Decisions to be made

BJL55

I wish to retire early so have decisions to make regarding what to do with my pension, it will be 3 years to state pension age (66) for both my wife and I.

I have both a Defined Benefits and a Defined Contribution scheme with the same employer; the Defined Benefits scheme closed 10 years ago and was replaced with a Defined Contribution scheme. My Defined Benefits CETV quote is 436K which translates to 32x company pension benefits, the Defined Contribution pot stands at 82K.

Would I be right to consider a SIPP/Drawdown option as opposed to taking the offered company benefits (inflation protection/spouse benefits)?

Cheers

BJL

LHW99

Probab;y a few questions before you look for an IFA with the required permissions to transfer out of a DB:
What income level do you need now / after 66?
What are the benefits from the DB scheme if you leave it where it is and live on the DC pot for the three years?
Have you / your wife checked your state pension entitlements?
Does your wife have any private pension provision of her own?
Probably otherquestions too that I can't think of.

BJL55

Thanks for the quick reply.

What income level do you need now / after 66: 35K now and after 66 would be good.
What are the benefits from the DB scheme if you leave it where it is and live on the DC pot for the three years: 13.5K with 5%/2.5% split max index linked.
Have you / your wife checked your state pension entitlements: Yes, approx joint 16K
Does your wife have any private pension provision of her own: Yes, approx 3.5K
Probably other questions too that I can't think of.
No mortgage (home owner 180K).
No Debt.

AlanP_2

So DBs + SP is roughly £33k from Age 66, not far short of your target.

If you transfer the DB out would you be able to replace that £13.5k by investing it and drawing down funds ech year?

Looks more risky than sticking with the guaranteed DB as a "safe base" level to me, particularly with the spouse benefits as most pension is yours.

Best option might be to absolutely mazimise what you can put into either the DC pot or a separate SIPP / PP between now and leaving and use that to get through the early retirement period and to top up to £35k after retirement.

Is your wife's pension DC or DB? Does your wife work? Trying to up her annual pension level might be smarter than upping yours to make sure she can fully utilise her Tax Free Allowance.

LHW99

Adding your wife's pension to the DWP and your own DB brings you up to around £33k pa as a couple. That's pretty close to what you want, with no investment risks.
You probably need to consider the position for the survivor if one of you passes away, since the NSP is no longer inheritable, so you wife will only receive a small amount of any old additional pension you may have built up (which is probably low if you were in a DB scheme).
AlanP's suggestion of building up your wife's provision seems sensible IMO.

jamesd

BJL55 wrote: »

My Defined Benefits CETV quote is 436K which translates to 32x company pension benefits, the Defined Contribution pot stands at 82K. ... Would I be right to consider a SIPP/Drawdown option as opposed to taking the offered company benefits (inflation protection/spouse benefits)?

Yes, that looks like an excellent idea that can provide both substantially higher income, probably better survivor's pension, better provision for possible care needs and normally substantial inheritance boost.

Please read Drawdown: safe withdrawal rates for more extensive discussion, links to worked examples and links to the research papers behind what I'm writing in this post.

Guaranteed income first, since that quite often is a concern. If a person defers claiming their state pension for a year it's increased by 5.8%, pro-rated for part of a year. Say you each will have initial state pensions of £8,000 a year and you defer claiming for a year, drawing on your pension pot instead. You'll have spent £16,000 and your state pensions combined will be increased by 0.058 * £16,000 = £928 a year. That's CPI inflation linked but no triple lock.

The DB pension is about £13,625 a year (lump sum / 32). 13625 / 928 = 14.7 years of you both deferring to get that, ignoring inflation increases to keep things simple. That would take 14.7 * £16,000 = £235,200 of your pot. But your DB pot is £436,000 so could do that and have almost half of the pot left over. Which is part of why your situation is so good for transferring.

14 years is normally longer than sensible for state pension deferring. Including the longevity insurance value 5-10 years tends to be good. Varies depending on life expectancy and how the money is invested instead as well as each person's preference for certainty and minimum worst case investment performance income need. Annuities also become gradually better value for money compared to deferring over time and eventually become a better buy than more deferring.

