Another View of Trying to Get Us Through Retirement Financially

GSP

On another thread (taking the growth when you can), I have mentioned my wife’s pension value rising and falling over the last 5 years and the value is now back at it’s original starting point.

Thinking more, it feels like what’s the point in arriving back at the same point from 5 years ago.

I am not into growing my pension fund which I am drawing down on. In fact mine and my wife’s planner shows a decline every year with expenditure partly offset by modest growth (3% p.a.).
But barring the last eleven months, there’s enough to see us through until we are 100 at least.

Again, I am not looking to grow our pension funds, just have enough money to see us through and wonder in our case if having our money invested in pension funds is right for us.

With above, the large fall in pension funds over the last year has made me think is there an alternative way through to get us through retirement financially?

Annuities only provide a certain amount each month and die with you, and would not be enough to live on.

If we could transfer all our pension out into cash, what may work is a product that pays around 3% p.a. until we die.
The interest on this plus an amount from the pot reducing it’s size each year would see us through.

It would also provide the certainty of our future, if feels like investing in pensions is like entering a casino with so much volatility, and uncertainty. 

A lot of worry in truth!

Any thoughts on this, and probably an absurd idea someone will kill very quickly!
There’s probably no product that exists that will do this for us anyway.

gm0

Your design problem is to generate the cashflow without the speculative investment risk and without handing over the risk and pot to the annuity provider in an actuarial death pool.

The school solution for this if there is adequate cash to generate it up front is a ladder of actual index linked bonds which return principal year by year (and some coupon).  The sale price or current price of the bonds is not relevant as you are generating the cashflow by redemption at term not sales.  It is called a bond ladder.

The same can  be done via non index linked gilts but this obviously has the deficiency further up the ladder in duration that the principal has been inflated away in value to some level when it turns up

The deficiency of this approach is that not all bond durations are available so an exact ladder is hard to build.  US treasuries are easier than UK gilts but introduce currency FX as another risk

Note that Bond funds are not the same thing.   As they sell and continually refresh a given mix and target duration as such they  are vulnerable to changes in interest rates and sentiment which a bond held for its whole term is not.  The "price" of the defined cashflow is locked in upon  purchase.

Cash term deposit for wrapped cash inside pension funds is not typically available at decent rates.

The easiest and closest fund equivalent is probably US treasuries of the very shortest duration so that interest rate change risk is minimised

Preacher64

Edit: saw you had discounted the annuity option

Linton

The problem with any cash based plan is inflation, an issue which you do not appear to consider.  The only ways of dealing with it are inflation linked annuities which are expensive or equity investments which are risky.  Though if you only need 3% per year perhaps an inflation linked annuity may be appropriate, at least for some of your income needs.

The strategy I use is to try as much as possible to keep equity risk for the long term only.  Short/medium term (10 years at least)  on-going expenses  and large one-off expenditure are covered by cash, fairly stable income generating investments, and lower risk Wealth Preservation funds plus SP and old (pre 2008 crash) largely fixed rate annuities.  WIth these in place I have watched the recent volatility in equity and bond markets with complete equanimity.

dunstonh

Annuities only provide a certain amount each month and die with you, and would not be enough to live on.

Why do you think that?

Annuity rates are the highest they have been for over a decade.  Still better if you are later 60s.   And don't forget that annuities also benefitted from changes in the law with the pension freedoms.   Death benefits are no longer restricted to 5 or 10 years.   You can get return of capital minus income paid out.  20 year or 30 year gurantees.

GSP

Linton said:

The problem with any cash based plan is inflation, an issue which you do not appear to consider.  The only ways of dealing with it are inflation linked annuities which are expensive or equity investments which are risky.  Though if you only need 3% per year perhaps an inflation linked annuity may be appropriate, at least for some of your income needs.

The strategy I use is to try as much as possible to keep equity risk for the long term only.  Short/medium term (10 years at least)  on-going expenses  and large one-off expenditure are covered by cash, fairly stable income generating investments, and lower risk Wealth Preservation funds plus SP and old (pre 2008 crash) largely fixed rate annuities.  WIth these in place I have watched the recent volatility in equity and bond markets with complete equanimity.

Thanks Linton.
I’ve only just thought of this and need to get to my laptop with excel and run a projection forward. As you say inflation may be a problem, though when the State pensions eventually kick in for both of us may offset a part of this.

gm0

As the other posters have said. 

