Retirement plan check

Pat38493

NedS 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. 

Following on... is the DB pension currently deferred or are you still actively contributing to it in your current employment?
If it's a deferred DB pension, not taking it early may be beneficial whilst inflation is high (above the 3% cap), as in deferment the cap is not applied annually, but is rather applied as a compounded figure over the length of the deferment. In other words, if it's been deferred for a number of years, you are likely to still get an increase significantly above the 3% cap this year as the average RPI increases over the lifetime of the deferment are likely to have been less than 3%. Depending how inflation pans out over the next couple years, you may already have used up any slack by the time you hit 64, or you may still have some slack left in the system which would be beneficial if inflation remains above the 3% cap. Once the pension goes into payment, the 3% cap will apply annually (unless the trustees use their discretion to award an increase above the cap, as mentioned above).

This forum never ceases to be an education where I keep realising things that the experts probably think are obvious but perhaps not to me.  I have been wrestling with the same question on my retirement planning as to whether I should take DB early or usc DC to bridge the gap.

I have run a lot of scenarios in Timline and a couple of other tools, and I was a bit surprised that in every scenario, I am better off taking the DB early.  Both scenarios meets my goals but with taking DB early, I would generally have a bigger spending power above my minimum and a larger pot at the end of the plan to pass on.  Generally I am trying to work to 99% success with at least some positive balance in the worst case scenario.

However this thread made me realise one thing that these tools doesn't cover - it seems that if your DB pension is in a deferred state, your inflation cap (5% RPI in my case) is averaged out over the years so even a year or two of much higher inflation won't be a problem, but if you put the pension into payment, the cap applies for each individual year.  This latter part is something I had not considered up to now.  Maybe I do need an financial adviser after all!

I am also in very similar position to OP in that LTA might play a part in the decision to take DB earlier.  Also, from what I could tell from the data my DB (soon to be bought out) sent to me, there is no one specific NRA for my DB asset as a portion of it has a retirement age of 60 (about a third) and the rest at 65.

michaels

Linton said:

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?

Thanks both

DC first then (fully indexed both before and during payment) DB

Advantages
Longevity insurance (although historic SWR does not really decline if period is increased above 40 years which is my starting point for a retirement at 55 modelling)
Money management issues when older

Disadvantages
Inheritability
Allocation of spousal benefit (my DB scheme you can only hypothecate 100% spousal benefit once pension is in payment)

Unclear
DC risk/return trade off - if you are spending the DC pot over say 12 years between 55 and 67 then equities are probably too risky but then other asset classes give a certain loss to inflation, whereas if you re drawing it over 40+ years then you can remain invested in equities which is a better inflation hedge (at the cost of increased volatility)

Anything else?

[Deleted User]

SWR concept is a “make belief” idea for a 30 year period of time.  Stretching it it to 40 year duration is equally valid.  Essentially, we have to put trust in market returns staying the same over the next 30 (or X) years as they have been in the past 100. Which they might. 

Having said this, I am sure that even if you put trust in future being like recent past, stretching Monte Carlo calcs beyond 30 years will either reduce SWR or reduce the confidence interval from 95%. 

Take your point re equity vs FI issue if your duration goes down to 12 years. Yes, if its exactly 12 years then one can buy a bond ladder of similar duration and guarantee income until drawing DB.  

Depending on circumstances, one can spend out of DC pot and still have some left over for the period after he starts drawing DB pension.  In a perfect world DB pensions provide for the basic necessities of life. And so does the “bond” portion of the DC portfolio. And in that case the balance of DC pension can be in equities.  

Its psychologically hard for us to see the “net worth” number decrease by delaying DB income.  Logically its the best approach under most circumstances.