Weighing up options in inflationary environment

Pensions_matter_2

I have both DB and DC funds (and appreciate how fortunate I am to have these) and Im trying to decide how and when I should take them, considering the way inflation is heading right now. Im finding it difficult to weigh up the various options and hoping others might be able to help me think things through the pros and cons. This is where I am right now:

DB pension 1 - approx £20000 at 60 (next summer) - has a cap on inflation increases (mainly 2.5% but some subject to 5% cap), but will increase by 6% every year I defer it after 60. DB pension 2 (in payment) - approx £3150, is fully inflation proof. 

DC funds - just over £100k, subject to a 4% pa guaranteed capital increase (old with profits). 

Savings outside of pensions - in the region of £50,000 (in premium bonds right now).

Full SP. No mortgage or debts.

Minimum income needed £24-25k net pa (with spare funds, say £60-80k minimum, for unexpected large expenses), keeping up with inflation if at all possible (!).

I had originally thought to take my DB pension 1 at 60, using some of my savings to live off till then, and the rest to top up till SP due, and keep my DC funds as an unexpected outlays/care fees fund (or possibly to use to buy an inflation linked annuity at some later point, say at 70 - I cant take these funds in whole or in part as drawdown, without losing the guarantee). Now with inflation taking off, Im not feeling so confident about that path and wondering if I should defer my DB pension for a bit to get the benefit of the 6% pa increase, using more of my savings to live on in the meantime. 

Im not a confident investor and would worry if funds tanked - I suppose that means I am risk averse, so any option involving investing a large sum may not be right for me.

Am I missing any avenues, what pros and cons should I factor into my thinking, inflation proofing being my main concern?  It may be I need to work through some complex calculations, based on certain inflation assumptions (worst case, best case etc), to get a clearer idea and help me decide?  Mathematical calculations not my forte, so any help much appreciated!

Marcon

Pensions_matter_2 said:

I have both DB and DC funds (and appreciate how fortunate I am to have these) and Im trying to decide how and when I should take them, considering the way inflation is heading right now. Im finding it difficult to weigh up the various options and hoping others might be able to help me think things through the pros and cons. This is where I am right now:

DB pension 1 - approx £20000 at 60 (next summer) - has a cap on inflation increases (mainly 2.5% but some subject to 5% cap), but will increase by 6% every year I defer it after 60. DB pension 2 (in payment) - approx £3150, is fully inflation proof. 

DC funds - just over £100k, subject to a 4% pa guaranteed capital increase (old with profits). 

Savings outside of pensions - in the region of £50,000 (in premium bonds right now).

Full SP. No mortgage or debts.

Minimum income needed £24-25k net pa (with spare funds, say £60-80k minimum, for unexpected large expenses), keeping up with inflation if at all possible (!).

I had originally thought to take my DB pension 1 at 60, using some of my savings to live off till then, and the rest to top up till SP due, and keep my DC funds as an unexpected outlays/care fees fund (or possibly to use to buy an inflation linked annuity at some later point, say at 70 - I cant take these funds in whole or in part as drawdown, without losing the guarantee). Now with inflation taking off, Im not feeling so confident about that path and wondering if I should defer my DB pension for a bit to get the benefit of the 6% pa increase, using more of my savings to live on in the meantime. 

Im not a confident investor and would worry if funds tanked - I suppose that means I am risk averse, so any option involving investing a large sum may not be right for me.

Am I missing any avenues, what pros and cons should I factor into my thinking, inflation proofing being my main concern?  It may be I need to work through some complex calculations, based on certain inflation assumptions (worst case, best case etc), to get a clearer idea and help me decide?  Mathematical calculations not my forte, so any help much appreciated!

Might be worth having a one-off advice session with an IFA, given that you are risk averse, calculations aren't your strong point, and you have enough assets to make such a consultation worthwhile.

Secret2ndAccount

First Thing: State Pension

Have you checked that you have paid enough National Insurance to get a full State Pension? It’s easy to do it here: https://www.gov.uk/check-state-pension

The top line tells you how much you could possibly get. Look down a bit further and it tells you if you need to pay more years NI to get to that number. You want to buy enough years to get close to the full pension as it’s very good value. It might cost you a few thousand, but it pays back very quickly.

