Thoughts about my pension please..?

C_Mababejive

Briefly, i am a member of a 1/60 DB scheme which is solvent.

I have 34years 177 days or thereabouts of pensionable service.

My benefit statement as of june 2017 said;

An annual scheme pension as at june 2017 of £18,489

pension at age 60 estimated 22176 or a TFLS of £110,274 and a reduced pension of 16541

or

pension at age 65


estimated 24,935

or TFLS 119500 and reduced pension of 17927

pensions are rpi indexed

Im currently 54.


Firstly, err,,,how does this look ? is it crap,poor,average,good,very good,extraordinary, or mind blowing?

My initial feeling is "good"

I have a typical CETV of circa 730k

I am pretty low maintenance so my personal rate of inflation is likely to be lower than that quoted by ONS.


According to the Aviva life expectancy calculator i will typically die at age 88. Im feeling in pretty good shape and healthy right now.




In a typical pension fund, what would be a "safe" annual yield ?

My initial thoughts are about 4% before charges.

This would generate just a bit over £25k pa without capital erosion. I am expecting that it might be a bit more complex than that?

My retirement plan is to pay as little tax as possible so prior to state pension payment, draw maybe up to personal allowance from pension fund and top up with ISA income etc ??


How much might an IFA charge to manage a pension fund? Is 1% typical?

Thanks all.

Thrugelmir

C_Mababejive wrote: »

In a typical pension fund, what would be a "safe" annual yield ?

My initial thoughts are about 4% before charges.

Where do you plan to invest your money to obtain this "safe annual yield"?

C_Mababejive

Well i hear you Thrug hence the "" around the "safe",,maybe i should have said "low risk" i.e the sort of investment vehicles generally considered suitable for providing an income for a pension investor...! Essentially is it easy to generate 4% or thereabouts from a low risk pension investment portfolio?

kidmugsy

C_Mababejive wrote: »

Essentially is it easy to generate 4% or thereabouts from a low risk pension investment portfolio?

It depends which risks you want to keep low.

(i) If you want to keep the risk of losing capital value in nominal terms low, you'll need to keep much of the money in cash or in fixed interest bonds. So you are most unlikely to earn 4%.

(ii) If you want to keep the risk of losing capital value in real terms low, you would in principle need to keep much of the money in index-linked gilts. But they are so expensive at the moment that they would lose you money in real terms if you kept them to maturity.

(iii) Commodities and gold don't pay out yields: you depend on capital gains. Do you want to? There's always commercial and residential property: do you feel lucky, punk?

(iv) Which brings us inevitably to equities. You can reduce their risks by accompanying them with the other asset classes mentioned, and rebalancing annually. If you were to live for another century you could reasonably be optimistic of making a decent real return on equities, with 4% being entirely plausible on a diversified portfolio with plenty of equities. But you are not a perpetual corporation so equities are riskier for you.

Dox

I"m confused by the sentence 'I have a typical CETV of circa 730k'.

Typical of what? You can't have a guaranteed CETV while you are still an active member of the scheme, but you obviously have something in mind by using that phrase...would 'indicative' more closely describe it?

Terron

I am confused. You have a good DB pension, but are asking about low risk ways to invest. Keeping it as it is is about as low risk as you can get,.


Are you thinking about withdrawing from the DB scheme? If som why?


Are you looking at retiring early?

kidmugsy

Terron wrote: »

You have a good DB pension, but are asking about low risk ways to invest. Keeping it as it is is about as low risk as you can get.

Very true.

In my comment above I should have added that someone who is happy to pay 1% p.a. for advice, plus the inevitable charges by providers and investment managers, is going to find it hard to be confident of a 4% real return.