Annuities have had an uptick.  And a "buffered" invested drawdown with a reasonable cash (and genuinely cashlike) hedge for a few years against a speculative investment downturn to prevent the need for growth asset sales can likely do the job as well.  That is essentially my plan.  SORR cash buffer.  Invested for 40 years through drawdown.  No annuity until I am a good deal older if at all.  But will keep under review.  Situation has changed (rates) since I started planning.

Such a DC drawdown strategy will of course have a range of growth assets with speculative risk (and probably some currency risks depending upon what is held.  40% - 70% growth assets would not be surprising.

Clearly State pension arriving (2x) for a couple provides some guaranteed (or good as) income.   A view can be taken on whether this is enough of an income floor.  If not.  Then an annuity can be purchased, a bond ladder built, a cash buffer held, other contingencies within the life of said buffer (of several years) such as timing of property downsizing) can be layered on top to provide the level of  comfort and confidence required.

Bernstein - Rational Expectations book is a fair (if old) read around this.  

Though the conservative version suggests "liability matching" income and then separating excess as the growth portfolio.  A more considered version takes a view on the lower "essential" income and nets off any other sources like state pension as mentioned.

It does provide a way to think in a simple way  about essential and desired and apply a realistic long term sustainable WR figure to translate "fixed indexed income" values and "pot values".  Such as the widely discussed figure of 3.5% for a UK investor.

Of course if you start lowering speculative risk on part of a pot.  And dial up risk on the "speculative growth" part then the whole portfolio blend of the two may well revert to somewhere close to where you started.

SouthCoastBoy

I have a similar predicament as I guess most people with dc only pensions do. I have 40% in cash, enough for at least 10 years, most probably more. I'm now currently getting between 2 and 4% so inflation is eroding its worth but currently not as much as my equities. My plan is not to touch equities for at least another 4 or 5 years, and maybe longer depending on the markets.

Depending on annuity rates I may buy a rpi annuity that pays out 10k a year at around 65, about 7 years away.

Nothing is set in concrete but I think it is good to think through options. I will also look at bond ladder ing, never considered that. With regards to gilts when they reach maturity do you have to apply for the redemption or does it automatically happen? Also do you buy the guilt from the govt, if not aren't you paying a market price which could be at a premium?

MK62

The OP hasn't talked about amounts, but I assume from other comments that the pot is relatively large (if it's enough to see the OP through to 100).....unfortunately there is no way to simply turn a substantial pension into cash, for subsequent depositing outside the pension, without incurring significant income tax.

Turning a 500k pot into cash, for instance, even accounting for the 25% tax free amount, would likely see a tax bill of around £150k.......so, tbh, it's probably a non-starter, unless your fear of investment risk is so great, you'd be willing to pay this level tax upfront (which may well be more than the investment risk you fear).

Malthusian

MK62 said:

The OP hasn't talked about amounts, but I assume from other comments that the pot is relatively large (if it's enough to see the OP through to 100).....unfortunately there is no way to simply turn a substantial pension into cash, for subsequent depositing outside the pension, without incurring significant income tax.

Although you specified "for subsequent depositing outside the pension", it's worth noting that there's nothing stopping you investing in cash within a SIPP. There are deposit accounts paying 3%pa - for a five year fix. Easy access pays 0.85%. Naturally you have to deduct the SIPP's running costs from that.
It's still not a very good idea, particularly if the only reason for doing so is "my investments have only grown 2-2.5%pa more than the risk-free rate over the last five years in exchange for me clicking a button and doing nothing, even after a 10-15% correction".

GSP

MK62 said:

The OP hasn't talked about amounts, but I assume from other comments that the pot is relatively large (if it's enough to see the OP through to 100).....unfortunately there is no way to simply turn a substantial pension into cash, for subsequent depositing outside the pension, without incurring significant income tax.

Turning a 500k pot into cash, for instance, even accounting for the 25% tax free amount, would likely see a tax bill of around £150k.......so, tbh, it's probably a non-starter, unless your fear of investment risk is so great, you'd be willing to pay this level tax upfront (which may well be more than the investment risk you fear).

That is a big stumbling block with the tax implications. Maybe this would have been doable earlier when the pot was around a million. But now losing a quarter of that at this time makes it too low to suffer any more losses, in tax this time.