Don't cash in your final salary pension

davieg11

kidmugsy wrote: »

Has anyone mentioned so far one compelling argument against some people swapping DB into DC, namely that the first time their capital sinks substantially they'll panic, sell, and lock in the loss? That's a commonly seen pattern of behaviour by private investors, isn't it? Those likeliest to panic might be (I guess) those who blithely told themselves that you can't really lose in equities.

No wonder IFAs are reluctant to recommend transferring out of DBs. They can foresee armies of disgruntled mug punters trying like mad to sue anyone within reach while disclaiming all responsibility for their own folly.

"I was missold" they will screech, armed with the sanctimonious stupidity and ignorance that tend to flourish in such cases. jamesd had better be careful to preserve his anonymity or they'll be after him for compensation.

If I had two large DB pensions awaiting me, a loonily high offered payout might very well tempt me to transfer out of one of them, but not both. In Old Age, especially old Old Age, there's a lot to be said for a steady inflow of inflation-protected income that needs no management.

My transfer is for life. I know fine well that some time in the future the market will crash but as history shows it will also recover. There is no panic, sell and lock in the loss. My IFA will look after it, then put it into drawdown when I decide to retire. A DC fund is invested until I pass on and leave my kids what's left.

zagfles

davieg11 wrote: »

My transfer is for life. I know fine well that some time in the future the market will crash but as history shows it will also recover.

Can take a while though. In the UK there was a crash in 1900. The markets eventually recovered to 1900 levels of course, but it took till 1954 !!

http://www.finfacts.ie/Private/curency/ftseperformance.htm

davieg11

zagfles wrote: »

Can take a while though. In the UK there was a crash in 1900. The markets eventually recovered to 1900 levels of course, but it took till 1954 !!

http://www.finfacts.ie/Private/curency/ftseperformance.htm

Big difference from 1900 to nowadays. Looks like it only increased from 93.95 in 1966 to 3221.42 in 2006. You would be a millionaire by now if could have retired in 1966 with a drawdown pension!!

zagfles

davieg11 wrote: »

Big difference from 1900 to nowadays. Looks like it only increased from 93.95 in 1966 to 3221.42 in 2006. You would be a millionaire by now if could have retired in 1966 with a drawdown pension!!

The average wage in 1966 was £891 a year so what size of pot do you think people would have had? Given the average DC pot these days only seems to be a few tens of thousands?

But yes you would have done well in the stockmarket over the last 50 years. But not so well the previous 50. The point is there are no guarantees. There will be crashes, and likely recoveries, but it's possible that the market will be lower in 50 years than it is now. History shows it's possible.

I'm prepared to take the risk with my DC pension, but no way would I consider transferring my DB whatever the CETV.

kidmugsy

davieg11 wrote: »

Big difference from 1900 to nowadays.

In what way?

jamesd

zagfles wrote: »

Can take a while though. In the UK there was a crash in 1900. The markets eventually recovered to 1900 levels of course, but it took till 1954 !!

http://www.finfacts.ie/Private/curency/ftseperformance.htm

The index was 37.39 at the end of 1900. It was 38.21 at the end of 1928. It was 38.97 at the end of 1936. It was 41.13 at the end of 1944 and end of year hasn't gone below 1900 since.

I've no idea how you got to 1954.

It's also misleading anyway because those are index values only and about half of the return is in dividends.

zagfles

jamesd wrote: »

The index was 37.39 at the end of 1900. It was 38.21 at the end of 1928. It was 38.97 at the end of 1936. It was 41.13 at the end of 1944 and end of year hasn't gone below 1900 since.

I've no idea how you got to 1954.

It's also misleading anyway because those are index values only and about half of the return is in dividends.

Sorry I was partly wrong, but so are you - looking again: The 1900 high was 40.25, it never got back to that high till 1944. And in 1953 the low was 40.04, so 53 years later the stockmarket was lower.

Look also at the Japanese market - lower now than 30 years ago.

These are of course worst cases - but it shows there's no guarantees with equities. People need to realise there's a risk, even over the long term eg the term of a typical retirement.

Malthusian

I find that index somewhat dubious given that the FTSE All Share in its current form didn't exist before 1984. Presumably they have measured the share prices of all the companies that were listed on the LSE at the time, but the constituents of that "index" would have changed dramatically from 1900 to 1950 so it is unlikely to be a like for like comparison. Without more information on what exactly they're treating as the "FTSE All Share" prior to 1984 it's difficult to draw any conclusions.

If you had actually invested in a portfolio of the top LSE-listed companies from 1900 to 1950 and reinvested dividends, and reinvested the proceeds of takeovers and other exits from the stockmarket into new entrants, it is extremely unlikely you would have lost money.

An investment in Japan 30 years ago would be up 150% (Nikko All Japan TR). Poor compared to what you'd've made in other geographic sectors but not disastrous.

jamesd

zagfles wrote: »

Sorry I was partly wrong, but so are you - looking again: The 1900 high was 40.25, it never got back to that high till 1944. And in 1953 the low was 40.04, so 53 years later the stockmarket was lower.

The difference is that I picked the same day each year while you picked the highest price in 1900. The numbers there aren't consistent with those from the 2016 Equity Gilt Study (page 74) but let's pretend and say what you would have demonstrated:

1. If a person bought only the shares in the UK market and nothing else at the highest price seen in 1900 and never again, and
2. Threw away about 4% a year in dividends, which aren't in this index
3. The capital value would not have recovered until 1944.

To see something a bit more realistic look at Figure 5 on page 72 which shows the inflation-adjusted values including dividends. While there were periods of drops it was mostly better throughout the period and at around nine times the value by 1953. Page 62 has more charts showing the huge difference in outcomes - the dividends reinvested one has to use a scale up to ten million while not reinvested only has to go to one hundred thousand.

By throwing away the dividends you grossly misrepresented what someone would actually have experienced.

zagfles wrote: »

Look also at the Japanese market - lower now than 30 years ago.

Like the UK index that is just share prices and ignores dividends. Though it's worse still for Japan because I think it has fairly consistently suffered deflation throughout the period.

zagfles wrote: »

These are of course worst cases - but it shows there's no guarantees with equities. People need to realise there's a risk, even over the long term eg the term of a typical retirement.

There definitely isn't a guarantee with equities but it isn't really very realistic to ignore half of the investment returns. Particularly when the bit being ignored is roughly enough to pay for the whole income need of the 4% rule that a retiree might be using for income.

JezR

According to Credit Suisse the worst period for shares in general since 1900 encompassed the panic of 1907, the First World War, and the immediate post war depression. For US shares this was 1906-21 and a bit longer for the UK from 1900-21, as you can include the Boer War. There was no positive return taking into account dividend re-investment over this time but not investment charges which could have eaten into it. Mind you that was some combination of factors.

If you'd put your money into Italian shares in 1906 you needed to wait until 1980 to make money, so they claim.