Transferring out of Defined Benefit pension

[Deleted User]

Prism said:

Deleted_User said:

Prism said:

itwasntme001 said:

Prism said:

itwasntme001 said:

Prism said:

itwasntme001 said:

Prism said:

It has barely made any difference over the last 5 years whether you include EM, small cap or dont.

How do you know it hasn't?

Because the returns tell me it hasn't

Which returns?  The evidence I see is that large cap US equities have outperformed small caps, EM, all other developed markets for the past 5 years.  So a tracker that has more US large cap will obviously out-perform a tracker with less.

Thats pretty much the point isn't it? Over the last 5 years global developed market funds, all world funds and small caps funds have all pretty much returned the same. So the only difference is the home bias. It was an active decision that hasn't yet worked out. If any other fund had under performed its benchmark and its peers by around 2% per year for 5 years we wouldn't be talking about it. Yet for some reason people want to excuse VLS 100 from poor performance. 

We are arguing about different things here.  I thought you said EM stocks, small caps etc hasn't made a difference to the out-performance of a pure market cap tracker vs VLS100.  I am saying it has, because VLS100 has under-weighted US large cap by design.  So maybe I am not understanding the point you are making.

VLS100 has been a poor performer over the last 5 years vs a pure global market cap tracker - I completely get that.  But that does not make it a poor choice by in itself.  It is simply a choice one has compared to a whole host of other funds.  No decision is ever going to be 100% passive, even if you choose a pure tracker fund.  Buying a market weight cap index is an ACTIVE choice.

You are right, it doesn't make it a poor choice but neither does it make it a good choice. Just one average fund out of several hundred similar funds. Some are cheaper, some are more expensive. 

I did say that EM and small companies have made no real difference to a standard market cap tracker since the returns have been almost identical over the last 5 years. For all of the talk about US large caps being the place to be, EM has been almost as good and global small caps have returned about the same as global large caps.

That’s not accurate. I hold separate ETFs for US total market, Emerging markets and US small cap/value.  The difference between 2010 and 2020, 2015 and 2020 or 2017 and 2020 is quite dramatic. Several times more for s&p500 in each case.  If S&P500 makes up 60 of your “global” fund then you had noticeably higher returns than  EM or small caps. 

And I doubt there are several hundred funds available to UK consumers that have the same level of diversification as VLS100. If diversification is important to you then VLS stands out. 

You say its not accurate but then give a different comparison than I did. 5 year returns for global developed world, global all world including emerging markets and global small caps are pretty much the same. Thats all I was saying. Therefore the different is, as you say purely down to the lack of US (or greater UK) allocation.

Edit: probably works best with examples over those 5 years
HSBC FTSE All World - 109.3%
Fidelity Index World - 109.0%
Vanguard Global Small Cap Index - 108.3%

In USD:
- VWO returned 83% (Emerging markets)
- S&P500 returned 102%
- VB returned 100% (US small cap)
- EWU returned 6% (UK)
So, you are right for small cap over 5 years, although  there was noticeable outperformance for US small cap in the last couple of months, some of which would not have been reflected in recent quartile data. 

This is detail though. The fact UK underperformed in the last 5 years does not translate to “VLS is an inferior product”. 

[Deleted User]

“you not saying that VLS is better than xyz and that VLS had disadvantages as well as advantages then why are you arguing with people that are saying the exact same thing? - does this go back to the apparent confusion where somehow "not so good" what equated to mean "bad"?”

Because when someone on this board is considering VLS, its a perfectly sound choice. And when someone from the financial industry turns up and says “its not a good fund” while furnishing irrelevant quarterly results (which inexperienced investors pay way too much attention to), its highly misleading and counterproductive. And thats exactly what you are doing. 

dunstonh

Deleted_User said:

“you not saying that VLS is better than xyz and that VLS had disadvantages as well as advantages then why are you arguing with people that are saying the exact same thing? - does this go back to the apparent confusion where somehow "not so good" what equated to mean "bad"?”

Because when someone on this board is considering VLS, its a perfectly sound choice. And when someone from the financial industry turns up and says “its not a good fund” while furnishing irrelevant quarterly results (which inexperienced investors pay way too much attention to), its highly misleading and counterproductive. And thats exactly what you are doing. 

