Thinking seriously of cashing in final salary pension

rudebhoy

Finst wrote: »

OK, I do broadly agree with your 300k based on how you've said the bridge pension option works.


But, ignoring your bridging pension option for a minute:

17.3k at 56 becomes 19.1k when you draw it at 60
That should grow to about 35.4k when you are 85
Your wife would get 24.2k, rising to 33.3k when she is 90 (and you would have been 99)


Try those numbers, and you should get a leftover sum of c5k (or 2k in today's money)


If you agree those figures, then what that would say is:
- the bridging pension option is ridiculously bad value (not usually true), or
- the bridging pension option doesn't work as you think it does


If that 14.7k is in today's money and needs to be increased by inflation to around 19k), that gets me back to a broadly equivalent value to the non-bridged pension. Could that be the answer?

Apologies, the current unreduced value of the pension is £15679. If the RPI is 2.5% for the next 4 years, it will be worth £17307 if I don't take it until 60, so my calc above should be correct.

Andypandyboy

Interesting discussion.

aldershot

Indeed it is. I know of someone with a final salary pot from investment banking looking at the same thing. It used to be that you wouldn't touch a final salary pot and take the cash because the guarantees were so valuable but if they are now being valued against a gilt curve that is way under the curve a more balanced portfolio would bring, it could make sense to take the cash and invest it yourself.

Triumph13

rudebhoy wrote: »

sorry, i didn't mean I would take the 25% upfront, my plan would be to take what I needed from that for the first 7-8 years (say 20k pa), while at the same time using our full ISA allowances to build up more tax free cash for later years.

Sorry, but where is the cash coming from to put into the ISAs? If the 25% lump sum is being used up by your spending, anything else you take out of the pension you will pay tax on as you take it out. I don't see the point of taking it out of the pension to put it into the ISA unless you think tax rates are going to increase in the future?

Finst

rudebhoy wrote: »

Apologies, the current unreduced value of the pension is £15679. If the RPI is 2.5% for the next 4 years, it will be worth £17307 if I don't take it until 60, so my calc above should be correct.

That would move things a bit, but certainly nowhere near 300k. I still thing there is something fishy in your numbers, but you can obviously discuss with your IFA.


The only other point I would mention is your statement on how much income you really need in your 90s - no-one like to think of it, but personal care and care home fees? Generally speaking, needs in retirement are highest in your 60s (active retirement), lowest in 70s and early 80s, and then rising back up again thereafter.


Good luck making your decision!

rudebhoy

Finst wrote: »

That would move things a bit, but certainly nowhere near 300k. I still thing there is something fishy in your numbers, but you can obviously discuss with your IFA.


The only other point I would mention is your statement on how much income you really need in your 90s - no-one like to think of it, but personal care and care home fees? Generally speaking, needs in retirement are highest in your 60s (active retirement), lowest in 70s and early 80s, and then rising back up again thereafter.


Good luck making your decision!

the figures above should be right. the calc is pretty straightforward (value of the pot at start of year * assumed growth of 2.5% minus the amount drawn down over the year = value of the pot at the start of the next year).

what's fishy about that?

Triumph13

I've managed to work out what's going on with your numbers and have a few observations:
1. Life would have been much simpler if you'd just worked in today's money rather than inflating the capital and income by the same percentage every year!
2. You are probably overstating your capital a little in that your inflation calcs assume you take the income in one go at the end of the year.
3. That £300k odd you show at the end is actually only worth a bit over £100k because of inflation, so things are much tighter than they look.
4. How much does the BG pension actually drop by at SPA under your bridging arrangement? You seem to have dropped by £7,500, but that is after 10 years of inflation so only £5,822 in today's money (you see why I said you should have done your calcs in today's money?)

daveyjp

Triumph13 wrote: »

I've managed to work out what's going on with your numbers and have a few observations:
1. Life would have been much simpler if you'd just worked in today's money rather than inflating the capital and income by the same percentage every year!
2. You are probably overstating your capital a little in that your inflation calcs assume you take the income in one go at the end of the year.
3. That £300k odd you show at the end is actually only worth a bit over £100k because of inflation, so things are much tighter than they look.
4. How much does the BG pension actually drop by at SPA under your bridging arrangement? You seem to have dropped by £7,500, but that is after 10 years of inflation so only £5,822 in today's money (you see why I said you should have done your calcs in today's money?)

Correct. The cash remaining column needs to be recalculated to show the present value of £351,000 in 24 years time. The discount rate adopted has a huge bearing on this figure, but it can quickly be into 5 figures.

Linton

1) Working on the assumption that you live to 85 is too short in my view. You have a 55% chance of living too long. Perhaps 95 would be a better value to use - somewhere around the 25% chance of living too long..

2) Your calculations seem to be based on unreasonably low investment returns. Suggest you have a look at cfiresim. Or firecalc which is rather simpler. Both model retirement against real data. They are US based but they should give you a better idea as to what is reasonable. Also in the case of cfiresim you can see the benefits of adjusting your drawdown depending on economic conditions.

3) Have a look at Jamesd's drawdown thread.

fifeken

Your draw rate starts at under 3%.

The traditionally accepted draw rate of 4% would mean your pot should last 30 years, so you've got a good bit of slack in there.

No need to overcomplicate it.

It may not be the best use of the pot, but that's not what you asked.