25% tax free lump sum calculation

jamesd

happyandcontented wrote: »

I read your comments on here re pensions regularly and you seem very knowledgeable, but you don't have an IFA statement in your signature. Are you an IFA? If so, where are you based? You seem to me to be the sort of person we would be interested in seeing.

Thanks for the compliment but I'm not an IFA, just someone who's taken a lot of interest in learning what I need to know and sharing that with others.

Dunstonh really is an IFA and the one I tend to suggest people consider.

GDB2222

One trouble with drawdown is mortality drag, which I notice nobody has mentioned. That gets steadily worse as you get older.

I fully agree that it's worth taking a money purchase Pension on drawdown, rather than buying annuities at today's absurd rates. Absurd because of QE and the funding constraints on pension funds. What I am querying is giving up the benefit of a defined benefit pension with limited index linking. It obviously depends on the critical yield and how you intend to invest.

Edit : Having had a look at the FCA handbook, COBS 19 and the annex, that requires the assumption of annuity investment at retirement, which seems inappropriate for cases where drawdown is expected. Is there any scope for producing a transfer analysis that reflects intended drawdown?

Also, it appears to be incredibly risky for an IFA to recommend a transfer at all, but almost suicidal unless the underlying investments are expected to beat the critical yield. https://www.fca.org.uk/news/news-stories/advising-pension-transfers-our-expectations

Is that why people her Are suggesting going down the insistent client route?

jamesd

Yes, as IFA dunstonh wrote an IFA can also use some reasonable basis. The investments don't need to beat the annuity buying assumptions critical yield if an annuity isn't going to be bought. The insistent client route shouldn't be necessary but some people may have objectives that can't make them better off by any reasonable measure or might be using an IFA who thinks that what the client believes to be reasonable, isn't.

There are lots of reasonable things which can be done which make a person poorer overall long term but deliver sufficient other benefit to be justifiable given the objectives of the client. But also lots of unreasonable ones. Possible examples:

1. Transfer out of DB and buy annuity plan that would pay 70% of DB due to fear that an underfunded scheme might fail and be unable to pay a £30,000 pension. Probably unreasonable, PPF would pay 90%, possibly with worse inflation linking.
2. As 1 but pension income £100,000 and sponsoring firm at serious risk of insolvency. Reasonable if transfer value is OK, PPF cap would do more damage.
3. Drawdown using investments to pay out more until work pension then state pensions start, to produce level income throughout retirement. Probably reasonable. Assuming the client understands what it means, including the risks...

Mortality drag is pretty well understood. It's part of the reason why in my drawdown suggestions I suggest that buying annuities is likely to be a good move eventually.

davieg11

GDB2222 wrote: »

One trouble with drawdown is mortality drag, which I notice nobody has mentioned. That gets steadily worse as you get older.

I fully agree that it's worth taking a money purchase Pension on drawdown, rather than buying annuities at today's absurd rates. Absurd because of QE and the funding constraints on pension funds. What I am querying is giving up the benefit of a defined benefit pension with limited index linking. It obviously depends on the critical yield and how you intend to invest.

Edit : Having had a look at the FCA handbook, COBS 19 and the annex, that requires the assumption of annuity investment at retirement, which seems inappropriate for cases where drawdown is expected. Is there any scope for producing a transfer analysis that reflects intended drawdown?

Also, it appears to be incredibly risky for an IFA to recommend a transfer at all, but almost suicidal unless the underlying investments are expected to beat the critical yield. https://www.fca.org.uk/news/news-stories/advising-pension-transfers-our-expectations

Is that why people her Are suggesting going down the insistent client route?

I presume that's why the critical yield is at 6.2% for my DB transfer. In reality if my transfer has a yield of only 2%, then I will have more than enough to put into a drawdown fund and live comfortably.