is lifestyling of pensions worth it if you are not planning to take out an annuity?

Pat38493

dunstonh said:

is lifestyling of pensions worth it if you are not planning to take out an annuity?

Could be.

Lifestyling doesnt come in one form.  It can be in many different forms.  Annuity purchase is just one form.    Another could be lifestyling on the 25% as only the 25% will be taken up front.

If you don't intend to use the 25% up front then you wouldn't use lifestyling.

I have been sort of doing this, but I recently wondered if this is a valid thing - if there is a market crash the 75% will shrink significantly so the 25% amount will be less as well.  Sure, it's still sitting there as cash or bonds but you can't take it out tax free if you don't have the other 75% anymore?

artyboy

For what it's worth (which could be a little), I am intending to remain 100% invested in equities well into whatever retirement I have. 

Two factors influencing this however are that I have enough 'free cash' (I think) to deal with relatively short term needs. And I am looking at this ultra-long term in that I expect (all things being equal) that a substantial proportion of my pension will be inherited by my children (assuming the trustees do what I bloody well wish).

Fingers crossed, eh 

JohnWinder

As indicated above I think you’ve ignored two issues which validate lifestyling: sequence of return risk, and what is I suppose related, the courage to deal with big value falls late in life.
On the second, early in life 100% in equities might be ok because you have ample human capital remaining to compensate for loss of equity capital. Retired, you’re pretty much out of human capital (earning capacity), so you don’t want to put too much of your other capital at too much risk.
You might have overlooked these two elements because it is far too often stated as you did that pension providers do lifestyling for annuity purchase reasons, but this is too much over-simplification. In the USA lifestyling is a big product despite those folk not being big on buying annuities.
So, if it’s logical to be high in equities at an early age and lower at a later age, do you make that jump in one step or do it gradually? Lifestyling is not as stupid as it might appear to you.

Bostonerimus1

JohnWinder said:

As indicated above I think you’ve ignored two issues which validate lifestyling: sequence of return risk, and what is I suppose related, the courage to deal with big value falls late in life.
On the second, early in life 100% in equities might be ok because you have ample human capital remaining to compensate for loss of equity capital. Retired, you’re pretty much out of human capital (earning capacity), so you don’t want to put too much of your other capital at too much risk.
You might have overlooked these two elements because it is far too often stated as you did that pension providers do lifestyling for annuity purchase reasons, but this is too much over-simplification. In the USA lifestyling is a big product despite those folk not being big on buying annuities.
So, if it’s logical to be high in equities at an early age and lower at a later age, do you make that jump in one step or do it gradually? Lifestyling is not as stupid as it might appear to you.

The retirement reverse equity guild path is a topic of some discussion on many US financial sites and there have been quite a few research papers on it published. I starts from an assumption that as you get further into retirement, sequence of return risk becomes less important because you have less time to make your money last. Research concludes that a rising equity allocation in retirement outperforms the usual "lifestyle" allocations in both ending account balances and the probability of not running out of money. So a lifetime equity allocation could be a parabola with 100% equities at the beginning, a split between equities and fixed income around retirement age to mitigate sequence of returns risk and then rising towards 100% equities again as you approach the Grim Reaper.

Linton

 Your drawdown strategy must include whatever protection you need to deal with a crash.  So rather than using crude automatic lifestyling simply switch to that strategy a few years before retirement before you actually withdraw any money.  

JohnWinder

Indeed. I think Michael Kitces has written about it as a 'bond tent'. The bond fraction increases towards retirement, as per the lifestyling we're talking about, then the bond fraction decreases as you spend the bonds and let the equities go their merry way for a luxurious later retirement, or they collapse but who cares since if you're not drawing from them there can be no sequence of returns damage.

peteasa

First thank you all for your comments.  Very representative of the thought process that I have gone through over the last few years.

artyboy said:

For what it's worth (which could be a little), I am intending to remain 100% invested in equities well into whatever retirement I have. 

Two factors influencing this however are that I have enough 'free cash' (I think) to deal with relatively short term needs. And I am looking at this ultra-long term in that I expect (all things being equal) that a substantial proportion of my pension will be inherited by my children (assuming the trustees do what I bloody well wish).

Fingers crossed, eh 

I have also thought about this.  The disadvantage of this approach is that if you live till after 75 the tax free inheritance stops (https://www.gov.uk/tax-on-pension-death-benefits).  So if you know that you are going to die a little over 75 then to maximize the gifts to children, grandchildren and charities, better give the money away now and spend the pension!

dunstonh said:

Lifestyling doesnt come in one form.  It can be in many different forms.  Annuity purchase is just one form.    Another could be lifestyling on the 25% as only the 25% will be taken up front.

