Cashing in pension

Linton

magd36 said:

eskbanker said:

What do you see as the benefit of moving from DB to DC and have you tried convincing a financial adviser yet?

The benefit would be to pass on the money if I die early. If I live until I'm very old I'm unlikely to need the DB as my outgoings are likely to be low and I should have enough other income that I won't need the DB. I've discussed this with an advisor and I think transferring will be a possibility for me. Thanks.

So you are saying that you don’t want to take any income? You see the pension purely as a means of passing wealth on when you die and you want the amount to be as large as possible?

That changes things completely. The answers generally, including mine, assumed you want the income. If that was the case then transferring at all would probably be a bad idea.

The problem is that nothing is safe. Cash will be significantly devalued by inflation in the long term. Shares could fall in value significantly in the short/medium term. The key factor is time. Clearly you don’t know what the time period will be, but you need to assume something to identify appropriate investments. 

If it is a small number of years cash is probably best despite some loss to inflation. For more than say 10 years share based investments would probably exceed inflation. With shares there is always the risk of a once in a decade 50% fall but over time the underlying trend upwards should win out barring world scenarios when anything could when any investments in anything could be of zero value.

Albermarle

As above, holding a pension as 100% cash, will mean that over many years the value/buying power of the money will be decimated by inflation. It could lose one third to a half in ten years.
The only way around this is to invest the money/take a risk. The longer the time period the lower the risk.
Also there are different type of investments and some are seen as lower risk than others.
In theory at least a medium risk investment portfolio, should give you a couple of per cent above inflation in the long run.
Also you can have a mixture of investments and cash, it does not need to be all or nothing.

If you are going to transfer a substantial sum to a DC pension, you need to do more reading on investments, inflation etc.
Or employ an IFA, maybe the one you are dealing with for the transfer, although that will cost money of course.

mcc100

magd36 said:

How secure can I make the pension and what would be the expected interest rate after all fees are taken into account?

I presume as it's secure as can be, the interest rate would be low but predictable.

There are several deposit accounts and bonds available that allow cash to be held within a SIPP.

One of the highest interest rates available is 2.9% with the United Trust Bank 3 year fixed rate bond.

EDIT ... I've had to remove the link as it did not work.

Albermarle

mcc100 said:

magd36 said:

How secure can I make the pension and what would be the expected interest rate after all fees are taken into account?

I presume as it's secure as can be, the interest rate would be low but predictable.

There are several deposit accounts and bonds available that allow cash to be held within a SIPP, some of which are listed here.

https://!!!!!!.uk/accounts-for-pensions/

The highest interest rate available from this list is 2.9% with the United Trust Bank 3 year fixed rate bond

Most of the well known pension/SIPP providers talked about on this forum, do not have the facility for you to hold these types of savings account. You need to go a more specialist provider, this one is mentioned sometimes,
InvestAcc Pensions - award winning SIPP and SSAS services : InvestAcc Pension Administration
There will be others .

magd36

dunstonh said:

 CTV is 35 times DB. Yes, I've taken advice, and transferring may be possible.

Is that CETV recent?   CETVs have fallen by around 25% over the last 3 months.   if the CETV is getting closer to its expiry, you may find you have to get another and it could be lower.

If you re willing to accept a 25% loss on the CETV to what it was 6 months ago, why are you not willing to utilise investments?

The CETV is getting closer to expiry so I agree it could be lower. I am willing to utilise investments if it's the best choice, which is what I'm trying to ascertain for my circumstances.

Thanks

magd36

NedS said:

magd36 said:

I'll try and explain.

It is linked to the consumer price index.

I have approached an IFA (paid for by my company) and have the option to transfer. Quite a few in my company have already done so (when CTV was peaking).

This is the decision I have to make, hence my question.

I am keen on security but have other sources of income (other DC pensions and savings) so this is a mathematical decision based on the likely age of death. I don't want to get into sharing my health information; at the end of the day, nobody knows when their times up. As I say I'm just trying to weigh things up.

If the reasons for the question are ignored is it possible to answer the original question?

Thanks

It is also fundamentally linked to your attitude toward and tolerance for risk. Regardless what the maths may tell you, if you cannot sleep at night worrying about the fact your pot has just dropped 40% due to a market crash then your quality of life will suffer.

It's the balance I'm trying to get to. If a 40% drop is likely on as secure investments I can get then I agree it's not worth the risk (hence my question). I know realise you could keep it as cash and inflation is the issue.

magd36

Linton said:

magd36 said:

eskbanker said:

What do you see as the benefit of moving from DB to DC and have you tried convincing a financial adviser yet?

The benefit would be to pass on the money if I die early. If I live until I'm very old I'm unlikely to need the DB as my outgoings are likely to be low and I should have enough other income that I won't need the DB. I've discussed this with an advisor and I think transferring will be a possibility for me. Thanks.