If the OP is keen to have some capital to manage he could always take a TFLS from his scheme. The commutation rate at 60 is about 20, so that's not too bad.

grey_gym_sock

C_Mababejive wrote: »

Well i hear you Thrug hence the "" around the "safe",,maybe i should have said "low risk" i.e the sort of investment vehicles generally considered suitable for providing an income for a pension investor...! Essentially is it easy to generate 4% or thereabouts from a low risk pension investment portfolio?

perhaps you've heard talk about a "4% safe withdrawal rate"?

this is sometimes mentioned, but it may not mean quite what you're thinking it means ...

it doesn't mean safe in the sense of sticking to low-risk investments. it usually assumes that you'll invest the pot in a mixture of equities and bonds, and that will include a lot of equities, which (as you know) are very volatile in price (though they often - not always - do well if you can hold them for the longer term).

the 4% "safe withdrawal" theory is about what happens if you invest your pot - so let's take your £730k figure as an example - in such a mixture of equities and bonds, and then start drawing a pension from the pot of 4% of its initial value - i.e. c. £29k per year. the theory is that you start drawing £29k a year, and you increase that in line with inflation annually, so if inflation is 3% you might be taking c. £30k in the second year, and so on.

so, what happens to the pot of investments? well, it fluctuates, e.g. it could go up to £1m or down to £500k, or whatever. but you keep on drawing your £29k a year (adjusted for inflation) regardless! fine if the pot has gone up, but a bit risky if it's going down. the 4% safe withdrawal rate theory says that, supposing your retirement lasts for 30 years, your pot is unlikely to run out completely within that time, if you invest in this kind of portfolio of risky assets and use this completely inflexible withdrawal strategy.

the 4% figure comes from some back-tests. i.e. they asked what would have happened if somebody had used this strategy at any time in the last 100 years or so (which is about as far back as we have reliable records about returns from stock markets). and 4% was about as high as they could go without there being a risk of running out of money within 30 years.

however, returns may be different in the future. and you may live longer than 30 years! so, while the 4% studies are interesting, you wouldn't actually use that as a strategy!

what you might more sensibly do is use a more flexible withdrawal strategy. i.e. you might start by withdrawing 4% of your pot (or even 5%) as pension, but be prepared to reduce that to 3% (or 2%) if investment returns are going badly (i.e. the pot is reducing in size). there are some fancy formula about how much you can withdraw year by year (which i don't know about in detail, but you could look for posts by jamesd mentioning guyton & klinger).

so, to summarize, there are possible methods of investing a £730k pension pot that might give you a higher income than just keeping your DB pension as it is. but it is not possible by sticking to safe investments, only by using riskier investments and more complex strategies.

perhaps the more important question is: what would you gain by giving up a guaranteed pension? does a potentially higher pension matter to you? is it worth taking on more risk in pursuit of that?

C_Mababejive

Thanks Gym sock,,, Well ive toyed with this for a while now.

Regarding the 4% model, if it has been tested back for many decades then its probably a reasonable starting point ?

The 4% i was looking at was 4% annual yield from a potential portfolio after charges. Is that unreasonable?

I realise there are no safe investments but there must be safer investments suitable for pension funds that have reasonable charges?

Transferring--well this is it. I have no dependents. The choice is have someone else meter out a fixed amount(plus indexation) and have no control of taxation, or have title to a big stack of money where i can control taxation, am willing to reduce income in poorer years if necessary to preserve capital, etc..

I know dead people dont need money but what if i retire and snuff it in 5 or 10 years ? I wil have had nothing like the potential CETV out of the scheme.

On the other hand, a good helping of caution does no harm. Maybe there are lots of IFAs getting rich on upselling transfers whilst quietly downplaying the risky bits?

Maybe the current surge will be the next PPI scandal,,

If my DB pension were your DB pension, what would you do ?

Alibert

If I could, I would swap my big pot for a DB scheme like yours

kidmugsy

C_Mababejive wrote: »

Transferring -- well this is it. I have no dependants.

You could always compromise e.g. take a transfer and then use part of the pot to buy yourself an index-linked annuity (providing a very, very low risk income to cover your essential expenditures) and use the balance of the capital for investing. Or, another compromise: take the transfer, keep a lot of the capital as cash and bonds, and use that money to spend while you defer your State Pension - that's another variant of buying an index-linked annuity.

But if you have no dependants to leave your left-over capital to (if there were any left over) why would you take the risk of giving up a guaranteed RPI-linked income?

I repeat my suggestion of the other-way-round compromise: keep the DB pension but take a max TFLS from it if you really want to try investing. Remember the ancient question: "If you don't need the return why take the risk?"