Final salary vs. Drawdown

snuff2pay

I know that everybody's circumstance is different, but we are trying to work out what's the best way forwards. My husband has a final salary scheme pension, which we know is ' the gold standard'. The total pot is worth in the region of £400,000 for drawdown purposes. However, he is a diabetic and has been for 10 years, therefore his life expectancy could be compromised. In either case he would take the lump sum in order to reduce the 137,000 mortgage. From the pension firm it would be £78000 lump sum and an annual index linked pension of £13000. I would be entitled to half of that as a Widows pension.

We have sought the advice of a financial adviser but are awaiting the final meeting. I want to be in a position where I have investigated all possibilities but it seems that the more I find out, the harder the decision will be. The fa's charges of around 2% to arrange drawdown seems steep, as does the on going management charge of 0.5% annually. That said, we expect to pay for advice but it seems to come without any guarantee of efficacy.

I am 9 years younger than my husband, and expect to have my own pension in place when I retire.

We were quite satisfied until the pension changes but now don't know what to do for the best. Our instinct is to access the money whilst he can enjoy it but any advice welcome.

tinter

Advice is required to make this kind of decision, and its rarely a good decision. The regulatory environment is such that an IFA facilitating this transfer is under serious future risk and its only to be expected the cost will be significant. However, the ongoing management charge does seem like it might be improved upon.

Its difficult to give a specific view on which would be financially better for you without the details of what you would receive and what guarantees there are under the DB entitlements. Do you have this, including widows entitlements, indexing, annual pension, and lump sum from the scheme? His age would also be helpful- I presume 65?

However, it is unlikely over the long term that drawdown will work out better for you.

Diabetes is variable in how life limiting it is. Statistically it does correlate with earlier death but this is partly due to occuring alongside other factors. Does his lifestyle or other health conditions, or medical advice, indicate you should be planning for a short life expectancy?

snuff2pay

Thanks for taking the trouble to reply. I do not have all the figures to hand at the moment, but the pension is index linked. I take your point about the risk taken by the ifa, and their subsequent fees. He seemed very positive about drawdown, and the thought of having an account with that much money to our name is tempting, but the prospect of retirement ( my husband is 59) seems to be improving his health !

Kids in sweetshops , it rarely ends well!

kidmugsy

tinter wrote: »

Does his lifestyle or other health conditions, or medical advice, indicate you should be planning for a short life expectancy?

In my experience doctors are reluctant to discuss individual life expectancy, but you, OP, might be lucky; maybe his would be prepared to give an informed guess, if only along the lines "people in your condition tend to live x years less than the average of men of your age". Diabetes (type 2, I assume?), in particular, can vary from a serious illness to a trivial one.

tinter

In this case, if he is looking into earlier retirement, its also worth knowing what the actuarial reduction would be for this. He is presumably fairly close to being able to retire on the scheme itself, so rushing to avoid a years work may not be a financially wise decision.

Still, without specific figures, its unlikely good opinions can be given. Still, in a general sense, people tend to:
-underestimate their lifespans
- not consider the risk of running out of money with the drawdown- especially with an AMC, this is quite possible, and if your husband does later become ill this might be exactly when you want more income not less
- fail to carefully do the maths involved

I hope you can return with further details so that you can get more detailed discussion on your case (there are many more informed users than myself); I also hope the professional financial advice you are receiving is good; if his lifespan is substantially limited it is possible you are in the edge cases where exiting a final salary scheme may be in your interest.

mgdavid

Do you have any other assets, savings, investments, likely future inheritances etc?
Have you worked out what your (joint) required income in retirement will be?
Will you continue to work after his retirement?

Al.

Snuff,

The only thing I'd suggest is that you see more than one adviser; sit down with at least three. When you're thirty years younger, you have time to remedy any mistakes. For the sake of a few meetings approaching retirement age to get a broad range of opinions, well.. it's time well spent.

saver861

Al. wrote: »

Snuff,

The only thing I'd suggest is that you see more than one adviser; sit down with at least three.

That is sound advice. I always think you need to be as up to date as you can be when meeting IFA's. While no advice is given in the initial free meetings, you will still learn a great deal.

By the time you get to the third adviser, you will be wiser and have more questions to ask!!

It won't necessarily make the decision easier but it certainly will help towards making a wiser decision!

princeofpounds

I would not tell you that taking the lump sum out to reduce the mortgage is the right decision - it may well be. But there is a possibility it is not.


You will need to compare the reduction in pension, after tax, caused by releasing the lump sum, with the potential reduction of interest cost on the mortgage. To do it properly, you might have to assume something about future interest rates as well, and understand if you may need to remortgage at any point, which could have practical implications.


The IFA's fees sound steep to me, although I will admit I know there have been problems caused by the regulatory burden so I can't tell you what is standard.


When looking at fees, make sure you compare apples with apples; you will use a pension platform that may have a charge, and that platform will likely contain funds that have a charge. This may or may not be rolled up into numbers you see.


As for life expectancy, just be aware than when you see that the average man lives until 82 (for example) that number is skewed by lots of people who die early on in life. If you make it to old age, you typically have a longer life expectancy than average (the older you get, the longer you can expect to live, weirdly!)

missbiggles1

You may well have seen this information before. if not, hope it's useful.

http://www.diabetes.co.uk/diabetes-life-expectancy.html

snuff2pay

Thanks to all for the input. It is really weird effectively gambling on the odds of my husband's early demise. And I am aware that I am assuming that I will live to a ripe old age, perhaps falsely.

I take on board the advice to contact a number of advisers, and the notion that paying off the mortgage may not be the best use of any lump sum (although neither is 'the car of his dreams' as far as I am concerned). It is a whole new mindset as 'mortgage free' was always the dream.

It's definitely the case that the more you know, the more you need to find out.