Another CETV Q; Help Me Thrash It Through...

LHW99

With regard to the health issues you mention, your mother's experience is likely to be important going foreward - those sort of operations are becoming more routine, and as she shows give an extra length of good quality life.
I would definately consider seeing what the survivor would be left to live on if the pensions are left as they are, compared to taking a CETV. Also could your OH cope if left with the lump sum to invest?

Thrugelmir

cloud_dog wrote: »

But, my DB pension minus PCLS would be £21773pa so, a 3.5% withdrawal rate would provide a comparable pension.

Your DB is index linked however.

Conversation rate of pension to lump sum is only 1:12.5

If CPI were 2% what would your DB pension be after 20 years?

Likewise what your wife would then receive.

cloud_dog

LHW99 wrote: »

Also could your OH cope if left with the lump sum to invest?

That is also a consideration. This aspect is not something my wife would want to pick up.

cloud_dog

Thrugelmir wrote: »

Your DB is index linked however.

Conversation rate of pension to lump sum is only 1:12.5

A little unsure what you are asking/pointing out here (apologies)?

Thrugelmir wrote: »

If CPI were 2% what would your DB pension be after 20 years?

According to the information on pension increases (posted in post #6), there is a range of price indexing for different years, I assume based on CPI (it refers to 'price inflation'), ranging from 2.5% to 5% (maximum). So assuming a 2%CPI for 20 years the pension would keep track with CPI (2%).

Thrugelmir wrote: »

Likewise what your wife would then receive.

Unsure. Unsure if it relates to 50% of the pension commencement amount (per year) or the pension at the time of death. I believe that the spouse pension would continue with the CPI increases as documented above (but would need to double check to confirm).

jamesd

cloud_dog wrote: »

One other thing that is at the back of my mind and, I believe needs due consideration. My father passed at age 63 from heart attack, my paternal grandmother passed at age 77 due to angina, my mother had a triple heart by-pass when she was 72 (she still going at 82, whoop whoop). This is not something I can ignore.

My father died of a heart attack in his mid forties and my mother of a pulmonary embolism at about your mother's age. You're right to consider it but I suggest that you consider doing what I did: CT screening checks with Lifescan, though they have now withdrawn from the market. What those tests told me is that I have only average risk, based on actually looking at heart images, not relying on lifestyle and family history. That greatly reduced my level of concern. I also went with their virtual colonoscopy option and that showed no sign of cancer issues. So spend a few hundred Pounds to find out and that could greatly reassure you or indicate something you need to do.

bostonerimus

Thrugelmir wrote: »

Your DB is index linked however.

Conversation rate of pension to lump sum is only 1:12.5

If CPI were 2% what would your DB pension be after 20 years?

Likewise what your wife would then receive.

"Safe" withdrawal rates from DC pension pots take inflation into account.

bostonerimus

cloud_dog wrote: »

I tried to cover that in the initial essay

I think it basically comes down to flexibility in allowing you to make more appropriate choices, if situations arise and you need to. No one has a crystal ball. For example retirering earlier (than 65), the ability to have financial means should I be made redundant late in my working life. Flexibility = Options.

Passing on money is not a primary consideration but it is something to consider, as per my comments on hireditary health. On its own it is not a factor.

I don't have a requirement / need to spend capital. I'm sure there will be requirements to spend capital going forward but it is not something that is in my decision makinh process.

Ok, you are making the present day all too common assumption that a large DC pension pot gives you more freedom and options that a DB pension. In some ways it does; it gives you the freedom to lose the capital necessary to generate income, and the freedom to worry about managing the money and also the freedom to have an increased possibility of lower income if you live longer than expected.

Having a combination of a DB pension and savings in ISAs etc gives you security and freedom. A DB pension is the best way to produce retirement income. I'm so glad I have mine and I hate to think that you would cash yours in believing that it will give you greater freedom or peace of mind in retirement.

jamesd

cloud_dog wrote: »

Pension Me: DB scheme, NRA 65 Pension at NRA: £33386pa. Pension OH: DB (age 67), S32 (age 60) LGPS DB at NRA: £2900pa ...
Based on the £852800 value, minus PCLS, would leave £639600. A draw down rate of 4% (???) would equate to a pension of £25584pa.

There's one really obvious thought: the household has DB pensions for two individuals and different options can be chosen for each pension.