So you are saying that you don’t want to take any income? You see the pension purely as a means of passing wealth on when you die and you want the amount to be as large as possible?

That changes things completely. The answers generally, including mine, assumed you want the income. If that was the case then transferring at all would probably be a bad idea.

The problem is that nothing is safe. Cash will be significantly devalued by inflation in the long term. Shares could fall in value significantly in the short/medium term. The key factor is time. Clearly you don’t know what the time period will be, but you need to assume something to identify appropriate investments. 

If it is a small number of years cash is probably best despite some loss to inflation. For more than say 10 years share based investments would probably exceed inflation. With shares there is always the risk of a once in a decade 50% fall but over time the underlying trend upwards should win out barring world scenarios when anything could when any investments in anything could be of zero value.

Thanks. I would be taking some income but I'm probably unlikely to deplete it unless there is a huge crash (hence the question of typical long term growth from something as secure as possible).

Essentially I'm trying to balance the best financial option of living a long time with a DB versus a short time with a DC (i.e. what would be left to pass on).

Alternatively the worst financial option of living a short time with a DB (i.e. what would be unused) versus a long time with a DC (i.e. when would it run out).

If I can compare these and find what age the cross over is, I can then assess the probability of living to this age, as well as the probability of not reaching this age by x years or surpassing this age by y years.

To do this I need to know likely growth of a fairly secure DC.

It sounds like 1% growth after fees is reasonable to use for comparison. I can simulate taking the income out of the investment over time and try different inflation rates to see the impact, as well as change the CTV to account for movements as well as fees to transfer.

HappyHarry

OP, have you asked these questions to your IFA, and what was their response?

magd36

Albermarle said:

As above, holding a pension as 100% cash, will mean that over many years the value/buying power of the money will be decimated by inflation. It could lose one third to a half in ten years.
The only way around this is to invest the money/take a risk. The longer the time period the lower the risk.
Also there are different type of investments and some are seen as lower risk than others.
In theory at least a medium risk investment portfolio, should give you a couple of per cent above inflation in the long run.
Also you can have a mixture of investments and cash, it does not need to be all or nothing.

If you are going to transfer a substantial sum to a DC pension, you need to do more reading on investments, inflation etc.
Or employ an IFA, maybe the one you are dealing with for the transfer, although that will cost money of course.

If losing a half in 10 years is possible on a low risk investment portfolio that may be a concern. But I will model this type of loss. I would employ a IFA. Thanks.

Linton

magd36 said:

Linton said:

magd36 said:

eskbanker said:

What do you see as the benefit of moving from DB to DC and have you tried convincing a financial adviser yet?

The benefit would be to pass on the money if I die early. If I live until I'm very old I'm unlikely to need the DB as my outgoings are likely to be low and I should have enough other income that I won't need the DB. I've discussed this with an advisor and I think transferring will be a possibility for me. Thanks.

So you are saying that you don’t want to take any income? You see the pension purely as a means of passing wealth on when you die and you want the amount to be as large as possible?

That changes things completely. The answers generally, including mine, assumed you want the income. If that was the case then transferring at all would probably be a bad idea.

The problem is that nothing is safe. Cash will be significantly devalued by inflation in the long term. Shares could fall in value significantly in the short/medium term. The key factor is time. Clearly you don’t know what the time period will be, but you need to assume something to identify appropriate investments. 

If it is a small number of years cash is probably best despite some loss to inflation. For more than say 10 years share based investments would probably exceed inflation. With shares there is always the risk of a once in a decade 50% fall but over time the underlying trend upwards should win out barring world scenarios when anything could when any investments in anything could be of zero value.

Thanks. I would be taking some income but I'm probably unlikely to deplete it unless there is a huge crash (hence the question of typical long term growth from something as secure as possible).

Essentially I'm trying to balance the best financial option of living a long time with a DB versus a short time with a DC (i.e. what would be left to pass on).

Alternatively the worst financial option of living a short time with a DB (i.e. what would be unused) versus a long time with a DC (i.e. when would it run out).

If I can compare these and find what age the cross over is, I can then assess the probability of living to this age, as well as the probability of not reaching this age by x years or surpassing this age by y years.

To do this I need to know likely growth of a fairly secure DC.

It sounds like 1% growth after fees is reasonable to use for comparison. I can simulate taking the income out of the investment over time and try different inflation rates to see the impact, as well as change the CTV to account for movements as well as fees to transfer.

It would be helpful if you could explain in more detail about what  you mean by "secure".  If you are worried about the danger of losing the lot, then you are protected (barring end of the world catastrophes) by any mainstream pension and sensible choice of investments.  If you would be worried about even say a 5% temporary drop in value in £s at some point in  time, then you are restricted to cash with the high risk from inflation.