Timing and order of DB access and DC withdrawal

Cobbler_tone

jimi_man said:

Cobbler_tone said:

Now favouring option 2, which mitigates risk.
Take tax free cash from DB and DC, with 10 year fixed term annuity with £100k (balance of DC pot). Gives a lifetime income of around £30k PA once state pension kicks in, plus decent lump sum. I don’t want to faff around with investments.
My DB will build and not drop at 67.

I’m assuming most fixed term annuity products need an adviser? I ran the calculation on Moneyhelper.

When you have a significant DB pension and also State Pension (guaranteed income) I’m struggling to see the benefit of purchasing an annuity? It seems like you are swapping your PCLS for an annuity (no inflation protection) when you’d be better off keeping it in the pension (some inflation protection).

Option 2 seems the worst of the lot. To ‘mitigate risk’ Option 4 seems like the best bet. Guaranteed income, above the level you require, (around £30k) for the rest of your life - the DC pot adding a bit of spending money. 

If you were adamant on the needing £100k cash, then take some PCLS. £37k from the DC pot and £63k from the DB pension and see what that gives you in yearly income. That would be somewhere between Option 3 and Option 4. A touch more risk but not as much risk as Option 2. 

Option 2 gives a lifetime guarantee on the DB with PCLS.
Using the DC TFLS (to give £140k in
total) and £100k FTA to cover the bridge to state pension (ie I’m not buying the FTA with the PCLS) as opposed to using the DB bridge from 57-67) If I use the DB bridge it drops my guaranteed income considerably at 67 and leaves the risk with the DC investment.

jimi_man

Cobbler_tone said:

jimi_man said:

Cobbler_tone said:

Now favouring option 2, which mitigates risk.
Take tax free cash from DB and DC, with 10 year fixed term annuity with £100k (balance of DC pot). Gives a lifetime income of around £30k PA once state pension kicks in, plus decent lump sum. I don’t want to faff around with investments.
My DB will build and not drop at 67.

I’m assuming most fixed term annuity products need an adviser? I ran the calculation on Moneyhelper.

When you have a significant DB pension and also State Pension (guaranteed income) I’m struggling to see the benefit of purchasing an annuity? It seems like you are swapping your PCLS for an annuity (no inflation protection) when you’d be better off keeping it in the pension (some inflation protection).

Option 2 seems the worst of the lot. To ‘mitigate risk’ Option 4 seems like the best bet. Guaranteed income, above the level you require, (around £30k) for the rest of your life - the DC pot adding a bit of spending money. 

If you were adamant on the needing £100k cash, then take some PCLS. £37k from the DC pot and £63k from the DB pension and see what that gives you in yearly income. That would be somewhere between Option 3 and Option 4. A touch more risk but not as much risk as Option 2. 

Option 2 gives a lifetime guarantee on the DB with PCLS.
Using the DC TFLS (to give £140k in
total) and £100k FTA to cover the bridge to state pension (ie I’m not buying the FTA with the PCLS) as opposed to using the DB bridge from 57-67) If I use the DB bridge it drops my guaranteed income considerably at 67 and leaves the risk with the DC investment.

Not sure what you mean by a 'lifetime guarantee'? Taking the PCLS is rarely a good option and the rate you've been offered doesn't seem particularly generous.

I agree you're not physically using the PCLS to fund the FTA but surely the effect is more or less the same?

The DB bridge evens out your income and with the State pension you'll end up with roughly the same amount of income from now until you die (plus index linking). The FTA offers no index linking.

I get the 'risk' with the DC investment, but in your plan you're talking about still ending up with a lump sum of £100k. That, to me, is also a risk since if you leave it in the bank then it's subject to inflation risk. 

Obviously it's your money and retirement so you should do what you think is right, I'm just pointing out what I perceive as some of the pitfalls. I was always led to understand that annuities are best suited to people who don't have a lot of guaranteed income and you don't seem to fit that description, unless there is something I'm missing.

