Could anyone comment on taking a CETV who has done it??

[Deleted User]

Don't be like Dairy Queen, converting a DB pension then twitching and apprehensive as she faces towards the future.
"Happy and contented" is a good moniker - I'm a gambler but for you two I reckon the DC pension is the better option.

bostonerimus

I'm in the US and had a unique opportunity to do the reverse of a CETV. My employer (a state government) actually allowed employees to transfer balances from the optional DC pension into the DB pension plan because of some lobbying from the unions after the 2007 crash. It reeked of "moral hazard". As I already had DC pensions from previous employers I bought into the DB pension and had a tidy sum left over in the DC account. The actuarial numbers made the transfer easy as if I lived an average lifespan I'd have to get 7% annual return on my DC pot to equal the DB lifetime income and form an asset allocation perspective it was easy too as the guaranteed income means I don't have to worry about income generation from the DC pot and can stay aggressively invested.

[Deleted User]

2018/2019 was my window for taking a CETV but, if the same rules apply, happyandcontented can decide as late as 2023.

All the more reason to convert the DC pension now and see how the couple deal with the responsibility. If all works out and they have the appetite, go all in with the DB pension.

Appears the ideal compromise for the cautious couple.

happyandcontented

ZingPowZing wrote: »

2018/2019 was my window for taking a CETV but, if the same rules apply, happyandcontented can decide as late as 2023.

All the more reason to convert the DC pension now and see how the couple deal with the responsibility. If all works out and they have the appetite, go all in with the DB pension.

Appears the ideal compromise for the cautious couple.

Sorry, I am not sure what you mean, the DC pension is invested in a SIPP which we can put into drawdown whenever we choose to do so.

[Deleted User]

happyandcontented wrote: »

Sorry, I am not sure what you mean, the DC pension is invested in a SIPP which we can put into drawdown whenever we choose to do so.

Sorry, I did not know.

But why not play around with that £300/400k rather than give up the guaranteed benefits of an £800k DB pension?

ffacoffipawb

ZingPowZing wrote: »

Sorry, I did not know.

But why not play around with that £300/400k rather than give up the guaranteed benefits of an £800k DB pension?

... is the correct answer.

happyandcontented

DairyQueen wrote: »

Yep, me.

I'm not sure my experience will be helpful as the wisdom (or not) of transferring is so dependent on each individual's circumstances. The major differences between your situation and our's are:
- you are considering transferring your main source of guaranteed income
- I have reduced life expectancy.

I transferred in 2017 with an enhanced CETV (x 32) from a private sector DB and was fortunate that the scheme paid for the IFA (I received a positive recommendation). I was then age 58 with a scheme NRA of 60 and already retired (supporting elderly parents). Property (mortgage-free) of approx £500k. Mr DQ (two years older and still working) has a generous DB pension which he has since deferred in order to increase to £32k at age 65 (2/3rds widows - max 5% indexation) plus a small S32 of approx £3k (no indexation). We have 2 x full nSPs from age 66. In 2017 our combined other assets (SIPPs/DCs/ISAs/ cash) was collectively worth around £500k.

Positives for transferring:
1) My reduced life expectancy
2) Sufficient other guaranteed income
3) Mr DQ did not require the widow(er) benefit
4) No dependents
5) Limited indexation on the DB pension once in payment. Discretionary increases on the excess in reality meant zero increases for several prior years, plus max 3% indexation on the post-88 GMP.
7) I had experience (non-expert) of managing our portfolio - including SIPPs
8) High tolerance to risk
9) Tax. Mr DQ will flirt with HRT once all pensions are in payment and he is in drawdown, and breaching the (2016 protection) LTA is a danger. I, on the other hand, would be best-served taking flexible drawdown rather than a DB income to minimise income tax during my lifetime and max the inheritable benefit.

At the time we were not considering 'up-valuing' our property but are now considering doing just that. We also have an eye on a dream property that may require an additional £100k-ish to purchase.

Foregoing guaranteed, index-linked income is a very big decision and, even without the LTA implications, we would never have considered transferring from Mr DQ's DB. The only risk is the potential for it to end-up in the PPF before it goes into payment. Weighed against the financial benefits, and Mr DQ's rude health and family history of longevity, that is a small risk worth taking.

I am now managing a portfolio approaching £800k. The psychology of this shouldn't be underestimated. I have yet to experience the 30% drop my asset allocation and history suggests will happen sooner rather than later. That percentage drop will be higher if the crash is delayed a few years as we are currently overweight cash in order to front-load drawdown when OH retires in around 15/18 months.

Handling that 30%+ drop will be much, much easier with the comfort of our guaranteed income. How will you feel when your £800k crashes to, perhaps, £500k? You will need to have a plan and a strategy. You will need to be sufficiently well-informed to have confidence that you will not panic. It has taken me around 3 years to believe I am ready but I have yet to be tested.

Given the situation with bonds and cash, you will need a reasonably high equity percentage to sustain the heavy lifting required to maintain returns over the long-term. Are you able to tolerate the associated level of risk?

