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  • FIRST POST
    • BJL55
    • By BJL55 21st Dec 17, 9:28 PM
    • 26Posts
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    BJL55
    Decisions to be made
    • #1
    • 21st Dec 17, 9:28 PM
    Decisions to be made 21st Dec 17 at 9:28 PM
    I wish to retire early so have decisions to make regarding what to do with my pension, it will be 3 years to state pension age (66) for both my wife and I.

    I have both a Defined Benefits and a Defined Contribution scheme with the same employer; the Defined Benefits scheme closed 10 years ago and was replaced with a Defined Contribution scheme. My Defined Benefits CETV quote is 436K which translates to 32x company pension benefits, the Defined Contribution pot stands at 82K.

    Would I be right to consider a SIPP/Drawdown option as opposed to taking the offered company benefits (inflation protection/spouse benefits)?

    Cheers

    BJL
Page 1
    • LHW99
    • By LHW99 21st Dec 17, 10:11 PM
    • 1,316 Posts
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    LHW99
    • #2
    • 21st Dec 17, 10:11 PM
    • #2
    • 21st Dec 17, 10:11 PM
    Probab;y a few questions before you look for an IFA with the required permissions to transfer out of a DB:
    What income level do you need now / after 66?
    What are the benefits from the DB scheme if you leave it where it is and live on the DC pot for the three years?
    Have you / your wife checked your state pension entitlements?
    Does your wife have any private pension provision of her own?
    Probably otherquestions too that I can't think of.
    • BJL55
    • By BJL55 21st Dec 17, 10:28 PM
    • 26 Posts
    • 5 Thanks
    BJL55
    • #3
    • 21st Dec 17, 10:28 PM
    • #3
    • 21st Dec 17, 10:28 PM
    Thanks for the quick reply.

    What income level do you need now / after 66: 35K now and after 66 would be good.
    What are the benefits from the DB scheme if you leave it where it is and live on the DC pot for the three years: 13.5K with 5%/2.5% split max index linked.
    Have you / your wife checked your state pension entitlements: Yes, approx joint 16K
    Does your wife have any private pension provision of her own: Yes, approx 3.5K
    Probably other questions too that I can't think of.
    No mortgage (home owner 180K).
    No Debt.
    • AlanP
    • By AlanP 22nd Dec 17, 12:17 PM
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    AlanP
    • #4
    • 22nd Dec 17, 12:17 PM
    • #4
    • 22nd Dec 17, 12:17 PM
    So DBs + SP is roughly £33k from Age 66, not far short of your target.

    If you transfer the DB out would you be able to replace that £13.5k by investing it and drawing down funds ech year?

    Looks more risky than sticking with the guaranteed DB as a "safe base" level to me, particularly with the spouse benefits as most pension is yours.

    Best option might be to absolutely mazimise what you can put into either the DC pot or a separate SIPP / PP between now and leaving and use that to get through the early retirement period and to top up to £35k after retirement.

    Is your wife's pension DC or DB? Does your wife work? Trying to up her annual pension level might be smarter than upping yours to make sure she can fully utilise her Tax Free Allowance.
    Last edited by AlanP; 22-12-2017 at 2:34 PM. Reason: Can't do SUMS!
    • LHW99
    • By LHW99 22nd Dec 17, 2:27 PM
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    LHW99
    • #5
    • 22nd Dec 17, 2:27 PM
    • #5
    • 22nd Dec 17, 2:27 PM
    Adding your wife's pension to the DWP and your own DB brings you up to around £33k pa as a couple. That's pretty close to what you want, with no investment risks.
    You probably need to consider the position for the survivor if one of you passes away, since the NSP is no longer inheritable, so you wife will only receive a small amount of any old additional pension you may have built up (which is probably low if you were in a DB scheme).
    AlanP's suggestion of building up your wife's provision seems sensible IMO.
  • jamesd
    • #6
    • 29th Dec 17, 4:16 AM
    • #6
    • 29th Dec 17, 4:16 AM
    My Defined Benefits CETV quote is 436K which translates to 32x company pension benefits, the Defined Contribution pot stands at 82K. ... Would I be right to consider a SIPP/Drawdown option as opposed to taking the offered company benefits (inflation protection/spouse benefits)?
    Originally posted by BJL55
    Yes, that looks like an excellent idea that can provide both substantially higher income, probably better survivor's pension, better provision for possible care needs and normally substantial inheritance boost.

