DB v DC pros and cons

jim8888

I'm in the fortunate position of having both a DB and DC pension, although the former is the smaller pot. Resultantly, I've shared the envy a lot of people have over people with 100% concrete DB pension incomes. However, it only just struck me that a downside of DB is that your income won't change from the moment you take it until you pop your clogs. You'll be getting the same amount of inflation adjusted pension at 90 as you will if you took it at 60. Once you've spent your lump sum, you can't build another dollop of cash unless you save it out your DB pension income (assuming you haven't any other savings, you can't downsize your house, rob a bank etc.) This realisation has helped me count my blessings as I watch the markets wobble my DC pot every now and again. 

Andy_L

jim8888 said:

I'm in the fortunate position of having both a DB and DC pension, although the former is the smaller pot. Resultantly, I've shared the envy a lot of people have over people with 100% concrete DB pension incomes. However, it only just struck me that a downside of DB is that your income won't change from the moment you take it until you pop your clogs. You'll be getting the same amount of inflation adjusted pension at 90 as you will if you took it at 60. Once you've spent your lump sum, you can't build another dollop of cash unless you save it out your DB pension income (assuming you haven't any other savings, you can't downsize your house, rob a bank etc.) This realisation has helped me count my blessings as I watch the markets wobble my DC pot every now and again. 

Why is protection against inflation a downside?

[Deleted User]

Andy_L said:

jim8888 said:

I'm in the fortunate position of having both a DB and DC pension, although the former is the smaller pot. Resultantly, I've shared the envy a lot of people have over people with 100% concrete DB pension incomes. However, it only just struck me that a downside of DB is that your income won't change from the moment you take it until you pop your clogs. You'll be getting the same amount of inflation adjusted pension at 90 as you will if you took it at 60. Once you've spent your lump sum, you can't build another dollop of cash unless you save it out your DB pension income (assuming you haven't any other savings, you can't downsize your house, rob a bank etc.) This realisation has helped me count my blessings as I watch the markets wobble my DC pot every now and again. 

Why is protection against inflation a downside?

This is a well known paradox.  People have a tendency to shun predictable pension products covering their needs in hope for unpredictable future gains.  Just how our brains are wired. 

Marcon

Deleted_User said:

Andy_L said:

jim8888 said:

I'm in the fortunate position of having both a DB and DC pension, although the former is the smaller pot. Resultantly, I've shared the envy a lot of people have over people with 100% concrete DB pension incomes. However, it only just struck me that a downside of DB is that your income won't change from the moment you take it until you pop your clogs. You'll be getting the same amount of inflation adjusted pension at 90 as you will if you took it at 60. Once you've spent your lump sum, you can't build another dollop of cash unless you save it out your DB pension income (assuming you haven't any other savings, you can't downsize your house, rob a bank etc.) This realisation has helped me count my blessings as I watch the markets wobble my DC pot every now and again. 

Why is protection against inflation a downside?

This is a well known paradox.  People have a tendency to shun predictable pension products covering their needs in preference to potential for unpredictable future gain.  Just how our brains are wired. 

Not everyone's brain is wired that way or we'd have seen mass transfers out of the DB arena for the last forty years!

jim8888

I didn't actually mean that protection against inflation was a downside - it's a plus point for sure. I was more thinking that with a DB income, you're never going to "earn" more than that annual amount when you first take it. It's like with a job, where all you ever get is an inflation based pay rise. If you're spending every penny you earn every year just to live at the standard you want, then how do you save for anything like an extra holiday or new car? Whereas with a DC pot, you can dip into it at any level you want if you need a cash injection.
It's relevant to me, because I'm always torn at which I should take first, the DB pension or the DC one? The DC one allows me to spend more in my "younger" years if I want to, whereas the DB doesn't. (In a way the DB means I get less in my earlier years because the earlier I take it, the less money I get.)

Thrugelmir

So your post retirement portfolio is going to consist entirely of equities? 

Bimbly

jim8888 said:

It's like with a job, where all you ever get is an inflation based pay rise. 

That would be nice. Last year, my pay rise was 0.9%. Inflation is now at something like 5.5%. The previous year no pay rise at all. etc

I think the idea (or the ideal, at least) is that your pension is more than you need and you can save up for those extras (holiday, car etc) like in the good old days. Or you start retirement with savings on which you can draw. 

Kim1965

Why is a predictable income a downside?
 Whats going to happen in the future with auto enrolement increasing the number of dc pensions. Many wont be switched on to manage investments in retirement, sequence of risk etc.
 I would imagine the best thing for the majority would be a stable db style income. Perhaps if annuity rates rise enough they may again become viable. 

NedS

jim8888 said:

I'm in the fortunate position of having both a DB and DC pension, although the former is the smaller pot. Resultantly, I've shared the envy a lot of people have over people with 100% concrete DB pension incomes. However, it only just struck me that a downside of DB is that your income won't change from the moment you take it until you pop your clogs. You'll be getting the same amount of inflation adjusted pension at 90 as you will if you took it at 60. Once you've spent your lump sum, you can't build another dollop of cash unless you save it out your DB pension income (assuming you haven't any other savings, you can't downsize your house, rob a bank etc.) This realisation has helped me count my blessings as I watch the markets wobble my DC pot every now and again. 

I agree that having a combination of guaranteed index-linked DB pension and a healthily sized DC pot is the best overall position. The flexibility of the DC pot also allows for bridging of early retirement and also front loading of income during earlier years whilst you may be more able to enjoy spending it whilst having the security of knowing that your DB pot will always cover the essentials and hopefully be enough in later life (care costs aside).

If your DB provision is a little on the low side, you can always defer taking State Pension (SP) for a few years, instead spending from the DC pot, thus converting 'DC -> SP' to increase your guaranteed index-linked income.

Terron

jim8888 said:

I'm in the fortunate position of having both a DB and DC pension, although the former is the smaller pot. Resultantly, I've shared the envy a lot of people have over people with 100% concrete DB pension incomes. However, it only just struck me that a downside of DB is that your income won't change from the moment you take it until you pop your clogs. You'll be getting the same amount of inflation adjusted pension at 90 as you will if you took it at 60. Once you've spent your lump sum, you can't build another dollop of cash unless you save it out your DB pension income (assuming you haven't any other savings, you can't downsize your house, rob a bank etc.) This realisation has helped me count my blessings as I watch the markets wobble my DC pot every now and again. 

If you are lucky. I have two DB pensions. One has rises "entirely at the discretion of the trustees" and they have been deciding on no rises for years. The other rises in line with inflation capped at 5%, so won't be keeping up with inflation this year. 

Having a guaranteed inflation proof income looks like a great upside to me.

af1963

Kim1965 said:

Why is a predictable income a downside?

Two possible reasons:  you may want to spend more in your earlier, more active retirement years, and less later - rather than finding yourself with plenty of income at 90 but not being healthy enough to enjoy spending it. 

And if you have children, grandchildren, or others that you may want to leave an inheritance, they can inherit anything left in a DC pot but generally (other than a spouse or similar dependent) they won't inherit anything from a DB pension - the payments will just stop when you die.

Having a bit of both DB and DC seems like a good mix.