Excited but Nervous - Transferring Final Salary Pension

bostonerimus

How on earth can UK retirees be ok with paying 25% of their retirement draw down income in fees?

gibbo888

We have no choice legally wrt paying for advice to transfer the CETV over 30K you negotiate your own price. mine was 1% including the mandatory report.
we have a choice with what to do with our monies once its been released.
to go DIY in generic Global trackers ie Vanguard or L&G index funds, then i would be paying about .25% to access these funds, then i would have to pay for a platform to "manage" them. these range from around .15% - .5% depending what services you want/require so its roughly goning to cost me 0.5% to go DIY.
So in my case i am "paying" 0.6% to an advisor to manage and select my funds for me.
I have given him 12mths to see what value he can add over the funds i would have selected if i went DIY, i have already got these funds in my tax free investments, so its a straight forward comparison. if he doesn't "beat" my selections by more than 0.6% and i deam the services he offers alongside my investments not good value, then i will switch to DIY, if he does beat my selections, then i am more than happy to pay for his advice.

I am not happy to pay to transfer my money but i have no choice. its the law.

soulsaver

Hi Cat
On a recent thread a London-based company called Tideway Investment Partners was mentioned; described as "...excellent information (freely available on the internet) and which only charges 1%" - there maybe a min of IIRC £2k, no connection, DYR.

Not connected with the above, I transferred £340k cetv recently for £2.5k. And have helped a couple of others of here to a suitably qualified IFA. I'll add the thread when I find it.

Edit: Here see post#23 in particular. http://forums.moneysavingexpert.com/showthread.php?t=5606039&page=2

jamesd

bostonerimus wrote: »

That 0.8% will probably turn out to be 25% of your income drawdown....that's far more than I'd want to pay.

The effect of fees on safe withdrawal rate is a reduction of about 40% of the fee level. If an over-cautious 4% rate is being used instead of more modern decision rules the 0.8% will be a reduction of 0.32%. That's about 8% reduction in the safe withdrawal rate. Not insignificant but nowhere near as bad.

jamesd

Cat_House wrote: »

I asked my pension company for a CETV on my final salary after reading about it here on the forums. I was shocked when I saw the amount, but still intended to leave it where it was until yesterday. I have another 160K DC and hubby has 120K DC and we also have savings and a couple of ISAs.

Hubby's state pension kicks in December 2021 and is forecast at £222 per week.

IFA worked it out to be around x 35 as the 8.5K does not kick in until Nov 2019. But it looks like I can now take more than 10K annually and retire two years earlier by putting just the FS into a flexi access with smoothed returns yielding 5% a year which we are both happy with.

We can live on savings and maybe access Tax Free Lump Sums if we need to until State Pensions kick in. I don't feel so nervous today as yesterday, having had time to sit down and think about it.

Your overall plan seems sensible in spite of the rip-off price you're being asked to pay. Sometimes advisers will deliberately ask ridiculously high prices for business that they don't want, or just ask a silly price that someone might not know is silly.

Assuming that your state pension will be £155 a week on top of the £222 a week that's £19,604 a year of guaranteed, inflation-linked income while you're both alive. An excellent core retirement income level, with around £23,000 being typical total income for retiree households.

There's an outdated but still handy rough rule that if you were to use investments in the US for a 30 year retirement you could take 4% of the total value as income. About £22,000 a year from £550,000 on top of the [STRIKE]£23,000[/STRIKE] £19,600, for a total of around [STRIKE]£45,000[/STRIKE] £41,600 a year before tax.

At ages 57 and 62 you could probably start out taking that [STRIKE]£45,000[/STRIKE] £41,600 immediately provided you're willing to be flexible and take a reduction if markets do badly, or just if you want to take less income later as part of a deliberate plan. You can do this because it's only until the state pensions start that the pot has to fund it all, and provided you really are willing to be flexible.

For planning it's good to be aware that in the UK it's normal for household spending to fall by around 35% between ages 65 and 80. Natural enough, people tend not to be as sprightly at 80 as 65. What this means is that you probably don't need to plan for a level income throughout retirement but might instead plan to deliberately take more at younger ages and less later.

