Retirement

Pensions_matter_2

Now retired (after just giving up part-time semi-retirement role) and thinking about decisions as to how to take my pensions in the next year or so (living off savings for now). Would be interested in views:

DB pension - approx £20000, with inflation protection but subject to various caps - 2.5% CPI, 3% RPI, 5% CPI. Could choose to take pension of around £16000 with lump sum of £100k instead (or slightly more pension and less lump sum -its flexible). Would not consider a transfer to DC.

DC pot - approx £150000, about £100k of which is in a with profits fund with 4% guarantee. About £30 - 35k of the £150k is in separate pension pots so could be taken earlier (using up personal allowance, for example), leaving the wp funds intact for as long as I want). 

RPI annuity - £3000 (I know it might seem crazy to many, but I wanted a guaranteed fully inflation proofed income of £12000 including SP, so decided to bite the bullet on that - who knows how annuity rates will go in future and it helps me sleep at night!).

Full SP

Savings £100k (will probably use up £20k before take other pensions,

House, no mortgage - around £700 - 750k. No plans to downsize.

Ideally Id like £24000 net a year, which I could achieve easily when SP kicks in. Because of worry about inflation taking off, I wonder if I should take the lump sum, invest it and later buy an RPI annuity to top up existing one, or am I mad???  I think my essential basic expenses amount to around £18000 (net) a year.

Interested in what others might do with all this. I dont foresee any major purchases/expenses in near future - may be a second hand car and new heating, but otherwise property fairly sound for now. Appreciate we cant predict the future. I see the house as insurance for future care, health treatments etc should the need arise.

Thanks in advance!

tacpot12

If the plan is to take the lump sum and eventually buy an annuity with it, it would be simpler to leave the lump sum in the DB pension. The end result is probably going to be the same (or worse with the annuity) in terms of income and money left to your heirs. It would be less risky just to leave the lump sum as part of the DB pension.  

Using the DC funds to buy an annuity that only increases in line with one of the inflation indexes isn't going to fix the problem with the inflation caps on the DB pension. You need to retain the flexibility to drawdown more from your DC funds in times of high inflation - and need to not drawdown as much as you normally would during times of low inflation - so that you can cover any shortfall from your DB pension.   

£24000 net income per year is about £27000 gross income. With the DB pension (£20K option) and your annuity, you have £23,000 gross already, so only need £4K pa from your DC funds before your state pension kicks. The money in your DC fund will certainly provide £4K pa until you reach your state retirement age, and it should have grown by 7% over the period if you are only drawing down £4K pa (and increase this drawdown amount in line with inflation). So you will have £160K+ in DC funds at your state retirement age. Normally I would say that this would produce an income (that rises with inflation) of about £6K pa, but if you kept the amount you were drawing down to £4K pa, you would leave more in the 'pot' to draw out if inflation rises unexectedly.  
 

You have some cash savings to use for your pension needs (£20K) which gives you a buffer against needing to sell assets at a time when the markets are depressed. 

I would expect that you would fair better turning your DC funds over to a discretionary manager rather than buy an annuity. Either way, you don't have to worry about making investment decisions. 

Albermarle

£100K today would only buy an inflation linked annuity income of about £2kpa , so you would be giving up guaranteed income of £4K for half that.
If you invested it and it got bigger then that would help, but what happens if its value decreases? 
I would just take the £20k pa. 

jamesd

You're not mad but maybe you should look into deferring claiming your state pension instead of more RPI annuity buying? It'll probably cost less than half as much per Pound of income assuming you're reasonably close to state pension age. Limit is how fast you can buy it since you can only spend your state pension amount on it each year to buy an increase of 5.8% of the state pension per year. Pretending that your state pension is 10k it'd cost you 10k per extra 580 of inflation protected income with no inflation cap, CPI. Buying £3,000 extra that way would take 5.2 years and cost £52,000.

There's no need to take a higher lump sum when doing this because the DB income can partly fund it out of income since there's no need for a large initial lump sum for an annuity purchase..

Pensions_matter_2

Thanks for useful comments. Yes, that does seem a good idea to defer SP and use the DC funds to cover risks till then. I could see if I can do a partial transfer into drawdown, and use as needed, keeping a balance in the 4% guarantee fund if inflation does not go above that at least.
Food for further thought!