Switch from DB to DC during downturn

knarl85

I am thinking about changing my current mix of DB and DC contributions to 100% DC for the next year or so whilst the stock market is in a downward trend.

My current DB is a 1/120 that costs me 4.7% and my employer puts 10%.  I have been part of the DB scheme for many years and latest statement shows around £11k at retirement (as at today - with no further contributions). 

I put an additional 15.3% to a DC pot via AVCs.  This is a relatively new contribution with a pot of around £20k.

I am considering moving the full total of 30% contributions to the DC pot to give that a kickstart and hopefully benefit from lower purchase price of units.  

The intention of the DC pot is to bridge early retirement between 57-60 and state pension/DB at 67-70.

Currently aged 37 with pensionable salary of around £64k.

MallyGirl

Will your employer put their 10% in a DC pension?

knarl85

Yes, 10% is the max they contribute in each scheme

dunstonh

I am thinking about changing my current mix of DB and DC contributions to 100% DC for the next year or so whilst the stock market is in a downward trend.

You only know if it's a trend with hindsight.   The drop could be over.  It could be that we are only half way.

My current DB is a 1/120 that costs me 4.7% and my employer puts 10%. 

Ignore the 10% as that is just a notional figure.   DB schemes do not get contributions from the employer in the same way DC schemes do.  Knowing the employer contribution with a DC scheme is vital information as it makes a difference.   With a DB scheme, it makes no difference.

I put an additional 15.3% to a DC pot via AVCs.  This is a relatively new contribution with a pot of around £20k.

AVCs are an old fashioned and rather niche option nowadays.   Unless the there are matched employer contributions on the AVC (very rare did exist at one time) or the PCLS from the main scheme can be diverted to the AVC or other contractual benefit, then the AVC may be more expensive and less flexible than a modern individual plan.

Yes, 10% is the max they contribute in each scheme

But as the employer contribution on the DB scheme isn't real and the total cost to replicate the benefits on a typical DB scheme is around 20-30% of salary, will you make up difference you will lose?

What is the scheme age for the DB pension?   What are the reductions, if any, for taking it earlier?   Funding the gap may be better in other ways than leaving the DB pension to around 67-70.

Malthusian

knarl85 said:

Yes, 10% is the max they contribute in each scheme

I got confused for a bit - but if I understand quickly they will pay a max of 10% across the two schemes? So you are currently getting 0% employer contributions to the DC scheme because you are already getting 10% to the DB scheme, and your whole 14.7% to the DB scheme can be freely moved across to the DC scheme.

Essentially, in the DB scheme you pay £9,408 and get a promise to pay £533pa (in today's money) from normal retirement age, guaranteed for life.

If you put it in the DC fund you could, using þe olde 4% rule, reasonably expect £376pa in today's money if it keeps pace with inflation. But with all the risk transferred to you.

To get that £376pa to beat £533pa, you need growth of 41% above inflation until you draw it. 

With potentially 30 years to normal retirement age (less if the NRA is before State Pension Age) that's not impossible, but still requires a bit of optimism.

You might say "the markets are down 10% so I've already got a head start on reaching that 41%", but bear in mind that the markets are random. They could easily have crashed again at the point you want to withdraw the pension. Over a 30 year timeframe, the state of the markets at the beginning of the 30 years is almost irrelevant. An 30-year investment that starts today will end up in almost the same place as one that started half a year ago when the markets were 10% higher.

So if you weren't inclined to bet the entire farm on DC half a year ago, the equation hasn't really changed that much today.

knarl85

Thank you for the replies.  It looks like I should keep the mix between DB and DC(AVC).  

The other option I have is to increase my DB to 1/80th with 15.5% required from me.

I think I could do with finding more info on the reductions for early retirement.

Brie

Will you be able to access the DC portion without touching the DB?

Marcon

knarl85 said:

Thank you for the replies.  It looks like I should keep the mix between DB and DC(AVC).  

The other option I have is to increase my DB to 1/80th with 15.5% required from me.

I think I could do with finding more info on the reductions for early retirement.

Have a look at the DB scheme information - there must be a booklet available to members, either in hard copy or online, which should give you information about early retirement reductions, BUT remember these can be changed at any time without notice to members. By the time you reach the point of wanting to draw your DB pension, the reductions could be better or worse; nobody can predict this far ahead.

knarl85

Brie said:

Will you be able to access the DC portion without touching the DB?

Yes, I believe so.  They are completely separate

Malthusian

knarl85 said:

The other option I have is to increase my DB to 1/80th with 15.5% required from me.

A 50% boost to the pension for treble the contributions? On the face of it not a great deal unless you want security above all else. Moving from the 120ths to 80ths means getting £267pa extra pension for a contribution of £6,912.

I think I could do with finding more info on the reductions for early retirement.

The reduction for taking DC pensions "early" is nil, so as you are building up a mix of DB and DC, using the DC pot to bridge the gap until the DB's Normal Retirement Age would be the default option. Unless the penalty for early retirement is relatively mild.

Yes, I believe so.  They are completely separate

Does the scheme allow you to exchange annual pension for a lump sum on retirement - and if so, can that lump sum be taken from the AVC instead of giving up annual pension? (In some schemes, you can take 25% of the whole [DB + DC] value from the DC pot only. Effectively this allows you to take more than the standard 25% of the AVC as tax free cash, while not having to give up any of the valuable DB pension. In these schemes you don't have to take them together but you would usually be missing out if you didn't.)

ChocolateWombat

Which pension is this, if you’re willing to say? Doesn’t sound like a standard public sector DB scheme.