VLS100 is a fair choice.  It hasn't been the best.  It hasn't been the worst.  It has been barely average since it launched.  If they want barely average then that is their choice to make.  
I looked back on the thread just to check and I said it's "not a very good global fund". I also said there is "nothing about VLS100 that makes it stand out against alternatives".   
Getting just about sector average means nearly half the funds in that sector have done better over the same period.    So, I stand by the statement that there is nothing about VLS100 that makes it stand out and it has not been a very good option.     You can't call mid table returns from launch very good.    The same cannot be said for the rest of the VLS range which are much stronger propositions.

coastline

At the end of the day the UK 100 hasn't been the place to be for years especially since the Dotcom boom when valuations were very heady. Banks etc were on P/E values in the 20's which was unheard of. Now P/E values are reasonable and maybe this will lift the UK along with others.? If you look at 6m returns the VLS 100 is up with the world index. Early days.
Easy to see looking back the USA was leading the pack and returns have been far better.
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salsa1

I have a frozen final salary (DB) pension for 28 years service. I have requested a transfer value and it is £479K. My annaul DB pension at 60 would be £13K. I am 55 and definately do not want to work past 60. £479K seems a lot of money to me and I would have to live 36 years (til Im 96) to get that back. Also the option of taking more when Im younger and healthier and the ability for my husband and children to have the inheritance when I die sound good.  Despite this everywhere I read says in most cases a DB pension is the best option. 
Can I have you advices please.
Thankyou

naedanger

salsa1 said:

I have a frozen final salary (DB) pension for 28 years service. I have requested a transfer value and it is £479K. My annaul DB pension at 60 would be £13K. I am 55 and definately do not want to work past 60. £479K seems a lot of money to me and I would have to live 36 years (til Im 96) to get that back. Also the option of taking more when Im younger and healthier and the ability for my husband and children to have the inheritance when I die sound good.  Despite this everywhere I read says in most cases a DB pension is the best option. 
Can I have you advices please.
Thankyou

Does the DB pension increase each year once it comes into payment? If so at what rate?
Does the DB pension increase each year prior to retirement? If so at what rate?
Is there a spouse's pension? If so how much and what it the age difference between you and your husband.
If you took drawdown what would you invest in? 

dunstonh

I have a frozen final salary (DB) pension for 28 years service. 

Are you sure it's frozen and not deferred?  (frozen has a specific meaning).

£479K seems a lot of money to me and I would have to live 36 years (til Im 96) to get that back. 

How are you calculating that? 

An annually increasing pension starting at £13,000 has an earlier breakeven point than 36 years.  Plus, you have not factored in any tax free cash payment.

Despite this everywhere I read says in most cases a DB pension is the best option. 

That is because it is.   Have you ever invested nearly £500k and seen the swings you WILL get on that?   A fairly typical 20% loss period would see your fund value drop by almost £100,000.     How would you handle your fund dropping by £100,000?

What happens if we go through a Japan style event (and there are signals that suggest it could happen) where the markets fall and never recover?   Can you afford to reduce your retirement income to a lower level?

Most people severely underestimate the benefit of having an annually increasing secure income for the rest of their life.  They think their investment-backed pension can do that. In some cases it may well do and more.  However, in some cases it won't and people will run out of money.

Linton

salsa1 said:

I have a frozen final salary (DB) pension for 28 years service. I have requested a transfer value and it is £479K. My annaul DB pension at 60 would be £13K. I am 55 and definately do not want to work past 60. £479K seems a lot of money to me and I would have to live 36 years (til Im 96) to get that back. Also the option of taking more when Im younger and healthier and the ability for my husband and children to have the inheritance when I die sound good.  Despite this everywhere I read says in most cases a DB pension is the best option. 
Can I have you advices please.
Thankyou

Your DB pension is  not "frozen".  It is at least increasing with inflation.

In your calculation you havent taken into account the DB pension increasing with inflation between now and 5 years time, and assuming it is under post 1997 rules, from then onwards.  In the past 36 years the value of the £ has fallen by over 2/3.  Is your DB pension capped for inflation increases?  If so at what %?

The downside of taking it as a cash lump sum is that to deal with inflation you will need it to be invested 50% or more in shares.  That brings in the risk of significant falls in value  perhaps every 5-10 years.  It also brings in the question of your ability to manage an investment portfolio of nearly £0.5 million.  Do you have any experience of handling that amount of money? What would you do if your 50% shares pot dropped by say 25%?  Would you start having sleepless nights? Many inexperienced investors would sell out to avoid further losses and in doing so would  turn a temporary loss into a permanent one.

Compare that with your DB pension which will continue to pay out regardless (barring the end of the world as we know it).   The money will just turn up every month with no effort or worry on your part.

There may be circumstances where transferring a DB pension into a DC pot would be recommended by any professional advisor.  The most common is if you have a seriously life limiting medical condition.  In that case you could buy an enhanced annuity which would give a better guaranteed income than the DB pension where the numbers are based on the population average.

daveyjp

Compound 13,000 at say 3%, total it up at 10, 20 and 30 years and see how much you have 'been paid back'.  It won't take you to 96 to get to 479,000.

If you want to leave an inheritence that is still possible with a DB pension.

salsa1

Thankyou all so much. Im sorry I dont think it is a frozen pension. It is an Aviva final salary pension that I paid into for 28 years . Since 2011 I have paid into a DC pension. The advice above steers to staying as i am rather than transfering 
I really appreciate your help. Thanks again.