How significant is Critical Yield

pip895

What assumptions do you think I should I look at in stress testing? returns under inflation over 30 years? 7% average inflation?

I think if we end up in trouble we will not be alone - if things get too bad DB pensions even in payment probably wont be that safe or the state pension for that matter.

Aegis

Malthusian wrote: »

Why do you want to transfer out?

Critical yield is like APR. It is an indication of how likely the transfer is to be a good idea (or otherwise), in the same way that APR indicates how expensive a loan is, even for loans which aren't on an annual basis.

Even if there is no chance that you will want to buy an annuity with inflation-linking and spouse's pension, it is still a good indication of whether you are likely to be better off or not by transferring. In the same way that the Annual Percentage Rate is still a good indication of how expensive a loan is, even if it's a payday loan which isn't designed to be held for a year.

This isn't wrong, but I would say it misses a few key points, most notably which critical yield you end up using. The traditional critical yield is the annuity purchase at a certain age, and I've recommended transfers where this figure is over 30% before - this can happen due to very short timeframes between the current date and the proposed retirement date. It doesn't mean it's a bad idea, it just means it's a bad idea if you want to replicate the benefits using a guaranteed income. Looking at the drawdown critical yield, that client didn't even need to match inflation in order to last past his 100th birthday.

There's talk from the FCA at the moment of downplaying the importance of critical yield in isolation because of how little it actually tells you about whether a case should proceed.

Short answer, if you're considering a transfer with a critical yield that high, there needs to be a good reason.

I'd actually eliminate "with a critical yield that high" from the above. There should be extremely good reasons for transferring any DB scheme, even one with a low critical yield.

Anyone who tells you that the critical yield is irrelevant should be treated with extreme caution.

It's not entirely irrelevant, but the annuity purchase critical yield is one of the least useful factors when considering a DB transfer.

pip895

Aegis wrote: »

It's not entirely irrelevant, but the annuity purchase critical yield is one of the least useful factors when considering a DB transfer.

Thanks for that it does rather confirm my conclusions.

My principal reasons for going for the transfer are
1. Flexibility - fitting in with other income streams - e.g. higher income prior to state pension - probably allowing deferment of state pension.
2. IHT planning purposes

Aegis

pip895 wrote: »

Thanks for that it does rather confirm my conclusions.

My principal reasons for going for the transfer are
1. Flexibility - fitting in with other income streams - e.g. higher income prior to state pension - probably allowing deferment of state pension.
2. IHT planning purposes

Whilst flexibility is important, you should certainly consider how robust your transferred balance will be to either sustained poor performance or significant market shock. You will be potentially taking on the entirety of the investment risk, and as such you ought to ensure that you have sufficient assets overall that you could ride out poor performance.

As to the latter point, you can also consider either gifting from the excess DB income (which can be immediately exempt from IHT) or using some of the excess income to pay for insurance to cover the IHT bill on death. These might be poor options for you, but you certainly shouldn't transfer without considering whether you can achieve all your goals without transferring.

pip895

I do agree it is not clear cut even at >x40 of CETV there are always multiple ways round things but I think I have been through most of the scenarios and am going into this with my eyes open.

The biggest concern I have for the future is for raging UK inflation and quite honestly if this policy had included uncapped index linking I wouldn't have even considered cashing it in.