Don't cash in your final salary pension

woolly_wombat

Article in the FT by John Ralfe:

https://www.ft.com/content/9bfda9b2-ec9e-11e6-ba01-119a44939bb6

Try googling "don't cash in your final salary pension" if the link doesn't work.

John Ralfe, independent pension consultant, warns "the claim that equity risk declines with time is a con" and that the only people who should seriously consider cashing in are those with sufficient wealth "to the extent that there is no risk of running out of enough money before you and your spouse die, no matter what" (my emboldening).

If that's not enough to deter you then this quote might: "do not think now is a clever time to take the money and invest in equities".

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chiefie

woolly_wombat wrote: »

Article in the FT by John Ralfe:

https://www.ft.com/content/9bfda9b2-ec9e-11e6-ba01-119a44939bb6

Try googling "don't cash in your final salary pension" if the link doesn't work.

John Ralfe, independent pension consultant, warns "the claim that equity risk declines with time is a con" and that the only people who should seriously consider cashing in are those with sufficient wealth "to the extent that there is no risk of running out of enough money before you and your spouse die, no matter what" (my emboldening).

If that's not enough to deter you then this quote might: "do not think now is a clever time to take the money and invest in equities".

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He is swimming against the tide. If my next ETV goes up again I'm taking it !

davieg11

You'll need a lot more than that to deter me. I'll be investing my CETV, for 23 years, which is 26 times the value of my yearly db payment. I'll expect my investment to increase during this time but even if it didn't and I ended up with the same amount of money from the CETV, then it will still be 26 years of money that I would have received from age 65.

PensionTech

I'll expect my investment to increase during this time but even if it didn't and I ended up with the same amount of money from the CETV, then it will still be 26 years of money that I would have received from age 65.

And what about inflation?

davieg11

Ok. If worst came to worst make that 20 years of payments I would have. Considering investing in equities for the last 100 years has always produced a return in the long run, I don't think I have much to worry about.

bigadaj

davieg11 wrote: »

Ok. If worst came to worst make that 20 years of payments I would have. Considering investing in equities for the last 100 years has always produced a return in the long run, I don't think I have much to worry about.

Probably not but interest rates haven't been this low for 300+ years, so it's by no means a given, we live in extraordinary times.

jamesd

Before treating that as credible you should know that John Ralfe is the guy who got fired after he moved the Boots pension scheme out of equities into bonds. Using him for comment on equities vs bonds is far from being the wisest thing to do.

And it's therefore no surprise that he makes a bogus argument to support his views. The pricing for options is not based on the income need. It's based on the possibility that at some point in the future there might for even an hour be a time that markets are down and the option seller will have to pay out to the buyer. But that's not how you really take pension income and you're not really as a retiree exposed to the option seller's risk.

Instead if you're sensible you'd be using something modern like the Guyton and Klinger rules. Those take money out of shares when prices are high to put into cash that is later used to pay the income. You only end up selling shares during a downturn if you've already used all of that cash and all of the bonds. That doesn't need a guarantee that the price will not even for an hour be lower than it is today.

Bonus points for those who noticed he was comparing to options at the same amount invested over the whole time when in retirement you're supposed to be drawing on the shares for your income, so the value is really reducing.

The guy set up a misleading straw man argument that doesn't reflect the reality of either taking retirement income or what options are really priced for.

jamesd

bigadaj wrote: »

Probably not but interest rates haven't been this low for 300+ years, so it's by no means a given, we live in extraordinary times.

What does that tell us about the likely direction moved movement for bond prices in the future? Pretty easy: large capital losses as rates eventually go above their low levels. By contrast equities are only a bit over average values in a fair number of markets and low interest rates make borrowing to invest cheaper for businesses, helping them to grow.

xylophone

Boots’ bonds architect on the merits of switching

https://www.ft.com/content/d7464f76-064c-11e1-a079-00144feabdc0

kidmugsy

davieg11 wrote: »

Considering investing in equities for the last 100 years has always produced a return in the long run

I suspect that you don't realise that that is untrue. What is roughly true is something like "investing in equities for the 80 years before the last 20 years always produced a return in the long run as long as you invested in the right countries and bought and sold at the right times."

How do you propose to select your countries in advance, and to identify the times to buy and sell? Do you plan simply to buy "now"? And sell as and when you need the money? Do you realise that the latter decision is not the same thing as holding shares for the long term? Do you plan to invest in the countries where the stock markets did well in the past? Why are you confident that they'll do well in the future?

But even if you put that aside, what's your clinching argument against Ralfe's "acid test" i.e.

If holding equities for the long-term really does mean you will always “win”, with little risk, why don’t investment firms offer funds with guaranteed equity outperformance, and charge a modest fee to reflect the (supposedly) modest risk?

BobQ

While there are arguments either way on this one, there is something simple about having a DB, inflation linked for life, without having to spend a lot of time thinking/worrying/predicting what global stockmarkets will do to your future income.

The alternative is to rely on what the annuity market happens to offer or to manage or pay someone else to manage your investments. Most people are not confident enough to do this themselves and while it might make sense when you are 65 it might be less sensible as you get older.

If I had the choice of a stress free DB income or accepting the uncertainty of the stockmarket I know what I would chose.