DT2001

What happens if inflation rises and is your pension going to be linked to CPI in a few years?
My DB pension that I took early changed at 65 to being all GMP and 50% will not increase at all and 50% by CPI maximum of 3%. So I’ve assumed it will lose its real value over time. In your situation you could ensure a higher guaranteed initial return, invest part of your DC pot for long term growth or be happy to maybe have a little less spending power. The other thing I would consider is does your OH get a % of your pension if you die first. Is the reduced household income enough to continue to enjoy the same standard of living. I think it is often the case that the survivor gets 50% of what the pension would have been without taking a lump sum. So if the residual income is tight taking a larger lump and investing for the long term might be a good plan. You just need to work out which options to prioritise but whichever you are in a good situation. Good luck 

Cobbler_tone

jimi_man said:

Cobbler_tone said:

jimi_man said:

Cobbler_tone said:

Now favouring option 2, which mitigates risk.
Take tax free cash from DB and DC, with 10 year fixed term annuity with £100k (balance of DC pot). Gives a lifetime income of around £30k PA once state pension kicks in, plus decent lump sum. I don’t want to faff around with investments.
My DB will build and not drop at 67.

I’m assuming most fixed term annuity products need an adviser? I ran the calculation on Moneyhelper.

When you have a significant DB pension and also State Pension (guaranteed income) I’m struggling to see the benefit of purchasing an annuity? It seems like you are swapping your PCLS for an annuity (no inflation protection) when you’d be better off keeping it in the pension (some inflation protection).

Option 2 seems the worst of the lot. To ‘mitigate risk’ Option 4 seems like the best bet. Guaranteed income, above the level you require, (around £30k) for the rest of your life - the DC pot adding a bit of spending money. 

If you were adamant on the needing £100k cash, then take some PCLS. £37k from the DC pot and £63k from the DB pension and see what that gives you in yearly income. That would be somewhere between Option 3 and Option 4. A touch more risk but not as much risk as Option 2. 

Option 2 gives a lifetime guarantee on the DB with PCLS.
Using the DC TFLS (to give £140k in
total) and £100k FTA to cover the bridge to state pension (ie I’m not buying the FTA with the PCLS) as opposed to using the DB bridge from 57-67) If I use the DB bridge it drops my guaranteed income considerably at 67 and leaves the risk with the DC investment.

Not sure what you mean by a 'lifetime guarantee'? Taking the PCLS is rarely a good option and the rate you've been offered doesn't seem particularly generous.

I agree you're not physically using the PCLS to fund the FTA but surely the effect is more or less the same?

The DB bridge evens out your income and with the State pension you'll end up with roughly the same amount of income from now until you die (plus index linking). The FTA offers no index linking.

I get the 'risk' with the DC investment, but in your plan you're talking about still ending up with a lump sum of £100k. That, to me, is also a risk since if you leave it in the bank then it's subject to inflation risk. 

Obviously it's your money and retirement so you should do what you think is right, I'm just pointing out what I perceive as some of the pitfalls. I was always led to understand that annuities are best suited to people who don't have a lot of guaranteed income and you don't seem to fit that description, unless there is something I'm missing.

The difference is option 3 gives a lifetime guarantee of around £22k a year (protected), option 2 (with fixed term annuity) gives £30k a year (protected) with the lump sums on top from DB and DC. I don’t want/need any greater available cash to spend or invest.
Leaves a joint gross income of £40k and £200k spare from ages of 54,57. The OH has her severance to live on for our year of ‘peace’.
You’re right, we all Iive by our individual decisions.

fuzzzzy

I have no idea which pension option you should choose but one thing to bear in mind should you choose a bridging option is that it may have an impact on your annual allowance. The initial uplift to your pension because of the bridging option will cause an increase to your pension savings for the year of your retirement, which you may want to check out nearer the time if you were going to go for this option.

Cobbler_tone

fuzzzzy said:

I have no idea which pension option you should choose but one thing to bear in mind should you choose a bridging option is that it may have an impact on your annual allowance. The initial uplift to your pension because of the bridging option will cause an increase to your pension savings for the year of your retirement, which you may want to check out nearer the time if you were going to go for this option.

That wouldn’t apply in my particular scenario but a good watch out for those considering this.

Triumph13

As someone who has spent countless hours trying to optimize my own strategy, I would say the key thing really is just to find a good enough strategy, not addle your brains trying to find the perfect one.

Having said that, I think you are not being entirely fair in your comparison of options 2 and 4.  Yes you end up with £35k more in your hot little hands than you would if you just took option 4, put the DC in a money market fund and drew it out as 25% TFLS, 75% taxed at 20% over a few years.  But what does that extra £35k cost you?