How much income do you need? This is a fundamental question that will weigh your transfer decision. Will you be able to cut your cloth/use cash in order to suspend drawdown for a prolonged period in the worst case scenario?

We decided to plan around probabilities. Possibilities are unlimited so go with the probability stats. This is especially true of life expectancy. The probability is that you will both live into your mid/late 80s (at least) and that a younger/same-age female will outlive her male spouse. There is a 25% chance that one of you will live to 95+. This is the opposite of our probability but likely applies to you.

Will the likely survivor be able to manage the portfolio? If no, who will manage?

The chances are high that you will need domestic support in your dotage and there is a 25% chance that one of you will require residential care. How will this be funded?

Do you wish to leave an inheritance? If so, why and how much? We decided against ring-fencing any assets for heirs. Our priority is each other's welfare and anything left will be a bonus for the beneficiaries.

What is your travel budget for your active retirement years. Is it affordable if you buy the dream house? Could it be sustained if the markets crash?

We found it helpful to do a comparison of our possible lifestyles based on our min/max expenses and comparing our min/max net income with/without transferring. Ditto inheritance.

Ultimately only you can decide whether the risk of transferring is worth the potential benefit. It could enable that dream house or it could reduce your income for several years in early retirement if sequence of returns is against you.

For us, transferring OH's DB failed the test but transferring mine passed it with flying colours.

Good luck.

Thank you, that was a very considered answer.

To answer some of your questions;

We have decided against buying that dream house for several reasons: it is unlikely to be a good investment price-wise as it is a new build, it is not in the ideal location for me as if I was left alone it would mean I had to drive to see friends which is currently not the case and there are some issues with the approach to it that worry me (but not DH).

Plan B is to sit it out and wait for one of the houses we love in our current location to come to the market, which is likely to be any time in the next five years. This will be worth less than our current home but will need renovation to upgrade it. So should end up cost-neutral.

We will need an income of c 40k for the first five years of retirement to allow for long haul travel: Australia, NZ, India, California, Canada. We have already travelled quite extensively and they are the only places we feel we would either like to return to or would like to see. After that, we feel that we would be quite content with European travel but in luxury, if we choose to do it that way. Although we have also done a lot of luxury European travel and often the less luxurious hotels/restaurants are the ones which stick in the memory. For example, in Positano, we ate at many top restaurants and a couple were a real let down, however, one of the most memorable was the meal we ate roadside overlooking the bay, the other was at Le Sirenuse which is high end, so we would like the choice!

After the first 5 years, our travel needs and therefore, our income requirements will drop substantially, and our SP will kick in at that point. I estimate that by then 2k a month from other pensions will suffice as long as we have access to savings for larger purchases. We both have new cars so that is unlikely to be an issue and we anticipate that we will drop to one car in retirement.

We could also downsize to release cash if needed.

Of course, the money is primarily for the benefit of us both and we won't stint to leave any, but we do want to leave an inheritance if possible, and with a DB that isn't on the cards. it certainly won't be ring-fenced.

With regard to managing the portfolio, one of us is money-savvy, the other less so, therefore, it would depend on who was left.

On the subject of market falls that is less clear cut, like you, I would hope we would ride it out and the long haul travel plans are not set in stone and it would not kill us if we could not realise all of them. We would probably be quite content with European forays!! Our other outgoings are pretty modest, we like to eat out and we enjoy good wine, but we realise that as we grow older those needs will wain.

Care is another unknown entity, but we (sadly)will also have an inheritance of c200k in the relatively near future which will go some way to address that need if required.

I think that whilst we are still both in reasonably good health, we have the fear that won't last and so we will not live long enough to gain the full benefit from the DB pot. Also, we do want to consider the inheritability issue, however much or little that might end up being.

DairyQueen

happyandcontented wrote: »

Thank you, that was a very considered answer.

We will need an income of c 40k for the first five years of retirement to allow for long haul travel:
...
After the first 5 years, our travel needs and therefore, our income requirements will drop substantially, and our SP will kick in at that point. I estimate that by then 2k a month from other pensions will suffice as long as we have access to savings for larger purchases. We both have new cars so that is unlikely to be an issue and we anticipate that we will drop to one car in retirement.

The income requirement is the stand-out part of your reply. For me, sleeping at night relied on meeting our basic income requirement without worrying about the markets. This was fundamental to whether (or not) to transfer regardless of the positive IFA recommendation.

I'm a bit confused by the figures as it seems that you are seeking a higher annual income after you complete your bucket-shop travels. You suggest £40kp.a. to include a luxury travel allowance for the first 5 years, and then non-SP income of £24k (£2k p.m.) plus 2 xSP after that. The nSP will generate around £18k for the two of you so that would make a total of £42kp.a. as your 'base' income target throughout the remainder of retirement.

I spent many days with a metaphorical microscope analysing our income requirement but approached annual cash flow in a slightly different way from you. I split our projected expenses (minus one-offs like early-retirement travel and capital expenses) into non-discretionary (e.g. keeping roof over head, eating and clothes) and discretionary (e.g. leisure activities, eating out). The non-discretionary was the absolute minimum we needed annually throughout retirement to survive. Adding the discretionary amount gave us our 'comfortable'/base annual income requirement.