For yours, transferring seems to be obviously the right choice: reduced life expectancy and improved spousal pension plus more benefit for the child either during life or after death, since the child isn't going to get any DB pension payments for long.

But you've given no indication that your OH has similar risks so they could take full pension income with no lump sum commutation.

Going back to yours, you seem to have decided to throw away the tax free lump sum after transferring and that's not a good move so I won't do that. I'll assume you both would want default DB lump sums and use your pot-transfer tax free lump sum to provide oth so your OH does no commuting. This gives these numbers.

You: assumed £8k state pension. £639,600 taxable at UK's 5.5% 40 year safe withdrawal rate minus 0.3% to allow for charges of 1% for a 60:40 equities:bonds mix to provide initial £33,259 of taxable income. Tax free lump sum of £213,200 which has £145,150 deducted to match your reduced pension lump sum and £12,490 for OH's lump sum. I'll assume you do with those deducted amounts whatever you'd do with the DB ones. That leaves £55,560 of your lump sum still available. At £8,000 a year I'll use it to fund 6.945 years of state pension deferring for the OH to produce an additional £3,222 of guaranteed inflation linked income. For your OH it's assumed £8k state pension plus unreduced DB of £2,900 + £292 + £1,220 = £4,412.

For the household that's matched tax free lump sum amount, £8,000 * 2 + £3,222 + £4,412 = £23,634 of guaranteed inflation-linked income, £15,634 of which survives your death, plus initial £33,259 of drawdown income which all survives your death, with the option to annuitise all or some of that capital pot. That's combined £56,893 of initial household income of which £48,893 survives your death. £33,259 survives both deaths and is available to the child.

All DB instead delivers matched tax free lump sum and £21,770 + £8,000 * 2 + £1,875 + £292 + £1,220 = £41,157 initial income. Of this, £21,770 * 0.5 + £8,000 + £2,900 + £292 + £1,220 = £23,262 survives your death and £0 survives the second death.

                 Don't transfer           |   Transfer
                 Guaranteed      Total    |   Guaranteed       Total
Initial          £41,157         £41,157  |   £23,634          £56,893
First death      £23,632         £23,632  |   £15,634          £48,893
Second death     £nil            £nil     |   £nil             £33,259

It's worth saying what the safe withdrawal rate is: the safe initial income value if you were to experience a repeat of the worst starting year in the last around 120 years. The Guyton-Klinger rules skip inflation increases in bad years and cut income if capital drops a lot. In more normal circumstances than worst the income would increase by more than inflation instead. 1936 was the worst starting year, harmed by the second word war.

jamesd

Now, say you want more guaranteed income, at the expense of lower total income. Easy enough. At the moment at age 65 a single life level annuity pays 5.3%. There's a £7,998 difference in OH guaranteed income after your death. That could be bought for £7,998 / 0.053 = £150,905. That much less capital would reduce the variable SWR income by £150,905 * 0.052 = £7,847. The new comparison table then looks like this:

                 Don't transfer           |   Transfer
                 Guaranteed      Total    |   Guaranteed       Total
Initial          £41,157         £41,157  |   £23,634          £56,893
First death      £23,632         £23,632  |   £23,632          £49,044*
Second death     £nil            £nil     |   £nil             £25,412

I used a level annuity because I know that spending normally declines with age so letting inflation do some of that seems sensible, though I haven't tried to illustrate this in the table. If desired additional annuity buying could be done to remove the effect. This table did the annuity only after your death because you're relatively comfortable with investing while your OH isn't, so matching the guaranteed after your death income looks interesting.

* this is higher than before in initial worst case SWR income but partially not inflation linked to a greater degree and partially without the income increases expected from average or better investment returns. The normally expected income is really lower.

jamesd

bostonerimus wrote: »

A DB pension is the best way to produce retirement income.

That's not really true. What it is is one of the more predictable ones.

But consider this case with expected 32:1 CETV, equivalent to 3.125% income per Pound of capital.

That's far worse than the UK Guyton-Klinger 40 year safe withdrawal rate after 1% fees of 5.2%. Though that is initial and it may well decrease. Unlikely to drop as low as 3.125% and state pension deferring and/or annuity buying can be used to increase the guaranteed portion as desired.

At current transfer values the DC transfer can be considerably more flexible about the guaranteed and unguaranteed mixture, potentially delivering more guaranteed if desired.