Cashing in pension

magd36

HappyHarry said:

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

Yes I did. They suggested keeping the DB, but I didn't mention my personal health situation. I intend to ask again as this may become clearer over the next couple of years.

magd36

Linton said:

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.

By secure I mean what would be a reasonable number to use as the lowest average annual growth expected over a 10 year + period in a low risk investment after fees are taken (even if this may be negative). I can simulate temporary drops of 20% and see the effect but hope this would be unlikely in a low risk investment, and if it happened would hope it wouldn't happen year on year in a low risk investment. Thanks.

MallyGirl

magd36 said:

Linton said:

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.

By secure I mean what would be a reasonable number to use as the lowest average annual growth expected over a 10 year + period in a low risk investment after fees are taken (even if this may be negative). I can simulate temporary drops of 20% and see the effect but hope this would be unlikely in a low risk investment, and if it happened would hope it wouldn't happen year on year in a low risk investment. Thanks.

Traditionally a low risk investment would be lower in equities and higher in others such as bonds. It has not been a good time for bonds recently:
https://www.ftadviser.com/investments/2022/08/08/uk-corporate-bonds-see-biggest-drop-in-20-years/#:~:text=Research by digital asset manager,corporate bonds market since 1998.

Corporate bonds down 13% in 6 months. 

Albermarle

magd36 said:

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.

You have misunderstood.
I said that if you keep it all in cash, its value could lose up to 50% in ten years due to inflation. For example if you have £100K earning max 1 % interest . Then after ten years you will have about £111K . However that £111K would buy you a lot less in goods and services than the £100K would have done ten years previously. So although the figure has gone up £11K, its value has dropped a lot.

If you invested it instead in a low/medium risk portfolio, then you could be reasonably hopeful it would at least keep up with inflation , with some ups and downs, over a 10 year + period.

It sounds like 1% growth after fees is reasonable to use for comparison.
One per cent in itself is very poor, what you need is 1 % growth above inflation. That is 1% Real Growth.

Linton

magd36 said:

Linton said:

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.

By secure I mean what would be a reasonable number to use as the lowest average annual growth expected over a 10 year + period in a low risk investment after fees are taken (even if this may be negative). I can simulate temporary drops of 20% and see the effect but hope this would be unlikely in a low risk investment, and if it happened would hope it wouldn't happen year on year in a low risk investment. Thanks.

OK, to see one specific example of what is possible, I personally like CGT (Capital Gearing Trust) as a lower risk/moderate retirn investment.  




It shows a steady increase over the past 27 years with only relatively small short furation volatility.  It is beating a world index because of the latter's poor performance in the 2000's from the ".com" crash in 2001 up to the 2008 crash.  Over more recent shorter periods the world index performed much better though CGT still recorded an average 5.5% over the past 10 years, so well ahead of inflation.

However such data does not provide any guarantees as to the future, in particular if you are investing for a much shorter period.

magd36

Thanks to everyone for your feedback.

I'm starting to get a picture of how to evaluate what is a reasonable comparison and the effects of high/low inflation.

Much appreciated.