Say you both defer for five years and start out with that £8,000 each. After the deferring the state pensions combined will be paying (1 + 0.058 * 5 ) * £16,000 = £20,640 a year. That's 20,640 / 35,000 * 100 = 59% of your target. Plus the £3,500 from your wife's pension. What that does is give you tremendous safety margin for investment performance and that's the next post...

jamesd

So, after allowing for using 5 * £16,000 = £80,000 of your pot for deferring and adding in the DC pot you have £436,000 - £80,000 + £82,000 = £438,000.

There's a now rather out of date guideline that a US investor can take 4% of their starting pot each year without any historic sequence of investment returns causing them to run out of money - down to just state pensions - during a 30 year retirement. 96% of the historic cases would produce a higher nominal ending pot than the starting one, while two thirds of the time the ending wealth is at least twice the starting wealth. That shows just how bad the investments have to do over a long time to threaten the income. UK safe withdrawal rates are about 0.3% lower and there are costs so I'll use 3.5% for this bit.

3.5% of the £438,000 is £15,330 a year. You shouldn't plan for just 30 years these days but that'll do for now. Adding in the state pensions with deferral and your wife's private pension and that's £20,640 + £3,500 + £15,330 = £39,470 a year. So initially you should be thinking of raising your income target to more like £40,000 a year.

But you can do better than that. The 4% rule has been greatly improved on over the years and now there are alternatives like Guyton-Klinger that can be used. Instead of assuming that everyone lives through the worst historic investing times, this sort of rule starts out assuming that you'll live through some of the more normal 75% and then adjusts the income up or down based on what you really live through. The result of that is something in the region of 5-6% initial withdrawing rate and not much chance that it would drop as low for your combined income as if you didn't transfer. And since you're living through it you can increase the cut to stay clear of that if it turns out that you do have a bad period of ten or more years. You should use cfiresim but to give some idea, 5% would mean £21,900 + £3,500 + £15,330 = £40,730 and 6% £44,990.

jamesd

Moving beyond that, spending tends to decrease as people get older, with the money being saved instead of spent. You can allow for this by adding some fake income in cfiresim. You can also restrict how low you want to allow the variable income to be allowed to go if you live through bad times, this cuts the initial income.

If you use those approaches and really are serious about being willing to vary your income you could probably start at £50,000 to £60,000 a year, less the age-related reductions you use to get to that level. That sort of level will only be sustainable for life if you live through average or better investing times so there is a substantial chance that you'll need to make greater than planned reductions. In exchange for that flexibility you get to start out with higher income while you're both young, in relatively good health and likely to value the spending power more.

At this point it should be clear that you can use drawdown in a way that's customised to your own preferences. That can be anything from almost all guaranteed income higher than you'd get through staying in the DB scheme to a wide range of higher initial incomes that require a willingness to plan for or take reductions in worse than average conditions.

It's up to you to pick the blend that best matches your own preferences.

For much more on this, it's over to that Drawdown: safe withdrawal rates thread.

BJL55

Thank you all for your replies, appreciated.

Thank you jamesd for all of that info, lots to digest.

Some more info, we have decided to retire in May 2018, I've had some bouts of ill health recently, OK now but you never know hence the decision to go early, 3yrs 2 months early for me and 3yrs 8 months for my wife.

The DB offers seem at odds with the CETV, 13.6K + 82K DC or 12.9K+86K max LS which is why I'm looking at a DD option (these quotes were from May 2017).

How does it look if I took a 15% LS for year one (some hols and house work), then 32K >35K till our SP kicks in then 16K > 17K ongoing?

jamesd

Just reduce the starting capital from £438,000 by that 15%, £65,700. Using some of the incomes I mentioned the effect is a reduction of:

4% rule (using 3.5%): 3.5% of £65,700 is a £2,300 a year income cut. So the investment bit falls from £15,330 to £13,030 and total to £37,170.

5% or 6%: cut by £3,300 or £4,000 but really cut as much as cfiresim says with the lower initial capital.

£50,000 to £60,000 with planned reductions and deliberate young age loading: cut by £5,000. These are also much more sensitive to how investments do in the few early years.

jamesd

Schemes decide how low a commutation rate should be used for normal lump sums but the calculation for the CETV transfer value is more constrained. 16:1 lump sum commutation vs 32:1 CETV wouldn't be surprising.

The CETV one is also boosted a bit by things like survivor benefits value that are just given up with the trypical initial lump sum approach.