What to do with DB Scheme

sandsy

Would you be able to sleep at night, knowing your future was dependent upon your £900k invested in the stock markets? Especially, given your self-stated tendency to be risk averse?

Do you have a good idea of your needs in retirement and how you want to spend your retirement income?

GSP

Do you have any children you might want to leave a nest egg to.
With a db pension, it dies with you and your spouse.
With income drawdown, monies left can go to anyone you wish.

CRUISEMAN

kidmugsy wrote: »

Given that you are tempted we should ask the usual questions.

How good is the index-linking? How sound are the scheme's finances?

50% widow's pension? How's your health and your wife's? Any objective reasons to expect unusually short or long lifespans?

Any compelling purposes for a large TFLS?

And perhaps the clincher: is either of you given to fretting?

The pension is with one of the UK's top clearing banks. Index linking is good (RPI?) and a 50% spouse pension. TFLS? And the Missus is prone to fretting.

kidmugsy

CRUISEMAN wrote: »

The pension is with one of the UK's top clearing banks. Index linking is good (RPI?) and a 50% spouse pension. TFLS? And the Missus is prone to fretting.

TFLS = tax-free lump sum: is there one automatically offered as part of the scheme?

DB pensions are just the ticket for people who are prone to fretting.

Another question is about managing the money if you transferred it. How would your wife cope if you died first? How would you cope as you got old and "cognitive decline" became serious?

If the bank's scheme is offering you 40x the trustees must presumably have balanced up making the offer attractive enough that many staff would accept it and therefore remove liabilities from the scheme, versus making it too costly for the scheme to pay.

If the RPI-linking has no cap on it that might explain why the offer looks so good. It's because what you'd be giving up is so good.

You should, I suggest, look at the scheme rules to see whether RPI is baked in or whether there's enough slack that they could swap to some other inflation index in future.

CRUISEMAN

kidmugsy wrote: »

TFLS = tax-free lump sum: is there one automatically offered as part of the scheme?

DB pensions are just the ticket for people who are prone to fretting.

Another question is about managing the money if you transferred it. How would your wife cope if you died first? How would you cope as you got old and "cognitive decline" became serious?

If the bank's scheme is offering you 40x the trustees must presumably have balanced up making the offer attractive enough that many staff would accept it and therefore remove liabilities from the scheme, versus making it too costly for the scheme to pay.

If the RPI-linking has no cap on it that might explain why the offer looks so good. It's because what you'd be giving up is so good.

You should, I suggest, look at the scheme rules to see whether RPI is baked in or whether there's enough slack that they could swap to some other inflation index in future.

I have the option with the DB of taking £74k cash and reducing the pension to £11k pa.

kidmugsy

Here's another view. Suppose the index-linking really is RPI uncapped.

Then 40x implies that you would be doing the equivalent of giving up an RPI-linked annuity, with 50% widow's benefit, that pays 2.5% initially. Nobody in good health, aged 57 or 58, could buy a commercial annuity that paid as much. Do check online annuity calculators: I doubt you'd get as much as 2%. Looked at that way even 40x is not fantastic value. Good value, certainly, but not fantastic.

If you had a compelling use for the 25% lump sum from a transferred pension, if both of you were used to managing investments, and if neither of you were prone to fretting, then in your shoes I'd be seriously tempted.

The first thing you must do is "Know thyselves". The second is that you must ignore rubbish about "equities always go up". For two reasons: (i) it's about the future, and nobody can possibly know that about the future, and (ii) it's not even true about the past. A lot of people on MSE have an absurdly starry-eyed view of equity investment, with not a glimmer of understanding about how erratically they can perform.

We've done well from investing in equities. The secret is to be lucky enough to have investable money when shares are good value, and to have the sense to take the opportunity. (It also helps if you can identify when shares are lousy value and take the opportunity to sell.) Are you feeling lucky?

kidmugsy

CRUISEMAN wrote: »

I have the option with the DB of taking £74k cash and reducing the pension to £11k pa.

So a commutation rate of nearly 25. That's pretty good. It makes me think that the pension you'd be giving up must have pretty good terms if the trustees are prepared to pay 25x to be rid of some of the liability. Do you have any compelling need for the £74k?

CRUISEMAN

Just checked and the scheme rules are an annual increase of RPI to a maximum of 5% and even then "at the trustees discretion" they can go above that.


No pressing need for the £74k as the mortgage will be paid off. In any event, I can get a TFLS (getting with the terminology now!!) of £85k from the DC scheme.

cloud_dog

Two points...

1. Even with the recent corrections, we are still in one of the longest running bull markets
2. The OH is prone to fretting, this would be a big red flag for me (I previously went through all the considerations you are going through), unless you have a solid plan for how to manage the situation should you precede your OH?

kidmugsy

cloud_dog wrote: »

... unless you have a solid plan for how to manage the situation should you precede your OH?

Yes, buying an annuity for his wife after his death would be a solution, but it's a solution that pretty much invites him to retain the DB pension instead.