If you don't intend to use the 25% up front then you wouldn't use lifestyling.

So this type of detailed information about lifestyling is only possible if you manage it separately to the pension provider(s).. My approach was to leave several pensions in lifestyling and others without lifestyling to kind of hedge my bets.

JohnWinder said:

So, if it’s logical to be high in equities at an early age and lower at a later age, do you make that jump in one step or do it gradually? Lifestyling is not as stupid as it might appear to you.

The best thing seems to be to make a decision based on the information that you have at the time and keep reviewing that decision each year to check it is right!

Bostonerimus1 said:

100% equities at the beginning, a split between equities and fixed income around retirement age to mitigate sequence of returns risk and then rising towards 100% equities again as you approach the Grim Reaper.

Exactly what I thought about when handling my fathers estate... at 90 it was clear that he did not have much more time left. But this also requires sufficient mental capacity to change the strategy at some point.  Or it requires a good bit of planning ahead of time so that the attorneys in the Power Of Attorney know what you want done!

JohnWinder said:

Indeed. I think Michael Kitces has written about it as a 'bond tent'. The bond fraction increases towards retirement, as per the lifestyling we're talking about, then the bond fraction decreases as you spend the bonds and let the equities go their merry way for a luxurious later retirement, or they collapse but who cares since if you're not drawing from them there can be no sequence of returns damage.

Now this is really pertinent as in recent years the interest rates have gone up.  I followed this strategy a bit and found to my dismay that the "safe bond tent" was not as safe as the blurb on the fund prospectus said it would be!  A fund called "my future annuity" designed to match the price of annuities sounded a good bet until it dropped in value by 25% because the fund was restricted to bonds and was not flexible enough to handle the drop in the bond market.  I rapidly found out that there is a relationship between bond prices and inflation.

So to summarise .. The best thing seems to be to make a decision based on the information that you have at the time and keep reviewing that decision each year to check it is right!

Albermarle

The disadvantage of this approach is that if you live till after 75 the tax free inheritance stops (https://www.gov.uk/tax-on-pension-death-benefits).  So if you know that you are going to die a little over 75 then to maximize the gifts to children, grandchildren and charities, better give the money away now and spend the pension!

There are two separate issues.

A pension pot remains outside your estate, so is not included in inheritance tax calculations at whatever age you die. ( under current rules anyway)

Only that if you die after 75 the beneficiary of the pot will pay income tax on any withdrawals.

You should note that the very generous ( in some peoples opinion) tax regime on pension pots on death, may not last forever. The rather illogical rule that beneficiaries pay no tax if you die before 75 is probably the most likely to get changed at some point.

Bostonerimus1

peteasa said:

First thank you all for your comments.  Very representative of the thought process that I have gone through over the last few years.

Bostonerimus1 said:

100% equities at the beginning, a split between equities and fixed income around retirement age to mitigate sequence of returns risk and then rising towards 100% equities again as you approach the Grim Reaper.

Exactly what I thought about when handling my fathers estate... at 90 it was clear that he did not have much more time left. But this also requires sufficient mental capacity to change the strategy at some point.  Or it requires a good bit of planning ahead of time so that the attorneys in the Power Of Attorney know what you want done!

It's easy to increase your equity allocation as you get further into retirement, simply spend from your bond allocation. Just before retirement I used some of my bond allocation to buy into a DB pension which put my equity percentage at about 80%. Because my equities have done better than my bonds and I have also invested some more in equities, 10 years into retirement I am now over 85% equities and will probably hit 90% soon. However, my pension spending is covered by DB pension and rental income so I don’t mind taking risk with my DC money. That might be different for someone who relies more on their DC pot.

peteasa

Anything to do with inheritance is complicated!

Albermarle said:

A pension pot remains outside your estate, so is not included in inheritance tax calculations at whatever age you die. ( under current rules anyway)

Main take away from this is to check what the rules are!  https://www.gov.uk/tax-on-pension-death-benefits tells me that :

You do not usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ - this means the pension provider can choose whether to pay it to you.

Ask the pension provider if payment of the lump sum was discretionary. If it was not, you may have to pay Inheritance Tax.

So under current rules the pension pot may or may not be part of the inheritance tax calculation... it depends.... and yes the rules can change at any time so keep monitoring what is going on!