Retirement plan check

billy2shots

barnstar2077 said:

Sounds like bliss, what are you waiting for?

Just one more year.......

Boat_to_Bolivia

billy2shots said:

barnstar2077 said:

Sounds like bliss, what are you waiting for?

Just one more year.......

In the OP's shoes, I'd be retiring tomorrow!!

Let's hope he heeds the advice in your earlier post!

SarahB16

 I will be 63 next year and would like to go part time at that point and work for another 12 months ending full time work on my 64th birthday. The plan ideally thereafter is to work in a small local “non stress” part time work says around £5k PA mainly to keep social.  

When you decide to retire as you don't really need this part time work for the income as it's more for the social side why don't you instead consider what your local community perhaps needs?  Are there local community groups that are looking for volunteers?  Could you start making enquiries now?    

You appear to be in very good health and could you volunteer your time helping a voluntary group or set up a voluntary group if one doesn't exist to help elderly neighbours in your community, e.g. take them shopping, take them for medical appointments, arrange days out, etc.  Are there other recently retired people that could help you.   

Personally if I were you rather than having a part time job instead I would try to do something more meaningful for the people in your community and you never know your eighty year old self may very well thank you.    

You may also wish to spend more time on hobbies that you enjoy or take up a new hobby, e.g. join a local walking group.  

michaels

NedS said:

You certainly seem to have plenty of assets to work with.

Can we have some more details around the DB pension. What is the inflation protection? Is it uncapped, 5%, 2.5% or maybe something different. If it's gold plated (uncapped), I would avoid taking it early at all costs, and use your DC pot to cover until NRA (65) - so Option 2

In fact, I'm not sure I would wait until 64 to take the tax free lump sum from your DC pot. Why not crystallise enough now to take sufficient TFLS to clear your debts (or use your £30k savings)? What interest rate are you paying on those debts? Are you making more in your DC pension that the debts are costing you? If not, why wait another 1-2 years to clear them? You could use the money you are saving from not paying the debs to maximise current DC pension contributions until you finish work, effectively recycling some of that cash (within pension recycling rules).

What is the rationale for this statement?  Assuming the actuarial reduction is 'fair' why does the level of inflation protection impact whether you should take it early or not?


[Like many I have a DC pot and a DB and am thinking of taking the DB (full CPI) as soon as possible as I can only choose 100% spousal protection once it is in payment.  Not sure if there is more or less risk in using the DC quickly rather than slowly - quickly means lower investment risk investments which also means less inflation protection]

Secret2ndAccount

michaels said:

NedS said:

... If it's gold plated (uncapped), I would avoid taking it early at all costs, and use your DC pot to cover until NRA (65) ...

What is the rationale for this statement?  Assuming the actuarial reduction is 'fair' why does the level of inflation protection impact whether you should take it early or not?

The good thing about a DB pension is the security it provides. If you live to be 100; if you lose your mental sharpness; doesn’t matter – the money drops onto the doormat every month for life. However, some DB’s don’t offer any inflation increases at all! So if you live to be 100, the real value of that guaranteed payment would be severely diluted. Even with a 2.5% cap, a year like this one would cost you 7.5% for the rest of your days. Notice that NedS’ comment referred to a DB with uncapped inflation increases. In this case, I would tend to agree with trying to protect it, though not as vehemently as Ned.

The OP is within inches of the LTA, and taking a DB early, with the resulting actuarial reduction, is one strategy for mitigating LTA concerns. So I think the picture is more nuanced. OP is not going to starve whichever option he chooses.

Agree that work is optional from here on out, and it would likely make sense to clear the debts unless the interest rate is very low.

[Deleted User]

Linton said:

Deleted_User said:

Option 2. Maximize no-risk, paid for life DB income.  Allows you to spend more safely because you don’t need to keep contingency to cover longevity risk. 

RPI capping is still a risk, in case long term inflation exceeds 3% but its small.

The plan looks great to me. 

Is 3% capping such a low risk?  If capping is calculated on a separate year by year basis one year of 10% inflation will reduce your real income by 7% for the rest of your life even if the average is below 3%. Not having a DB pension I dont know how capping works.

That’s another reason to delay so that year by year capping is delayed.  

Perhaps its a judgment call whether this risk is “low” but its lower than drawing DB early.  And I do think its low. Spending on consumables and holidays drops over time anyway. Healthcare usage goes up but its “free”.  

michaels

Deleted_User said:

Linton said:

Deleted_User said:

Option 2. Maximize no-risk, paid for life DB income.  Allows you to spend more safely because you don’t need to keep contingency to cover longevity risk. 

RPI capping is still a risk, in case long term inflation exceeds 3% but its small.

The plan looks great to me. 

Is 3% capping such a low risk?  If capping is calculated on a separate year by year basis one year of 10% inflation will reduce your real income by 7% for the rest of your life even if the average is below 3%. Not having a DB pension I dont know how capping works.

That’s another reason to delay so that year by year capping is delayed.  

Perhaps its a judgment call whether this risk is “low” but its lower than drawing DB early.  And I do think its low. Spending on consumables and holidays drops over time anyway. Healthcare usage goes up but its “free”.  

The year by year capping I understand but it was specifically uncapped rather than capped where the suggestion was not to take early.

Surely an actuarially fair reduction on an uncapped CPU is worth the same whenever you take it so the only question is which is the better strategy for the DC part?

For example, I could have about 12k at 55 or 22k at 67, both of which I think have the same real terms expected value.