I then calculated how much extra cash we would require to cover one-off costs (cars/replacement white goods/moving house/etc.) throughout retirement. This was very much a finger-in-the-air job but I allocated that from our capital, not from income.

These two figures (income and essential capital) were our minimum/base retirement numbers. Any assets/income above this would be available to fund really good stuff like early retirement/bucket list/higher income.

Your posts suggest that your comfortable income requirement is either £40k or £24k p.a. If it is the latter (and gross) then it's currently covered by the DB you are considering transferring. 2 x SPs are also not far off meeting it until the first of you dies. However, these guaranteed sources don't kick-in for years after you wish to retire and work your way through the bucket list.

£400k in other assets, plus another £200k on the horizon, suggests you will have plenty of wiggle-room to cover capital expenses/bucket list/early retirement without transferring the DB. This asset cushion also allows you to bridge income shortfall between the DB at 65 and SPs at 67. The DB and SPs will more than cover a (gross or net) income requirement of £24kp.a.from age 67 but drawdown from your portfolio will be required if that figure is actually £42k net.

If, say, £200k is required to cover your travel bucket list and to bridge income until the DB/SPs kick-in, and (say) £100k will cover capital expenses throughout retirement, then the balance of £300k (including the £200k inheritance? plus investment returns) would be available for drawdown from the age of 67. However, you may need to allocate some to a cash buffer in order to suspend drawdown if the markets crash.

A £300k pot would support drawdown of £9k p.a. at a 'safe' 3%. More if you adopted one of the flexible drawdown strategies like Guyton-Klinger.

OTOH...

If you transferred the DB...

You may breach the LTA so tax could be an issue. Assuming that the entire £800k would be available it would generate £24kp.a. at 3%, and perhaps 5/7% with a flexible withdrawal strategy. It would be available to you immediately after transfer and would reduce the need to bridge from other investments.

However, if your income requirement from age 67 is £42k net then the £800k would require careful management as drawdown would be essential. This could be do-able for the money-savvy one of you but, even then, assume you will lose the ability to do so once you are well into your 80s. At some point an IFA will be required.

Our other major concern was losing the ability/willingness to self-manage in our dotage. I think that the attractions of a big money DB transfer diminish with age as guaranteed, trouble-free income is much more of a priority in old age. This is also true after the first death, and especially if the survivor isn't financially savvy.

Mr DQ and I are both competent financially but I am far more au fait with managing investments. As he is likely to be the survivor it is better for him that he will have a guaranteed income from his own DB and SP to meet his needs. The balance of my SIPP, and our other assets, will be available to fund his care costs if required. Releasing equity from property will be the last resort.

Also, don't underestimate the difficulty of actually transferring. I am sure you have read about the costs/limitations associated with this, and the regulator is becoming tougher on IFAs each year. On the info you have provided I think it unlikely that you will receive a positive recommendation and transferring as an insistent client will complicate the process.

I understand why this decision isn't clear-cut for you but it may help to project yourself forward 20 years. Your needs and priorities at 80 will be very different. It appears that you will have the means to fulfil your travel dreams without transferring, and a guaranteed comfy income is something most can only dream of.

happyandcontented

Yes, I do need to sit down and assess in more detail to two sets of projected expenses and the two categories you suggest would fit the bill.

Income after the first five years would still only be from private pensions as SP is seven years away. So the 24k which was a plucked from the air figure really would need to be wholly funded from other sources for 2 years. From 67 we would have the extra 18k to add into the pot which would reduce the drawdown figure substantially.

However, when we analyse it the issue with the DB pension is that it is our money but we will have it drip fed to us and have no control over it and at 25k PA we would only break even if the holder lives for over 30 years. Spousal pension is 12k if the pension is already in payment and simply the return of premiums if death occurs before that.
So, in essence, although the probability may be that one or both of us lives to extreme old age we are gambling a lot of money on that premise. We may actually fall into the same category as several of our friends who had short illnesses from a previously healthy base and died prematurely.

For argument's sake if we simply stuck the whole lot into (several) interest bearing accounts or even premium bonds (which we won't do!) it might gain us 2%PA which would just about keep pace with inflation and be safe from the vagaries of the markets but give us control over how and when we use it. Ditto, very safe, cautious investments inside a SIPP. The returns may not set the world alight but we would have control and relative safety for the cash pot. Conservation of the pot not growth would probably be our main concern if we went down the transfer route.

Logically, that is probably not the way to look at it, and maybe for the very financially savvy they ring alarm bells, but try as we might those thoughts do intrude.

LHW99

For argument's sake if we simply stuck the whole lot into (several) interest bearing accounts or even premium bonds (which we won't do!) it might gain us 2%PA which would just about keep pace with inflation

Long term inflation average has been over 3%, and you seem to have to go back to the 1950's to get a rate as low as it has been in the last 10 years
https://www.inflationdata.com/inflation/Inflation/DecadeInflation.asp