DB pension options - head in a spin

GenieLBH

Cobbler_tone said:

Albermarle said:

 It seems kind of mad to choose an option that won't break even until 86. If I were to get taken out by a bus or a swift heart attack it would not matter so much, it is the thought of getting a terminal diagnosis soon after retiring on option 1 and thinking about all that potential pension wasted.

Just FYI, a 60 year old will on average live for another 25 years. So yes you could die before then, but also you have a 50% chance of living longer than that and a 25% chance of reaching your 90's.

The more saliant points are probably....
1. Would you even notice/care if you could have been technically 'better off' by the time you pass 86, if that was the number? You'll be even more comfortable by this point, starting with £600k, adequate pension provisions and low outgoings. Potentially a millionaire.
2. What didn't you do that you could have done if you had the (pension) money earlier?
3. Are you likely to need a more modest income as you get into old age? Or effectively a flat income for the rest of your life taking a bridging/state pension. 
4. Are you leaving behind wealth, with the amount not making too much difference?

The only argument I can think of is will there be slightly less left in the event of funding care for your final years, which again is an unknown. I think it would be extremely sad and pessimistic to target your lifelong purpose to having as much money as possible for that. 
I wouldn't mind the home on 'A Man on the Inside' with cocktail parties in the afternoon. You won't get in there on a state pension.

Having set all the facts out here and got my head straight I don't think it does really matter too much for me which option I take. If I took less pension income until 67 and did not have enough I could always supplement from savings.

If I did not have anyone to leave money to then it would not be an issue at all, but I think I had got myself into the mindset of feeling I needed to maximise what I leave behind too. To be honest I thought I would get a whole load of posts about inflation risk and why I do not have more invested, there are so many people on here with huge investment pots. I'm likely not going to be able to spend it all myself but you never know, I might have a complete character change now I am retired. 

It is certainly not my aim to target lots of money toward future care. I know it is easy to say it as a nearly 60 year old, and I might feel differently in my 80s, but I really don't intend to go into care, unless it was taken out of my hands by a sudden event that left me so incapacitated that I knew nothing about it.

FIREDreamer

I would go for option 1 - you have plenty of cash already, arguably too much.

GenieLBH

Yes I think I had been inclined towards that option all along but it always takes me a long time to work through decisions.

Triumph13

Another argument for option 1 is that a higher fixed income makes it more likely that you will be able to decide early on that some of that cash is surplus to requirements - and therefore comfortable passing it on early to avoid inheritance tax.

And yes, you really should be looking at getting some of that cash invested.  But set £70k aside to fill in for the state pension (7 years x £12k x 80% as tax free)

GenieLBH

Thank you for your comment. Yes that had also been one of my ways of thinking, that going for the option that gives the highest long term pension income might make me feel freer about spending/gifting savings.

I am not opposed to investing. I had often thought about transferring some of my cash ISAs to S&S ISAs. I know I would be a lot richer if I had. I am just a chronic procrastinator and tend to look into doing stuff but never quite take the leap. Then the last couple of years it seemed too tempting not to lock it away as cash at good fixed rates. I thought I would think about it again when rates start to fall. And this year with all the noise around the cash ISA limits potentially being cut I thought I might as well go cash ISA again, as I may be forced into S&Ss anyway in the future.

When I think about investing though, the issue of death comes up again. Just thinking about my own needs I don't need to take any risks as I am sure I have enough to see me out. The only reason for investing would be to maximise my wealth for the purpose of passing it on. But that could backfire if I happened to die during a big prolonged market crash. I know you can have up to 3 years to cash in ISAs after a death, but 3 years might not be long enough for the markets to recover. Do other people who invest and hope to pass on wealth worry about this?

I would like to get my adult child interested in investing. That way as well as gifting cash to enjoy I could also gift for the purpose of them growing a S&Ss ISA and SIPP for the future. That feels less risky than me investing. At the moment they are really busy studying and enjoying life and don't have much interest in talking about money with me.