To then have a flat 32k I could:
Top up the 12k early DB by 20k for 12 years = £240k plus 10k post SRA
Pay 32k for 12 years and then have 32k from State plus DB = £384k total

phynix_uk

Deferring drawing your DB pension may look sensible and may well win the overall race in the long-term but we're talking a really long term here and without being morbid, you have to live long enough to achieve it. You need to establish the 'crossover' here:

If we assume you don't work:

Draw the DB pension at 64. Gross annual pension £29,000, net income £25,714.
Draw the DB pension at 65. Gross annual pension £30,000, net income £26,514

You're essentially giving up £25,714 income so you can benefit from an extra £800 per year. Ignoring inflationary increases, it'll take you 32 years to make back the £25,714. I appreciate there are differences between pension increases when deferred and in payment but assuming inflation drops back to something more palatable (which it will in the next 12-18 months) the difference won't make that crossover period significant enough to justify deferring it.

As for drawing down from your DC pot first, bad idea. Unlike your DB pension, your DC has legacy planning attached and can be passed to your loved ones. Sure, there are arguments about using it but would draw tax free cash out in stages (drawdown) to satisfy your need to clear debts etc. Don't fully crystallise it if you don't need to.

Lastly, the Lifetime Allowance isn't much of a driving force here, it won't prevent the amount of Tax-Free Cash you can take (unless they change the rules again), you're just deferring the decision to take it. You're DC pot can continue to grow and quite frankly, we should all be aiming for a LTA problem, trying to avoid it is like trying to avoid becoming a higher-rate taxpayer.

[Deleted User]

michaels said:

Deleted_User said:

Linton said:

Deleted_User said:

Option 2. Maximize no-risk, paid for life DB income.  Allows you to spend more safely because you don’t need to keep contingency to cover longevity risk. 

RPI capping is still a risk, in case long term inflation exceeds 3% but its small.

The plan looks great to me. 

Is 3% capping such a low risk?  If capping is calculated on a separate year by year basis one year of 10% inflation will reduce your real income by 7% for the rest of your life even if the average is below 3%. Not having a DB pension I dont know how capping works.

That’s another reason to delay so that year by year capping is delayed.  

Perhaps its a judgment call whether this risk is “low” but its lower than drawing DB early.  And I do think its low. Spending on consumables and holidays drops over time anyway. Healthcare usage goes up but its “free”.  

The year by year capping I understand but it was specifically uncapped rather than capped where the suggestion was not to take early.

Surely an actuarially fair reduction on an uncapped CPU is worth the same whenever you take it so the only question is which is the better strategy for the DC part?

For example, I could have about 12k at 55 or 22k at 67, both of which I think have the same real terms expected value.

To then have a flat 32k I could:
Top up the 12k early DB by 20k for 12 years = £240k plus 10k post SRA
Pay 32k for 12 years and then have 32k from State plus DB = £384k total 

To me, the key issue is risk of outliving your money. “Actuarial reductions” average life expectancy between a very large number of retirees. Which is fine for a pot which has a large number of retirees; the required duration can be estimated with great precision. That’s your DB. Your DC pot, on the other hand, only has a single person to provide for. The risk of outliving “median” life expectancy is 50%. Effectively, actuarial calculations give you longivity insurance at zero cost for taking your DB pension on time rather than early. 

If you take DB pension early then you need to make your own provisions for living way longer than average.  And it could be a lot longer, so can’t assume “30 years” like in the “safe withdrawal rate”.  Which really means that you can afford to spend less if you delay spending from your DC pot but trigger DB pension early.  Why would one want to spend less?  Only if legacy is the priority as opposed to risk of old age poverty.  

And if you prioritize spending from your DB pot over DC pot then you have to manage your DC pension after the age of 75 when the likelihood of financial mistakes goes up.  

Last but not least, I don’t like the idea of leveraging to invest at the age approaching, let alone, past retirement.  And that’s what the OP is doing: he has debts as well as investments.  This creates unnecessary risks. 

Linton

michaels said:

NedS said:

You certainly seem to have plenty of assets to work with.

Can we have some more details around the DB pension. What is the inflation protection? Is it uncapped, 5%, 2.5% or maybe something different. If it's gold plated (uncapped), I would avoid taking it early at all costs, and use your DC pot to cover until NRA (65) - so Option 2

In fact, I'm not sure I would wait until 64 to take the tax free lump sum from your DC pot. Why not crystallise enough now to take sufficient TFLS to clear your debts (or use your £30k savings)? What interest rate are you paying on those debts? Are you making more in your DC pension that the debts are costing you? If not, why wait another 1-2 years to clear them? You could use the money you are saving from not paying the debs to maximise current DC pension contributions until you finish work, effectively recycling some of that cash (within pension recycling rules).

What is the rationale for this statement?  Assuming the actuarial reduction is 'fair' why does the level of inflation protection impact whether you should take it early or not?


[Like many I have a DC pot and a DB and am thinking of taking the DB (full CPI) as soon as possible as I can only choose 100% spousal protection once it is in payment.  Not sure if there is more or less risk in using the DC quickly rather than slowly - quickly means lower investment risk investments which also means less inflation protection]

Takng the maximum DB pension is insurance against living too long if the DB pension on its own is insufficient for your needs.  You can use your DC in the first few years at minimum risk, how confident are you that it will still be doing its job in 25 years time? Hpw confident are you that you will be able to manage it?