To get some idea of what's possible I suggest that you have a read through the examples linked from here and try with your own numbers. Those examples and the thread they are linked from cover much more on the subject of safe withdrawal rates, including how the 4% needs to be reduced in the UK and for times longer than 30 years as well as far better rules than the 4% one that allow more than that to be taken without an excessive chance of too much reduction in income. But those rules do require you to genuinely be willing to take income reductions, so be sure you set the minimum income level to one that you're comfortable with. The higher you set that minimum, the lower the initial income level becomes, so you pay a price for lower reduction if you happen to see unusually bad times during your own particular retirement.

The US researcher Blanchett suggests using a success rate target of around 75% for a household where about half of total wealth is in guaranteed income, about the same is non-discretionary spending and where there's a desire for quite high stability of income. This is in part to strike a balance between using the money when you're certain to be alive together with people's preference for money when younger and the risk of leaving the money for later when you may be dead. That tends to favour taking more at the start, which is what lower success rate targets deliver.

The sort of planning that cfiresim does is called stochastic modelling. Not all advisors will be comfortable using it. Similarly, not all will be comfortable using decision rules that reduce income if things go badly or with planning to take a lower income later in life. Part of your task is to find one that will use your own preferences for these things. After you've decided for yourself what you are willing to accept and want. There are many possible answers and preferences and it's finding out what's doable in the way of income with your own that matters.

I've completely ignored the value of your home that could either add to the available income or provide a lot of additional safety margin. I've also assumed that you don't have a very high desire to prioritise money for inheritance, but it's normal for a lot of a pension pot to be left at death. For the 4% rule in the US 96% of cases left an amount of the same starting number, without inflation adjustment, or more.

bostonerimus

jamesd wrote: »

The effect of fees on safe withdrawal rate is a reduction of about 40% of the fee level. If an over-cautious 4% rate is being used the 0.8% will be a reduction of 0.32%. That's only about 8% reduction in the withdrawal rate.

True, a 1% expense would be 25% of a 4% safe withdrawal rate in the first year and as the account value varied the overall effect would lessen assuming the fees stay at a constant percentage. It really depends on portfolio returns, still why should I give 8% to someone?

I wouldn't call 4% a cautious rate for a 40 year retirement with a 60/40 asset allocation.

bostonerimus

gibbo888 wrote: »

I am not happy to pay to transfer my money but i have no choice. its the law.

I agree and I know it's the law in the UK....but it still amazes me.

jamesd

bostonerimus wrote: »

True, a 1% expense would be 25% of a 4% safe withdrawal rate in the first year and as the account value varied the overall effect would lessen assuming the fees stay at a constant percentage. It really depends on portfolio returns, still why should I give 8% to someone?

It's more that the safe withdrawal rate limiting factor is the really nasty case where the pot is drained to nil at the end and in that case the income being taken is far more than the fee. No reason to pay the 0.8% unless it's for some service you need or want.

bostonerimus wrote: »

I wouldn't call 4% a cautious rate for a 40 year retirement with a 60/40 asset allocation.

Depends on the income rules being used. If I was using original Bengen 4% increasing with inflation, without even the 0.5% he increased it to by adding some small cap shares, I'd be suggesting less than that in the UK both in general at the current bond and equity prices.

But I wouldn't do that because I know about rules that safely allow more income to be taken, if spending can be varied, and know about Guyton's sequence of return risk reduction and other adjustments that further improve the SWR. So instead I explain those to people and ask them to consider what they really want and need and how that will change.

Unless I think that the person just can't deal with it, which is true for quite a lot of people.

cloud_dog

jamesd wrote: »

Unless I think that the person just can't deal with it, which is true for quite a lot of people.

So, in these complex situations perhaps it should be mandated for people to take professional advice? No, wait.....

Malthusian

bostonerimus wrote: »

I'd certainly shop around. Being in the US it still amazes me that in the UK you need to pay someone to get advice on what to do with your own money

Money held by trustees to provide for your retirement is not your own money.