Second Thing: Emergency Fund

When a person is working and paying a mortgage, it’s good to have a substantial emergency fund. You want to be able to keep paying the mortgage and putting food on the table for six months if you lose your job. Once retired with a DB pension, your income is guaranteed, and you have no mortgage, so your fund is now more about rainy days than a prolonged winter. Nonetheless, you have your 100k DC to fall back on if disaster strikes.

Many pensioners who are drawing down from investments like to keep a cash buffer which they draw on in the case of a stock market crash. You don’t have stocks so you don’t need that either.

Your emergency fund is very healthy indeed.

Pension Spending Plan

So, assuming a full SP of close to 10,000/yr, you are going to have substantially above your 25k number once you reach age 67.  Therefore, this becomes a case of working out how to get to 67.

I would suggest you take the DB at 60. Deferring doesn’t really make your payout bigger. You lend your pension company 20k, and they pay it back to you over the next 20 years. You don’t normally end up a lot richer or poorer – you’re just moving the money around. If you live to be 90, you have made money on the deal, but we’ve already noted that you will have plenty of money at age 90. It’s your 60’s we have to worry about.

If you add the 20k from the DB to the 3k from DB2, then take away some tax, you are left with 21k. So you need to take 4k from your savings each year to get your desired 25k. You could just do that for 7 years. Your emergency fund can easily handle it. I ran some projections accounting for inflation. At age 66, you might have 9000 left in your savings, but would also have a DC pot of 131k, still untouched. Once the State pension comes along, you can start to rebuild your savings, or just spend a bit more. Honestly you could spend a little more every year, starting now. You risk dying with a 300k DC pot that you never used.

Pensions_matter_2

Thank you both for your comments. Its incredibly helpful to get some perspective - perhaps Im getting carried away by inflation worries!

My SP is approx £9600, which should help if inflation is sustained. I probably need to take £10000 or so off the savings table for a newer car sometime in the next year, so thats the £9000 spare mentioned by Secret2ndAccount used up!  Interesting about viewing delaying taking my DB pension as a loan - Ive been struggling with that one and trying to understand what would benefit me more and how to work that out. Working backwards from SP makes a lot of sense too, and as you point out I could start to save some after reaching SP so all is not lost!

It may be I should only be concerned if we get sustained inflation above, say, 5% for many years. As Marcon suggests, perhaps worth getting an adviser to do the sums to get peace of mind.

Really appreciate input here. 

Albermarle

Thank you both for your comments. Its incredibly helpful to get some perspective - perhaps Im getting carried away by inflation worries!

Inflation is a worry for everybody but in reality it is less of a worry for the better off than the poor.

You could at some point take the 25% tax free cash from the DC pension , to refill the coffers after buying a new car . Or buy yourself a bigger car !

In case it could be an issue , if you die with a DC pension pot , then you can pass it on separately from your main estate . This means it will not be included in any inheritance tax calculations.

Thrugelmir

Albermarle said:

Thank you both for your comments. Its incredibly helpful to get some perspective - perhaps Im getting carried away by inflation worries!

Inflation is a worry for everybody but in reality it is less of a worry for the better off than the poor.

Depends on your lifestyle and what you spend your money on. 

Secret2ndAccount

Pensions_matter_2 said:

...
My SP is approx £9600, which should help if inflation is sustained. I probably need to take £10000 or so off the savings table for a newer car sometime in the next year, so thats the £9000 spare mentioned by Secret2ndAccount used up!
...

Actually I'd budgeted £3000 to top up your State Pension.  It seems your pension is already full, so you can have that car after all

Pensions_matter_2

Thank you all for further comments. 

Im liking the idea of spending all the non-pension savings over the next 7/8 years (my SP kicks in at 67!) and then possibly saving a little after that if inflation hasnt eroded my DB pension too much. If Im not investing the savings and that period is short, it makes sense to use that bit up first and leave the DC funds intact for as long as possible. That’s a great idea about taking tax free cash from the DC pot if I need it later (I would lose the guarantee of course). Its very reassuring to have that option. 

Its been useful to read the concurrent threads on annuities. Something to keep in mind as a possibility in future. A really helpful forum. Thank you to everyone who has input. Its greatly appreciated.