Draw DB pension and invest 25%?

quantum

thunderroad88 said:

quantum said:

I am seeking advice on my defined benefits pension, which I had intended to start to draw shortly. 
I had considered taking my maximum cash sum of appx £60k plus reduced pension and investing that. £20k in an ISA and the rest in either a savings account or stocks and shares. 
I'm 63 in July.

I did this 3 years ago, took lump sum and invested it in a combination of equities and fixed savings accounts. It’s easily returned way more each year than I gave up in annual pension plus I still have the full capital amount. Worked for me but I guess some people prefer the safety of 100% guaranteed income and don’t take it.

Thanks. I wonder if you'd do the same now with market volatility. My immediate reaction is now would be a perfect time as markets fall. However other have noted that it could take several months to get it through...

DRS1

People on here will ask you what your commutation rate is - ie how many £xx of lump sum do you get for each £x pa of pension given up.  They might also ask what pension increases you will get - eg CPI capped at 5%.

quantum

DRS1 said:

People on here will ask you what your commutation rate is - ie how many £xx of lump sum do you get for each £x pa of pension given up.  They might also ask what pension increases you will get - eg CPI capped at 5%.

Nope, only you've asked 😉.
But I have no idea what all that is. Does it apply to a DB pension?

DRS1

Yes it does.

If you are given a choice between a pension of say £10k pa or a reduced pension of £9k per annum and a lump sum of £15k then you can see that you have a commutation rate of 15 to 1 (you give up £1 k pa of pension for a lump sum of £15k).  People on the pension board will tell you 12 to 1 is lousy and 20+ to 1 is good.  Don't ask me how they factor in the pension increases.

thunderroad88

quantum said:

thunderroad88 said:

quantum said:

I am seeking advice on my defined benefits pension, which I had intended to start to draw shortly. 
I had considered taking my maximum cash sum of appx £60k plus reduced pension and investing that. £20k in an ISA and the rest in either a savings account or stocks and shares. 
I'm 63 in July.

I did this 3 years ago, took lump sum and invested it in a combination of equities and fixed savings accounts. It’s easily returned way more each year than I gave up in annual pension plus I still have the full capital amount. Worked for me but I guess some people prefer the safety of 100% guaranteed income and don’t take it.

Thanks. I wonder if you'd do the same now with market volatility. My immediate reaction is now would be a perfect time as markets fall. However other have noted that it could take several months to get it through...

I would do the same now…I wanted it out of my old company’s scheme and away from Capita’s clutches asap before anything could go wrong. I preferred and would still prefer to be in control of it. Tax issues were not relevant to me as I was able to get £40k into our ISAs straight away and the rest into a high interest savings account in my non tax paying wife’s name. Sure I got it into the markets at the right time, but I still think some portion in equities even now will be beneficial. If you’re unsure of the markets you could put £20k into a STMMF in your isa and the rest into a 3 or 6 month fixed rate  until things settle and it gets you some thinking time. if there’s another big drop in markets you can move the mmf funds into equities. 

quantum

DRS1 said:

Yes it does.

If you are given a choice between a pension of say £10k pa or a reduced pension of £9k per annum and a lump sum of £15k then you can see that you have a commutation rate of 15 to 1 (you give up £1 k pa of pension for a lump sum of £15k).  People on the pension board will tell you 12 to 1 is lousy and 20+ to 1 is good.  Don't ask me how they factor in the pension increases.

I need help with my maths... actually tax free lump sum it says is £43,761, reduced pension of £6,564. No lump sum pension only is £9,754. 
Can you help me work this out? 🙏 

DRS1

9754 - 6564 = 3190
43761 / 3190 = 13.7181 etc
So not great.

Albermarle

DRS1 said:

9754 - 6564 = 3190
43761 / 3190 = 13.7181 etc
So not great.

You are right it is not great, but it depends to some extent how good the terms and conditions of the pension income are.

If they are good, with full annual inflation linking and spousal provision if you die, then a commutation rate of 13.7 is very poor.

If the pension is poor say with no yearly increases ( which would be unusual) and no spousal provision then, swopping it for tax free cash at 13.7 is less of an issue.

In reality the large majority of people with these choices, take the cash, whether it is a good financial decision or not. 

boingy

It was an easy decision for me with my DB pension because the ratio was not that great and it's also a very small pension so I took the cash along with the AVCs and stuck it all in a global tracking ISA. 

I've also now got all of the lump sum from my (much larger) DC pension safely tucked away in ISAs invested in the same type of funds as it was when it was inside the pension. My logic is that I should see the same performance but with lower fees and that chunk of money now is under my control rather than being vulnerable to any future changes to pension rules.

That's the problem with pensions. They are such long-term things that inevitably the rules change several times over your lifetime as governments come and go. I have to say that I'm loving drawdown. It's definitely not for everyone but it suits me down to the ground.