Annuity or drawdown

OldScientist

SouthCoastBoy said:

Albermarle said:

Prostang said:

Thanks for the replies we both will receive full state pension, my problem is I have worked hard to get to this position and don’t like taking risks , we also are  not very extravagant and live on my £25k part time wage . 

The other problem is I went to a adviser’ (not IFA) and the initial 4 % charge put me off 

But in reality you are taking a risk, that the value of your cash savings will get eroded by inflation. In fact it is not a risk, more of a certainty.

I understand the statement regarding risk by holding cash, however I have a large cash holding and I would say generally I have been getting 1% to 2 % below inflation per annum as a return. Compounded over a number of years I can see that it would erode a lot of my cash in real terms, however I still feel comfortable with that, as I can't lose 50% overnight. The caveat to holding cash is that it is around 40% of my portfolio, the rest is invested in OEICs. I think it all depends on your mindset and what you feel comfortable with. Also when I do retire I will initially be using cash and not realise any value locked up in the funds I have invested in, over the last 30 years (both inside and outside my pension), so my cash value will slowly erode until I get to a lower cash percentage, which I have yet to decide what that should stabilise at, maybe 25 to 30%.

I'm saying this as I think the OP needs to make decisions that are comfortable for them, everyone is different. As said in previous posts, firstly work out your monthly income, identify how much capital expenditure you may need over the course of your retirement and go from there.

Unfortunately there is not a magic formula that can give you an answer, it is what you feel comfortable with and what is best for you, this is one of the challenges of a DC pension, with DB such issues don't arise, you get what you are given.

There's cash and there's cash...

If it is sat in a traditional current account then will definitely lose to inflation.

Treasury bills (3 month, but often used as a proxy for cash) have had a real return of about 1% over the last century or so. Of course, the real return varies with time and some periods are better than others (but that's true for shares and bonds too).

More recently, between 2008 and 2021 (I happen to have some data handy, some derived from this site)

3 month Bills had nominal yields of between 0.2% and 1.0% and real yields of between -4.7% and 0% (with an arithmetic average of -1.7%)

The interest rate on Instant access saving's accounts was above the yield on bills by between 0.6 and 3.0 percentage points (the average was 1.6 percentage points). The arithmetic average real return was -0.2%.

Over the same period, the interest rate on 1 year fixed savings accounts was, on average, just over 50 bp higher than the easy access rate and had an arithmetic average real return of 0.3%



How much cash is too much cash is a different argument, but is certainly a question the OP could consider.  Personally,  cash in 1 year fixed accounts forms about 25% of our overall portfolio (and 75% of the fixed income component - my overall asset allocation is 67/33, but I have income from a DB pension) but this comes out of a strong preference of my OH and a mild dabbling in active management of fixed income on my part (i.e., some minor fiddling with duration).

Albermarle

SouthCoastBoy said:

Albermarle said:

Prostang said:

Thanks for the replies we both will receive full state pension, my problem is I have worked hard to get to this position and don’t like taking risks , we also are  not very extravagant and live on my £25k part time wage . 

The other problem is I went to a adviser’ (not IFA) and the initial 4 % charge put me off 

But in reality you are taking a risk, that the value of your cash savings will get eroded by inflation. In fact it is not a risk, more of a certainty.

I understand the statement regarding risk by holding cash, however I have a large cash holding and I would say generally I have been getting 1% to 2 % below inflation per annum as a return. Compounded over a number of years I can see that it would erode a lot of my cash in real terms, however I still feel comfortable with that, as I can't lose 50% overnight. The caveat to holding cash is that it is around 40% of my portfolio, the rest is invested in OEICs. I think it all depends on your mindset and what you feel comfortable with. Also when I do retire I will initially be using cash and not realise any value locked up in the funds I have invested in, over the last 30 years (both inside and outside my pension), so my cash value will slowly erode until I get to a lower cash percentage, which I have yet to decide what that should stabilise at, maybe 25 to 30%.

I'm saying this as I think the OP needs to make decisions that are comfortable for them, everyone is different. As said in previous posts, firstly work out your monthly income, identify how much capital expenditure you may need over the course of your retirement and go from there.

Unfortunately there is not a magic formula that can give you an answer, it is what you feel comfortable with and what is best for you, this is one of the challenges of a DC pension, with DB such issues don't arise, you get what you are given.

You are right that how much cash to have as part of your retirement plan, is driven partly by personal preference. I also hold quite a lot of cash.
The point I was just trying to make to the OP is that pretty much everything has its own risks, including holding a lot of cash.
Also we do not know how their pension is invested. It could well be at the low risk end of the investment spectrum. If so then having 50% in cash as well, means a low equity % and a very low growth scenario. So more of a risk of it running out, than if it was conventionally invested.