What net rate of Interest should I use

fjh

At present just looking on a spreadsheet at income I could gain by taking pension as a lump sum
As a 'guide' net of tax / fee's what would a reasonable rate of interest be for an investor with safe/medium attitude to risk?
Thanks

robin61

I used 3% in the assumptions for retire easy.
retireeasy.co.uk
Hopefully they will do better than that of course but I would rather be cautious and then any more is a bonus.

Linton

Will it be interest or will it be equity investments returns? You also need to consider inflation, For my retirement plans (I have now been retir3ed 10 years) I used 3% inflation, 4% investment return, which has turned out to be very pessimistic on both counts. If you really mean interest I would put it as rather less than your assumed inflation, especially if its net of tax.

dunstonh

As a 'guide' net of tax / fee's what would a reasonable rate of interest be for an investor with safe/medium attitude to risk?

Safe/medium is a wide range on the scale. So, you really need to narrow that down more as the income potential will be different across that range.

Interest will not be present on the bulk of the investments you use. Do you really mean interest or rate of return?

Are you looking for sustainability of income which can include pot erosion over the long term or pot value sustainability?
Are you looking for level or increasing income?

fjh

Thanks - I am just 'playing' with spreadsheets to see what on paper is 'best' take Pension - final salary or take cash & put into drawdown and invest / take monthly income - idea is that with Pension nothing for family ( my dad worked 43 years was divorced and died after drawing Final salary pension for 6 years - children got zero)

bigadaj

fjh wrote: »

Thanks - I am just 'playing' with spreadsheets to see what on paper is 'best' take Pension - final salary or take cash & put into drawdown and invest / take monthly income - idea is that with Pension nothing for family ( my dad worked 43 years was divorced and died after drawing Final salary pension for 6 years - children got zero)

4% is a frequently quoted number, which might be interpreted as 7% return on an equity heavy portfolio and 3% inflation to allow the capital to maintain in real terms.

One approach is to undertake a sensitivity analysis by varying a spreadsheet with a range of values, maybe from 10% through to zero or even negative.

jamesd

Please have a read of this topic about income drawdown. It's not so much interest as safe withdrawal rate that you need to be looking at.

If you do just want one number and are willing to use a mixture of equities and bonds than one old standard is 4% of the capital value at retirement, increasing with inflation each year. That was found to survive all past sequences of bad investment results for a 30 year retirement period. A more modern strategy might use something like six or even seven percent, depending on how willing you are to accept reductions if you happen to be unlucky in your retirement timing and subsequent results.

For all of the drawdown strategies mentioned it's expected that the level of income will be able to be increased over time unless the worst case situation is experienced.

There's a trade off in provision for inheritance. If you want to guarantee some, it costs you in reduced income. If you instead let it be the value left if you die sooner than your maximum life expectancy and if markets do much better than the worst case you're still likely to provide a large inheritance, without having to reduce your own income level. That in turn can benefit would-be beneficiaries because you may be able to give away more income while alive so they can benefit from it sooner and you can see them doing so.

jamesd

A brief note on terminology. Pension as you're using it probably means one of:

1. defined benefit pension. From an employer and no investments you have control of.
2. annuity. Insurance company pays an income and you have no investments.

Either of those typically vanishes when you die though there is often a spousal pension or for an annuity the option to take a lower income to provide a spousal pension.

But pensions are much broader than that and income drawdown is the main option for ongoing income while invested. It's also pension income, it just doesn't spend all of the capital to buy a guaranteed income.

In the UK there is also the option to defer the state pension. This causes it to increase by 5.8% per year of deferral, pro-rated for shorter times. You can fund the pension you're not taking using drawdown from a pension or any other source of money. that 5.8% is inflation linked to CPI and is about twice the rate an annuity would pay. A catch is that it is limited in how much you can sensibly buy, to perhaps no more than ten times your original state pension level if you were to defer for ten years. Like the defined benefit and annuity pension options this money is spent and not available for inheritance.

Interestingly, sometimes you can get a higher value from a defined benefit pension by transferring out then deferring your state pension. The transfer value is likely to be higher than the value you can get from taking the usual tax free lump sum while taking the income for the rest.

Keep_pedalling

fjh wrote: »

Thanks - I am just 'playing' with spreadsheets to see what on paper is 'best' take Pension - final salary or take cash & put into drawdown and invest / take monthly income - idea is that with Pension nothing for family ( my dad worked 43 years was divorced and died after drawing Final salary pension for 6 years - children got zero)

Better the children get zero, than you living to a ripe old age but run out of money well before you die.

saver861

fjh wrote: »

Thanks - I am just 'playing' with spreadsheets to see what on paper is 'best' take Pension - final salary or take cash & put into drawdown and invest / take monthly income - idea is that with Pension nothing for family ( my dad worked 43 years was divorced and died after drawing Final salary pension for 6 years - children got zero)

Well if you have an indexed linked final salary pension and are in good health etc then you are unlikely to do better. You have a guaranteed income for life and combatting inflation.

The other option is somewhat of a gamble in comparison - and you could end up with considerably less over the duration.

jamesd

saver861 wrote: »

Well if you have an indexed linked final salary pension and are in good health etc then you are unlikely to do better. You have a guaranteed income for life and combatting inflation.

An income 25-50% higher is entirely possible, depending on the details. That's considerably better.

saver861 wrote: »

The other option is somewhat of a gamble in comparison - and you could end up with considerably less over the duration.

The most comparable option is taking the money and using it to fund deferring the state pension to obtain a guaranteed income for life that way. In one case looked at recently it appears that this would increase the guaranteed income level by 25% compared to just taking the defined benefit pension.

Depending on the transfer value it's entirely possible that a higher or same guaranteed income can be obtained with significantly more than that available on top from ongoing investments.