Is £782k Transfer Out Safe?

GSP

Intend to drawdown on this amount starting at a figure of £28k p.a. and see how it goes. Might use £16.5k out of my tax free amount (just under £200k), with the £11.5k remaining from my personal allowance.

Rather than how much the funds can rise, been concentrating more on the falls likely and the storms that have to be weathered her to get through the years and understand that nothing is guaranteed. My IFA asked what other income we had to fall back on, so with these conversations it does make you wary about the whole thing, though if things remained bad you would of thought the whole industry would be in turmoil if there were a number of years of sustained losses.

With the risks noted, what would be your take on a fund of £782k and what would you do to get through many years on it. My risk appetite is in a range from 1 low to 5 high was between 2 and 3.
Thanks

enator

I set up my portfolio for income, and the natural yield (not guaranteed obviously) is c4.3% about £53k. I will take out £45k to match the start of higher rate tax and leave the remainder (along with any growth) to cover future inflation and provide a pot for the kids when I shuffle off.

It's not my main source of income, so when the mother of all crashes happens (and it will at some point) I will be quite sanguine to see the pension pot halve or more - the question is are you prepared for that?

If not, stay in the DB scheme

As an aside, I do find the tone of the various posters asking about large CETV's slightly hysterical - ranting on about it's my money, why do I have to pay an IFA, I'm writing to my MP, I've been robbed of extra years state pension etc, etc, etc ad nauseum.

I get the impression they will be the first to whine & bleat about mis-selling when the brown stuff hits the fan

Oh, and to answer your question of course the £782k is not safe.

JoeCrystal

Well, if you didn't transfer it out, what is the pension per year? I think I will stick with the guaranteed income thank you very much.

dunstonh

My IFA asked what other income we had to fall back on, so with these conversations it does make you wary about the whole thing, though if things remained bad you would of thought the whole industry would be in turmoil if there were a number of years of sustained losses.

Drawdown is not a new thing. So, there is plenty of history to look at and it is clear it goes wrong with some people.

During negative periods, the number of complaints goes up and the FOS allocate more resources to it. The industry wouldnt be in turmoil if there were a number of years of sustained losses. Big losses or long periods of loss happen frequently enough for them to be expected and dealt with when they do happen. It is whether the individual has planned for that or not and whether they accept the consequences or not.

In the past, drawdown was considered the high risk option because of the risk of the money running out. That risk hasnt gone away just because more people are using it now.

My risk appetite is in a range from 1 low to 5 high was between 2 and 3.

I hate 1-5 scales as that is not enough to give any real context. 1= cash. 5 = the highest risk unit linked funds. So, that just leaves 2-3-4 to cover in between. That is not enough. You say between 2 and 3 but that could be loss potential between 5% and 25%.

Back onto risks. The most common failures in drawdown are:
1 - drawing unrealistic amounts that are unsustainable (in fact, all the following lead to this).
2 - failure to consider inflation and drawing too much at the start and not leaving enough to cover inflation and later increases eroding the fund quicker
3 - drawing too many ad-hoc payments in addition to the income (seeing it as an easy to pot to draw on). Usually linked in with people drawing the extra during growth years without realising that you have to average out the ups and downs.
4 - A market crash occurring early into the drawdown period and no scope with other income or ability to reduce the drawdown rate causing erosion that will never be recovered.

I gave the example in another thread. So, excuse the copy and paste again:

Lets say you have budgeted on 4% income and a fund of £500,000. So, 20k a year income. Then early on there is a market crash of 25%. So, your pension is has lost £125,000 and is now worth £375,000. If you still take £20k a year income, then your planned draw rate of 4% is now 5.3%. Not leaving much for a recovery in the fund value and could start a cycle of capital erosion if you increase that £20,000 periodically to cover inflation. Maybe your value recovers 40% of that loss before the next downturn and your fund then falls to £280,000 and your draw rate is 7.14%. You are unlikely to see any recovering as the income is drawing all the future growth. So, when the next crash comes you into the £100k range and the draw rate means you run out of money.

That is not a rare worst case scenario. It is a very common failure model. Hence why the adviser is looking at your other incomes in retirement and other things you could fall back on and whether you have scope to reduce the income you draw in bad times etc. They are likely also to be looking at your behaviour and how you view the pension. Do you view it as your income generator in retirement or as a cash machine to draw on willy nilly.

On £782k, the volatility is going to result in big value swings. You could gain £200k in one year or lose £200k. Could you handle your value falling from by £195k to £586k? That isnt a maybe scenario. That is a "when it happens" scenario as it will happen at some point. Think about getting your statement through and the last one said £780k and this one says £580k. What is your reaction to that?

Your adviser then contacts you and says that you should drop your income from £28k to £20k for a couple of years. Can you afford that?

This is where planning comes in. Having other income sources or a pot of money to draw on during bad days to allow a reduction. Maybe operating 18-24 months worth of income in the cash account on the pension so you dont have to sell investment to feed an income during negative periods.

GSP

Must be comfortable enator having that other income to fall back on.
Does make you wonder about doing something different with it like just holding it in cash and waiting for things to change like interest rates or annuity rates to go up then to go for them.
Could I survive a number of years just taking the cash and then doing the above IF and when the time is right.

This is something I have to do Joe. I'm nearly 55, haven't had a job for a year and no prospects of one so need an income now. Normal Retirement Age on my DB pension is 60, so to call that in now would suffer harsh penalties for taking early, from a quarter to a third reduction. Current DB is £19.5k and guesstimate it would be £22k at 60. But again I need to have an income now. In addition, I found that my DB pension carries a State Pension Deduction of £2k a year. This would be waived by transferring out.

Thanks dunstonh. My wife has a current CETV figure of £146k, though she is 50. DB pension is £2k p.a., so the 146 looks attractive to use later on, but something we can use later on in five years time depending what's happened in between. We are going to be careful in the early years as understand these years are important for the sustainability of the fund.
Do you have any suggestions for when "times are good" and moving money out and elsewhere or leaving as cash. i.e. by leaving it in the fund you could lose it all the following year.

dunstonh

Does make you wonder about doing something different with it like just holding it in cash and waiting for things to change like interest rates or annuity rates to go up then to go for them.

That guarantees a loss. So, why would you choose the option that guarantees a loss rather than the one that may have a loss? You are not going to need all that money in the short term. So, you can segment the portfolio. However, what you are proposing as possibility is rather extreme.

Trying to time the markets usually results in lower returns than just staying put and punching through the volatility.

Do you have any suggestions for when "times are good" and moving money out and elsewhere or leaving as cash. i.e. by leaving it in the fund you could lose it all the following year.

I will leave that to your adviser as I don't know what strategy they are proposing to use (there are several).