Triumph13

If you die during a prolonged market crash, your kids pay less inheritance tax

Juno_Moneta

“But that could backfire if I happened to die during a big prolonged market crash.”

This is quite a statement! I’ve never seen anyone worrying about their death coinciding with a market crash! Maybe you’re overthinking a little?

My choice would be the simplest, take the maximum tax free amount possible, yes you’re already cash heavy, but what is your end goal for all that money? 

Then I’d give a large amount (6 figures) to the only child with the hope I lived 7 more years and it therefore swerved inheritance tax. If I don’t then so what they pay some tax. 

The rest? Do something amazing for you. 

A Porsche 911 if that’s your thing, a long world cruise. Just do something that brings you joy and think less about timing your last day vs the stockmarket.

Cobbler_tone

It’s the beauty of how we are all different. I wouldn’t look further than the bridged option with a flat (highest) guaranteed income, allowing for the state pension, probably converting the lump sum to higher pension. The biggest income from the off, knowing that was your number until your demise. Still with oodles to assets to burn, although apart from the odd big purchase you wouldn’t need to. The higher starting pension would fund increased spending.
If you are half glass full, you might look back in a decade or two and say, “I might have had even more cash by now.”
I’m also of the view to gift out as soon as you have a clear view of your finances. I’ve already told mine that after I give them some money, anything left at the end is a bonus.
Like I said though, we’re all different and regardless of the approach you’re going to be fine.

GenieLBH

Juno_Moneta said:

“But that could backfire if I happened to die during a big prolonged market crash.”

This is quite a statement! I’ve never seen anyone worrying about their death coinciding with a market crash! Maybe you’re overthinking a little?

My choice would be the simplest, take the maximum tax free amount possible, yes you’re already cash heavy, but what is your end goal for all that money? 

Then I’d give a large amount (6 figures) to the only child with the hope I lived 7 more years and it therefore swerved inheritance tax. If I don’t then so what they pay some tax. 

The rest? Do something amazing for you. 

A Porsche 911 if that’s your thing, a long world cruise. Just do something that brings you joy and think less about timing your last day vs the stockmarket.

You did rather take that statement out of the context of the preceding ones.

As I said, if the only purpose of investing is to maximise wealth to pass on, because you have enough wealth for your own needs and don't need to invest for that purpose, then why should the timing of death not be a consideration. The mantra about investing seems to be "don't invest for the long term anything you might need in the next 10 years". Surely once you are over 60 years old your chances of dying in the next 10 years are increasing every year, so there is a risk of that investment pot for your beneficiary being decimated by a crash.

That is why I am not so bothered about drawing down on the DC pension and will still contribute to the SIPP, despite the changes to bringing them into IHT consideration, because I assume my child could just keep them invested in the event of a crash. (I will have to check with the providers on that and will consider withdrawing the tax free amount at some point). For the same reason I would like to try to get said child to invest in S&Ss ISA and SIPP with gifts from me every year. 

I promise to try and have fun with my money too, though I don't see a Porsche on the horizon.

GenieLBH

Cobbler_tone said:

It’s the beauty of how we are all different. I wouldn’t look further than the bridged option with a flat (highest) guaranteed income, allowing for the state pension, probably converting the lump sum to higher pension. The biggest income from the off, knowing that was your number until your demise. Still with oodles to assets to burn, although apart from the odd big purchase you wouldn’t need to. The higher starting pension would fund increased spending.
If you are half glass full, you might look back in a decade or two and say, “I might have had even more cash by now.”
I’m also of the view to gift out as soon as you have a clear view of your finances. I’ve already told mine that after I give them some money, anything left at the end is a bonus.
Like I said though, we’re all different and regardless of the approach you’re going to be fine.

It has been really useful to read other people's comments rather than being in the bubble of my own head.

Working life is over now. Future goals : spend money, have fun.