    Please read Drawdown: safe withdrawal rates for more extensive discussion, links to worked examples and links to the research papers behind what I'm writing in this post.

    Guaranteed income first, since that quite often is a concern. If a person defers claiming their state pension for a year it's increased by 5.8%, pro-rated for part of a year. Say you each will have initial state pensions of £8,000 a year and you defer claiming for a year, drawing on your pension pot instead. You'll have spent £16,000 and your state pensions combined will be increased by 0.058 * £16,000 = £928 a year. That's CPI inflation linked but no triple lock.

    The DB pension is about £13,625 a year (lump sum / 32). 13625 / 928 = 14.7 years of you both deferring to get that, ignoring inflation increases to keep things simple. That would take 14.7 * £16,000 = £235,200 of your pot. But your DB pot is £436,000 so could do that and have almost half of the pot left over. Which is part of why your situation is so good for transferring.

    14 years is normally longer than sensible for state pension deferring. Including the longevity insurance value 5-10 years tends to be good. Varies depending on life expectancy and how the money is invested instead as well as each person's preference for certainty and minimum worst case investment performance income need. Annuities also become gradually better value for money compared to deferring over time and eventually become a better buy than more deferring.

    Say you both defer for five years and start out with that £8,000 each. After the deferring the state pensions combined will be paying (1 + 0.058 * 5 ) * £16,000 = £20,640 a year. That's 20,640 / 35,000 * 100 = 59% of your target. Plus the £3,500 from your wife's pension. What that does is give you tremendous safety margin for investment performance and that's the next post...
    Last edited by jamesd; 29-12-2017 at 4:19 AM.
  • jamesd
    • #7
    • 29th Dec 17, 4:46 AM
    • #7
    • 29th Dec 17, 4:46 AM
    So, after allowing for using 5 * £16,000 = £80,000 of your pot for deferring and adding in the DC pot you have £436,000 - £80,000 + £82,000 = £438,000.

    There's a now rather out of date guideline that a US investor can take 4% of their starting pot each year without any historic sequence of investment returns causing them to run out of money - down to just state pensions - during a 30 year retirement. 96% of the historic cases would produce a higher nominal ending pot than the starting one, while two thirds of the time the ending wealth is at least twice the starting wealth. That shows just how bad the investments have to do over a long time to threaten the income. UK safe withdrawal rates are about 0.3% lower and there are costs so I'll use 3.5% for this bit.

    3.5% of the £438,000 is £15,330 a year. You shouldn't plan for just 30 years these days but that'll do for now. Adding in the state pensions with deferral and your wife's private pension and that's £20,640 + £3,500 + £15,330 = £39,470 a year. So initially you should be thinking of raising your income target to more like £40,000 a year.

    But you can do better than that. The 4% rule has been greatly improved on over the years and now there are alternatives like Guyton-Klinger that can be used. Instead of assuming that everyone lives through the worst historic investing times, this sort of rule starts out assuming that you'll live through some of the more normal 75% and then adjusts the income up or down based on what you really live through. The result of that is something in the region of 5-6% initial withdrawing rate and not much chance that it would drop as low for your combined income as if you didn't transfer. And since you're living through it you can increase the cut to stay clear of that if it turns out that you do have a bad period of ten or more years. You should use cfiresim but to give some idea, 5% would mean £21,900 + £3,500 + £15,330 = £40,730 and 6% £44,990.
  • jamesd
    • #8
    • 29th Dec 17, 5:35 AM
    • #8
    • 29th Dec 17, 5:35 AM
    Moving beyond that, spending tends to decrease as people get older, with the money being saved instead of spent. You can allow for this by adding some fake income in cfiresim. You can also restrict how low you want to allow the variable income to be allowed to go if you live through bad times, this cuts the initial income.

    If you use those approaches and really are serious about being willing to vary your income you could probably start at £50,000 to £60,000 a year, less the age-related reductions you use to get to that level. That sort of level will only be sustainable for life if you live through average or better investing times so there is a substantial chance that you'll need to make greater than planned reductions. In exchange for that flexibility you get to start out with higher income while you're both young, in relatively good health and likely to value the spending power more.

