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

cloud_dog

Jamesd, wow. Thanks for your posts.

There is a lot there for me to digest. You've also highlighted an option for the OH post my demise. I'm not a morbid person, and am looking forward to a long and eventful retirement, but it makes sense to me to consider all eventualities.

Linton

jamesd wrote: »

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.

That is assuming that the retiree has...

1) a very high acceptance of risk as a high % equity portfolio will be required.
2) the ability to understand and implement Guyton-Klinger
3) the experience to manage the high equity portfolio
4) a large cash buffer

I find that running 5.25% Guyton Kilinger 100% equity on cfiresim for 30 years shows a 100% chance of not running out of capital but during retirement a 46% chance of capital falling below 40% of the initial at some point with falls of income down to 1.9% of initial capital. Is this to be expected?

Mutton_Geoff

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

cloud_dog wrote: »

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

You will effectively be giving up an inflation protected guaranteed amount by paying the equivalent of 8%. This is poor value compared to an annuity unless you have some pressing need to pay off a high interest loan from the tax free cash.


My DB scheme has a similar rate. I've used all my AVCs to take tax free cash but there is still some £12k headroom left where I'd have to reduce my DB income. Even as a high rate tax payer, the sums don't add up taking this at a cost of reducing the DB income when I retire.

cloud_dog

Whilst I digest everything I think it makes sense to request a CETV, so that if necessary I can discuss from a point of the absolute rather than the hypothetical.

I'll just reiterate that I am not absolutely sold on transferring. I very much appreciate the value and benefits associated with a DB shceme; if all it does is place the risk management with another party and not us, that is a considerable consideration.

cloud_dog

Linton wrote: »

That is assuming that the retiree has...

1) a very high acceptance of risk as a high % equity portfolio will be required.
....Me Yes, OH no
2) the ability to understand and implement Guyton-Klinger
....Me probably
3) the experience to manage the high equity portfolio
....Me potentially
4) a large cash buffer
....I'm not including inheritance values but if I were and including PCLS that would be in the region of £450k

Irrespective of the transfer decision we will continue with trying to max out the OH SIPP contributions and either retain my AVC or add that in to my own SIPP.

At present I expect us to work for at least another 10 years.

jamesd

Linton wrote: »

1) a very high acceptance of risk as a high % equity portfolio will be required.

The initial portfolio assumption is typical for drawdown, 60% equities. That gives volatility drop of around 30% assuming equity drop of 40% and bond drop of 15%.

Linton wrote: »

2) the ability to understand and implement Guyton-Klinger

The poster here seems able to and could leave instructions to partially annuitise and switch to the level inflation-adjusted income approach after their death.

Linton wrote: »

3) the experience to manage the high equity portfolio

Two funds doesn't take a lot of managing, one equities, one bonds. Though a small cap should be added and more could be used.

Linton wrote: »

4) a large cash buffer

A year or so of investment income, perhaps. Though lump sum matching provided £157,000 of tax free lump sum that I didn't use for income and I largely ignored the DC pensions and other savings and investments.

Linton wrote: »

I find that running 5.25% Guyton Kilinger 100% equity on cfiresim for 30 years shows a 100% chance of not running out of capital but during retirement a 46% chance of capital falling below 40% of the initial at some point with falls of income down to 1.9% of initial capital. Is this to be expected?

That's the sort of thing that should be expected if the retiree lives through a bad investment returns sequence. However, UK worst case would see capital going to zero as the limiting value if there was a third world war involving substantial attacks on the UK, which is part of the UK's 1936 case. The US worst cases with much lower world war harm are the late 1960s.

I normally suggest using Guyton's sequence of return risk reduction method and that allows higher income with reduced equity drops. I also normally suggest using the cfiresim option to set an income floor.

I'm not sure whether or how you included spousal and state pensions or partial annuitisation in your cfiresim trials. The £23,634 or £23,632 of guaranteed income is quite important when looking at the worst case end of the range of outcomes and cfiresim does provide the options to include those. £23,632 is 3.7% of £639,600. 1.9% of £639,650 is £12,152, so I wonder if you included them, since that looks too low.

jamesd

Mutton_Geoff wrote: »

Conversation rate of pension to lump sum is only 1:12.5 ... You will effectively be giving up an inflation protected guaranteed amount by paying the equivalent of 8%.

A CETV is normally much higher than a commutation rate, 32:1 wouldn't be unusual at the moment. That is why I used no lump sum for the OH with no transfer for them, though.

Mutton_Geoff

jamesd wrote: »

A CETV is normally much higher than a commutation rate, 32:1 wouldn't be unusual at the moment. That is why I used no lump sum for the OH with no transfer for them, though.

I understand that, if the OP chooses to CETV then access to tax free cash is more of a "no brainer" but to reduce a DB pension for the sake of accessing the tfc is not automatically a simple decision.

bostonerimus

cloud_dog wrote: »

I'll just reiterate that I am not absolutely sold on transferring. I very much appreciate the value and benefits associated with a DB shceme; if all it does is place the risk management with another party and not us, that is a considerable consideration.

Exactly....why do you think companies and so keen to off load their DB pensions to employees. They want to get rid of the risk and it surprises me that so many people are so anxious to oblige.

cloud_dog

bostonerimus wrote: »

Exactly....why do you think companies and so keen to off load their DB pensions to employees. They want to get rid of the risk and it surprises me that so many people are so anxious to oblige.

Yes, and under normal (old????) financial circumstances the CETV ratios were horrible and made the remain within the DB a no brainer. Whilst we are currently under exceptional financial circumstances / coming out of those circumstances the ratios have become far more 'generous' (for want of a word), and have to a large degree tipped the balance point toward a CETV in a number of scenarios.

All of this is why I am keen to chew the cud and try to understand any implications as much as possible (either way).