Defined Benefit pension, and will get state pension in 6 years.)

dunstonh

I see no point in taking a risk with my capital when I don't need to.

You are talking investment risk but you do need to remember shortfall risk and inflation risk. These can hit harder in later years.

What type of funds should I be looking at with these aims? Any specific recommendations would be most welcome!

That is a regulated activity and the board is not authorised to do that.

I know that a fixed term savings account with a high street bank/building society would be equivalent to what I want

No it wouldnt. It would be quite a high risk option for what you are looking to do. In real terms, your £400k would be worth around £260k in 10 years. The £1000pm income would have the spending power of around £650. Then add another 10 years and possibly another.

I know this is an unconventional requirement, but any help would be appreciated!

It is not an unconventional requirement. You are just not quite understanding the risks at the moment.

Have you considered an annuity? That would seem to fit the bill here. (even part annuity, part drawdown).

Martin_Stevens

If my fund growth can keep pace with inflation then I'm OK aren't I? Many funds aim for growth far ahead of inflation, so there should be funds that match inflation?

I don't want an annuity - that way I lose all my capital

dunstonh

If my fund growth can keep pace with inflation then I'm OK aren't I?

But cash wont do that.

I don't want an annuity - that way I lose all my capital

But you are going to lose your capital anyway. You said as much in your post.

There are certainly investments that you can use which could be matched to the objective but without capital guarantee.

Martin_Stevens

With drawdown I spend my capital on myself - that's OK

With an annuity I have to live around 25 years to get my capital back, not allowing for inflation - that's not OK to me

dunstonh

Martin_Stevens wrote: »

With drawdown I spend my capital on myself - that's OK

With an annuity I have to live around 25 years to get my capital back, not allowing for inflation - that's not OK to me

Sorry but I don't follow that. Eroding the fund by using cash and using an annuity both result in you using up the fund (ignoring guaranteed options that exist on the annuity).

If you are going to erode the fund by keeping it in cash like returns, then why not use an annuity for part of it that would equal the cash like return and then do drawdown with the rest?

Martin_Stevens

If I can guarantee to live 30+ years, then the outcome from both could be similar.

But I can't guarantee that. If I die earlier, an annuity leaves me with nothing, but drawdown means I have the unused cash in my estate.

dunstonh

If I die earlier, an annuity leaves me with nothing,

What makes you think that is the case?

No death return is an option that exists that may be suitable for a single person or couple with no dependants. However, death benefits are available (such as return of unused fund or a time based guarantee of say 20-30 years).

xylophone

To an extent ( I assume), you have inflation protection from your defined benefit pension and will have inflation protection from your state pension.

Is your DB pension enough together with your state pension when it becomes payable likely to be enough for your needs?

You will become eligible for the state pension under the new arrangement- have you requested a new state pension statement?

See

https://www.gov.uk/state-pension-statement

https://www.gov.uk/new-state-pension/overview

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447195/new-state-pension--effect-of-being-contracted-out.pdf

If your DB is enough to keep you comfortable then you can be more relaxed about ups and downs on your drawdown pension?

If your drawdown pension were transferred to a SIPP, you could hold a certain amount in cash - the interest would be tiny but the fact of holding the cash ( say a year's requirement), might prove comforting?

http://www.hl.co.uk/pensions/drawdown/how-does-it-work



An IFA could assist https://www.unbiased.co.uk/

zagfles

dunstonh wrote: »

No it wouldnt. It would be quite a high risk option for what you are looking to do. In real terms, your £400k would be worth around £260k in 10 years.

What makes you think inflation will be 4.4% on average for the next 10 years? It's currently under 1%. The BoE target is 2%.

Have you considered an annuity? That would seem to fit the bill here. (even part annuity, part drawdown).

A level annuity would of course have exactly the same inflation risk.

zagfles

Martin_Stevens wrote: »

With drawdown I spend my capital on myself - that's OK

With an annuity I have to live around 25 years to get my capital back, not allowing for inflation - that's not OK to me

In defence of annuities, the idea of an annuity is that you pool mortality risk, ie those who die sooner subsidise those who die later. So if you live longer than average you get more than your capital back, paid for by those who die sooner. Basically insurance against longevity.

Not that I like annuities or the way they're sold, they're still quite murky financial products with commission built in and different rates for advised and non advised, and haggling often necessary to get a good deal...