Combined risk profile of DB and SIPP pensions

fcandmp

cloud_dog said:

fcandmp said:

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

I glad you have asked the question, as I am all ears on this subject.

At present (unless I am convinced otherwise of the benefits of drawing the DB early (1)), we will have a pure SIPP drawdown for the 6 years of early retirement until the main DB scheme kicks in, and 2 years later (for us) SP and another small LGPS DB kicks in.

Based on our projected income number once all the guaranteed pensions (DBs / SPs) are in payment we will only have a 10% funding requirement from our SIPP.  With this in mind I am tempted (2) to take a fairly high risk approach and leave the remainder of the SIPP invested in equities 100% (or at a very high level).  Worst case scenario, we tighten our belt / reign in discretionary spending during any particular market turmoil. 

(1) - Part of the reason I am quite keen to not draw the main DB pension early is to 'safeguard' (for want of a word) dealing with drawdown in out older years (and also because of point 2).

(2) - My longer term choices are also based on the possibility of me not being around and my partner having to deal with things (drawdown etc).  Simply getting them to open a new savings account because it pays 1% more than their current savings account is challenge enough. 

Thanks, and as background, I did decide to take my DB's early mainly to address a lifetime allowance challenge had I left them until I was 65 (this has now disappeared with changes kicking in in April, unless the new government reverses). I also took the majority of pension commencement lump sums and tucked them away into ISAs over following years (while most DB schemes half payment to surviving spouses, they do this on the basis of the value had the PCLS not been taken - worth checking). I have also written a fairly comprehensive finance guide for my wife, with details of all our policies and accounts and a rudimentary Yr 1 plan should I not be around. We go through this together once a year with a glass of wine. 

westv

El_Torro said:

Brie said:

I'm wondering why you need to consider of the DBs at all given how very secure they are.  It would take a catastrophic event to decrease the value (inflation aside).  

All it takes is for the company providing the pension to go bust (OP says their DB pensions are private sector, not public sector). I wouldn't call that a catastrophic event. 

Admittedly the OP should still get 90% of their DB pension, even if the provider runs out of money.

Also limited to nil inflation rises for service prior to April 97 and 2.5% (I think) after that.

Linton

El_Torro said:

Brie said:

I'm wondering why you need to consider of the DBs at all given how very secure they are.  It would take a catastrophic event to decrease the value (inflation aside).  

All it takes is for the company providing the pension to go bust (OP says their DB pensions are private sector, not public sector). I wouldn't call that a catastrophic event. 

Admittedly the OP should still get 90% of their DB pension, even if the provider runs out of money.

DB pensions in payment are 100% protected.  The 90% only applies prior to the scheme pension age.

The money held by a DB pension scheme is ring fenced from the company.  So a company going bust won't necessarily lead to problems with its employees pensions.  

A far greater risk is inflation where the guaranteed increase is capped as any amount lost against inflation is never recovered.  If you have a DB pension with a low cap  you may need to consider increasing your income from other sources at some stage.

Bostonerimus1

OP I think you are basically right. I have a DB pension and very stable rental income that more than covers my retirement income needs and so I am 90% equities with my DC pensions and other investments.

Albermarle

fcandmp said:

Albermarle said:

fcandmp said:

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

It is good that you start to look at your finances in the round. You could also expand this to any cash savings/investments you have outside your DC pension, and take into account the guaranteed income from the state pension.
Also if you have a partner, how their finances fit in.

Thanks, I hadn't really thought about including other cash savings, but have brought together my Wife's SIPP and ISA holdings into the picture. 

Plus her state pension of course, which is a significant asset as well. 

LHW99

fcandmp said:

El_Torro said:

I'm not sure you're looking at it the right way. Yes, your DB pension is pretty safe. Even if the pension scheme fails (may or may not be likely, depending on who the provider is) you will still continue to receive most of the money you are owed. 

As for your SIPP, how much do you need to draw on to maintain your preferred standard of living? If your SIPP is a nice to have this is very different than if you actually need the money in there to live. 

I don't really think the split between equities and bonds / cash is all that relevant. One way to look at it is how much of your SIPP will be needed in the next 5 years, how much in the next 6-10 years and how much after that. Then you can split your pot in a way that makes sense with your drawdown strategy.

I am currently drawing 4% of my SIPP per year and we can live comfortably on this. In the next two years both my wife and my state pensions kick in and will reduce 4% draw to below 2%. The SIPP going forward will be more of an inheritance for our three children.