1. 75% of your DC is not even close to enough to replace the extra £12 k pa for 10 years (plus indexation) from the bridging option.  Expect more than half of your 'winnings' to be eaten up there, more if inflation is high.
2. The underlying income in option 4 is £750pa higher than option 2.  It would take the balance of your winnings to but an equivalent annuity.

In reality you have got two pretty equal options, but 4 is definitely less risk and a lot less faff than 2.

Cobbler_tone

Triumph13 said:

As someone who has spent countless hours trying to optimize my own strategy, I would say the key thing really is just to find a good enough strategy, not addle your brains trying to find the perfect one.

Having said that, I think you are not being entirely fair in your comparison of options 2 and 4.  Yes you end up with £35k more in your hot little hands than you would if you just took option 4, put the DC in a money market fund and drew it out as 25% TFLS, 75% taxed at 20% over a few years.  But what does that extra £35k cost you?

1. 75% of your DC is not even close to enough to replace the extra £12 k pa for 10 years (plus indexation) from the bridging option.  Expect more than half of your 'winnings' to be eaten up there, more if inflation is high.
2. The underlying income in option 4 is £750pa higher than option 2.  It would take the balance of your winnings to but an equivalent annuity.

In reality you have got two pretty equal options, but 4 is definitely less risk and a lot less faff than 2.

Thanks Triumph. You are right about the first part! The Holy Grail of an optimum strategy.
I think my biggest struggle is being a bit 'scared' of handing a DC pot and something I try to educate myself from the postings on here. I am certainly not stupid and always keen to learn. I have certain established that I am 'risk adverse'.
With option 4 I also start with no cash lump sum and the way my life has panned out, I don't have a lot else saved and currently piling into the DC to make the £130k, £140k plus. I do live comfortably though.

If I apply 2.5% (finger in the air, 50% capped at 2.5% and 50% capped at 5%) to the DB. On option 4 the pension at 67 drops to £22k, after ending on £37k at 66, with added state pension. 
After starting with no lump sum it depends what (and how quickly) I can convert the £130-140k DC to cash in the most efficient way to do the route you suggest. e.g. I will immediately be wanting to spend c£30k on a car. Not fussed about holidays and there are two of us, so she pays for all the house projects. 

On your point one (may not be index linked) but £100k buys a 10 year annuity of £13k a year.
I'd also say option 2 doesn't carry much risk as you are backing on a DB pension and fixed term annuity, i.e. you know what your guaranteed income is for life. 

Ultimately at the turn of the year I will enlist the services of an IFA who I am hoping can explain the full range of products, along with my partners situation with DB and DC pensions.
  
We have lost two loved ones this year and I have two elderly parents, so well aware of the twists and turns of life too.

I am confident that I am going to be fine whichever route. My motivation to finish next year (at 57) is driven by physical health (and 40 years on the work train) and after 3 back surgeries across my life I'd like to enjoy a few years of decent health. Otherwise I'd put another couple of years in....but we can all do 'one more year'.

Plenty of food for thought.

Moonwolf

This looks not dissimilar to my own dilemma.

https://forums.moneysavingexpert.com/discussion/6489313/choices-choices

My initial thought was to wait for the last DB pension in order to maximise guaranteed income later and use my DC as a bridge. That is how I have started.

My feeling now is to take my DB early with the actuarial reduction, reducing my reliance on my DC pot, which while it is growing nicely is very volatile. 

In the end all the strategies seem to work.

Triumph13

"I think my biggest struggle is being a bit 'scared' of handing a DC pot and something I try to educate myself from the postings on here. I am certainly not stupid and always keen to learn. I have certain established that I am 'risk adverse'."

The most important thing for you to grasp is that a DC pension is just a wrapper.  For all intents and purposes, you can hold exactly the same assets inside one as you can outside.  The only extra thing you have to manage is staying within the 20% tax band on your withdrawals and that's very easy to calculate - just delete your other taxable income from the threshold amount and withdraw that much.  All very easy.

Is it the wrapper that's scaring you though or is it a) the idea of being invested in anything other than cash; and/or b) the idea of managing a lump sum over the rest of your life?

If it's a) then you can replicate that in the pension - though many would advise you not to keep it all in cash wherever it is due to the risk of it being eroded by inflation.  If it's b) then thaty problem doesn't go away wherever you hold it.