Drawdown or Final salary?

A7andy

I am new too and need to decide which way to go with my pension.

the transfer value is very very good and i could also take my final salary pension now with very good benefits, however the transfer value is much more than I thought and it makes the 25% tax free lump sum quite a substantial amout more than what i will get from my final salary pension. That would mean investing 650K in a drawdown wrapper, I will only need a 2% net growth for the first 10 years, is this doable ?? and can anyone describe low risk investments to me.

xylophone

and can anyone describe low risk investments to me.

If you need to ask this, are you sure that you are ready to transfer out?

Assuming your DB scheme permits transfer out, bear in mind that you will be required to take advice from an IFA with the necessary qualifications and permissions for pension transfer.

This advice will need to be paid for and is likely to be expensive.

http://www.pruadviser.co.uk/content/knowledge/technical-centre/pension_switches_transfers/

http://www.pruadviser.co.uk/content/knowledge/technical-centre/transfer_pension_scheme/

http://www.royallondon.com/Global/documents/GoodWithYourMoney/COMPANY-PENSIONS-FIVE-REASONS-TO-TRANSFER-OUT-AND-FIVE-REASONS-NOT-TO.pdf

dunstonh

I will only need a 2% net growth for the first 10 years, is this doable ??

net of what? charges? inflation?

and can anyone describe low risk investments to me.

Something that is quite possibly not going to provide 2% net of inflation. How you allowed for indexation that the DB scheme would have paid?

Low risk investments are in a bit of a bubble at the moment. They have been for a while and it may continue for longer. Nobody knows which is what you have to accept when you move into a high risk option like drawdown.

Low risk also needs context. Low risk to one person is high risk to another. However, if you are looking at the cautious end of the scale then you need to be prepared to lose around 15% of your value.

Its difficult as wanting low risk investments in a higher risk transaction (drawdown) doesnt really go together. It is more about acceptable risks and understanding and being prepared as well as having the capacity for loss. As well as accepting that some years you may have to reduce your income for a while if its a particular poor year.

A7andy

your quite right i am not sure what to do with my pension, hence my post. I'm hoping that i will get some advice on the pitfalls and the benifits ( if any) on a draw down pension.

2% net was supposed to read after all charges, inflation would factored in on the amount I draw from the invested part of the pension after 25% tax free part. my intial intensions would be to avoid paying tax an using my tax free lump plus personnel allowance to live on for as long as I could without taking excessive amounts out of the pension wrapper.

I would really like to hear from anyone that is in drawdown and making it work, or not work as the case maybe.

thanks for the comments so far it helps to know that they are people with far more knowledge than me on this subject that can help me decide over the next few months.

thanks all

dunstonh

my intial intensions would be to avoid paying tax an using my tax free lump plus personnel allowance to live on for as long as I could without taking excessive amounts out of the pension wrapper.

Would it be better to used phased drawdown or phased flexi-access drawdown instead? They would likely provide a better outcome than taking the 25% up front.

I would really like to hear from anyone that is in drawdown and making it work, or not work as the case maybe.

It can work and it can fail. There are plenty of people who make it work and there are many people that take out too much leaving themselves with insufficient money for later life. Also, inexperienced low risk investors often get nervous when the next crash comes along (not a case of if but when).

How old are you? The younger you are, the more inflation is likely to be an issue. It is something that people really do not take enough notice of when drawing an income. If you go too low risk, you may end up just standing still on the 2% with little scope for inflation increases. This can lead to you drawing out more money than is being made and that erosion can speed up creating a cycle of erosion over time.

That may sound like a worse case scenario but is one that tends to rear its ugly head every time there is a market crash. For me personally, 2% would be worth the risk. However, for a very cautious person is going to get worried when the pension fund drops from £650k to £550k, it may not be the ideal thing.

Could you handle seeing your fund lose £100k? (as it will happen at some point and on multiple occasions). And remember drawing 2% on £650k goes up to 2.36% when £550k. Going into drawdown requires you to be accepting of a number of scenarios that will happen at some point (and again and again). Its one thing to say you accept it but its another when it actually happens

AlanP_2

A7andy wrote: »

I am new too and need to decide which way to go with my pension.

the transfer value is very very good and i could also take my final salary pension now with very good benefits, however the transfer value is much more than I thought and it makes the 25% tax free lump sum quite a substantial amout more than what i will get from my final salary pension. That would mean investing 650K in a drawdown wrapper, I will only need a 2% net growth for the first 10 years, is this doable ?? and can anyone describe low risk investments to me.

My uderstanding is that some schemes DO NOT allow transfers once the pension is eligible to be paid which sounds like it is in your case.

You might want to enquire whether transfer is even a possibility before investigating whether it is a sensible idea.

A7andy

Thanks dunstonh All good points and I am aware that to make this work i have to deal with the good and the bad times whilst in drawdown, I still don't know enough about were the money is invested, not too bothered about 100k reduction, my worry is setting myself up to ride the waves until it comes back again. just for info Im 56 and wont get state pension until i am 67.

AlanP I can transfer I have had the valuation and need to be defered, which I can do on leaving my company