That sounds as if you are using the SIPP currently to bridge the gap between retiring and SP, which is often mentioned here.

2% should be sustainable long term, but the question would be how much has the SIPP reduced when you reach SP age, and will the 2% be 2% of that, or 2% of the original (much) larger amount?

OldScientist

fcandmp said:

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

One way of considering this is drawing up a list of possible events and their consequences.

For example (there may be other events you should think about),

What would the effect of an extended 70% stock market crash be on your income at asset allocations of 50/50, 70/30, etc.?

If your DB pensions are not fully inflation protected, what would the effect of a sustained period of high inflation be (e.g., with a 2.5% cap, 10% inflation for 10 years would lead to a reduction in DB income of over 50% in real terms).

What would the effect of some/all your DB pensions falling into the pension protection fund (https://www.ppf.co.uk/ ) on your income be (e.g., PPF indexation is capped at 2.5%, etc.)?

What would happen to your spouse's income should you die early (i.e., what are the survivor benefits for your DB pensions)?

I note that the magnitude of the effect of some of these will be different before and after state pension age.

Those interested in combining the effects various outcomes might want to google 'event tree analysis'.

FWIW, my own approach to deal with the same problem has been to plan for changes in asset allocation as additional sources of guaranteed income are received since there will then be fewer scenarios where we are reliant on portfolio income. For example, after receipt of each state pension, our target stock allocation will increase (gradually either side of the date of receipt). In the event of a loss or reduction of guaranteed income, the stock allocation will be reduced.

Albermarle

Those interested in combining the effects various outcomes might want to google 'event tree analysis'.

Especially if you want to have a few sleepless nights !

fcandmp

OldScientist said:

fcandmp said:

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

One way of considering this is drawing up a list of possible events and their consequences.

For example (there may be other events you should think about),

What would the effect of an extended 70% stock market crash be on your income at asset allocations of 50/50, 70/30, etc.?

If your DB pensions are not fully inflation protected, what would the effect of a sustained period of high inflation be (e.g., with a 2.5% cap, 10% inflation for 10 years would lead to a reduction in DB income of over 50% in real terms).

What would the effect of some/all your DB pensions falling into the pension protection fund (https://www.ppf.co.uk/ ) on your income be (e.g., PPF indexation is capped at 2.5%, etc.)?

What would happen to your spouse's income should you die early (i.e., what are the survivor benefits for your DB pensions)?

I note that the magnitude of the effect of some of these will be different before and after state pension age.

Those interested in combining the effects various outcomes might want to google 'event tree analysis'.

FWIW, my own approach to deal with the same problem has been to plan for changes in asset allocation as additional sources of guaranteed income are received since there will then be fewer scenarios where we are reliant on portfolio income. For example, after receipt of each state pension, our target stock allocation will increase (gradually either side of the date of receipt). In the event of a loss or reduction of guaranteed income, the stock allocation will be reduced.

That's a really helpful suggestion, re events and consequences. I have considered the broad impact of either one of us dying on the ability to sustain consistent income, but perhaps others need to be factored in as well.

fcandmp

LHW99 said:

fcandmp said:

El_Torro said:

I'm not sure you're looking at it the right way. Yes, your DB pension is pretty safe. Even if the pension scheme fails (may or may not be likely, depending on who the provider is) you will still continue to receive most of the money you are owed. 

As for your SIPP, how much do you need to draw on to maintain your preferred standard of living? If your SIPP is a nice to have this is very different than if you actually need the money in there to live. 

I don't really think the split between equities and bonds / cash is all that relevant. One way to look at it is how much of your SIPP will be needed in the next 5 years, how much in the next 6-10 years and how much after that. Then you can split your pot in a way that makes sense with your drawdown strategy.

I am currently drawing 4% of my SIPP per year and we can live comfortably on this. In the next two years both my wife and my state pensions kick in and will reduce 4% draw to below 2%. The SIPP going forward will be more of an inheritance for our three children.

That sounds as if you are using the SIPP currently to bridge the gap between retiring and SP, which is often mentioned here.

2% should be sustainable long term, but the question would be how much has the SIPP reduced when you reach SP age, and will the 2% be 2% of that, or 2% of the original (much) larger amount?

Yes, very much the case, but I am in the fortunate position that SIPP total value and current drawdown amounts keep it relatively constant, largely because of additional income from other DB pensions which I took early when I retired at 60.