    At this point it should be clear that you can use drawdown in a way that's customised to your own preferences. That can be anything from almost all guaranteed income higher than you'd get through staying in the DB scheme to a wide range of higher initial incomes that require a willingness to plan for or take reductions in worse than average conditions.

    It's up to you to pick the blend that best matches your own preferences.

    For much more on this, it's over to that Drawdown: safe withdrawal rates thread.
    • BJL55
    • By BJL55 29th Dec 17, 8:00 PM
    • 26 Posts
    • 5 Thanks
    BJL55
    • #9
    • 29th Dec 17, 8:00 PM
    • #9
    • 29th Dec 17, 8:00 PM
    Thank you all for your replies, appreciated.

    Thank you jamesd for all of that info, lots to digest.

    Some more info, we have decided to retire in May 2018, I've had some bouts of ill health recently, OK now but you never know hence the decision to go early, 3yrs 2 months early for me and 3yrs 8 months for my wife.

    The DB offers seem at odds with the CETV, 13.6K + 82K DC or 12.9K+86K max LS which is why I'm looking at a DD option (these quotes were from May 2017).

    How does it look if I took a 15% LS for year one (some hols and house work), then 32K >35K till our SP kicks in then 16K > 17K ongoing?
  • jamesd
    Just reduce the starting capital from £438,000 by that 15%, £65,700. Using some of the incomes I mentioned the effect is a reduction of:

    4% rule (using 3.5%): 3.5% of £65,700 is a £2,300 a year income cut. So the investment bit falls from £15,330 to £13,030 and total to £37,170.

    5% or 6%: cut by £3,300 or £4,000 but really cut as much as cfiresim says with the lower initial capital.

    £50,000 to £60,000 with planned reductions and deliberate young age loading: cut by £5,000. These are also much more sensitive to how investments do in the few early years.
  • jamesd
    Schemes decide how low a commutation rate should be used for normal lump sums but the calculation for the CETV transfer value is more constrained. 16:1 lump sum commutation vs 32:1 CETV wouldn't be surprising.

    The CETV one is also boosted a bit by things like survivor benefits value that are just given up with the trypical initial lump sum approach.
    • kidmugsy
    • By kidmugsy 31st Dec 17, 2:31 AM
    • 10,842 Posts
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    kidmugsy
    I am much less enthusiastic than jamesd about deferring new-style State Retirement Pensions. Consider your wife. You say she will have a pension of £3.5k - you mean £3.5k per annum I suppose. If her SRP is about £8k p.a. then she will be using almost all of her Personal Allowance against income tax. Deferring an SRP that is untaxed to increase her later income by an amount that will be taxable seems pretty unattractive to me. A better wheeze would probably be to use her little bit of unused Personal Allowance by making annual contributions to, and drawdowns from, say, a SIPP.

    On which point: your wife (and perhaps you) would be wise to use her/your last year of twelvemonth earnings to make a maximum contribution to a pension of some sort.

    Now, consider yourself. If you die before 75 then as long as you have completed the relevant form, all the undrawn money in your DC pension will be available tax-free to your widow. TAX-FREE! So there is an incentive to drawdown less money from the pension by taking your SRP as soon as possible. If you are so careless as to die after 75, then any money that your widow draws from your surviving DC pension pot will be taxed as income - just as it will be for you before your death.

    You have to remember that when you die very little of your SRP will be inherited by your widow, but all your unused DC pension pot can go to her. That seems to me to give a considerable incentive for you not to defer your SRP. After all, if you transfer out of your DB pension you will be giving up the chance of your wife receiving the widow's pension: protecting her position by trying to keep your DC pension pot large seems to me to be a good idea. When you both get old enough to consider using the pot to buy an annuity you can buy a joint-life annuity to protect her.
    Free the dunston one next time too.
  • jamesd
    There are four particularly important reasons why I like deferral:

    1. the income is effectively guaranteed and normally at present by far the cheapest guaranteed income that can be bought at a fairly young age. Annuities don't tend to become competitive with deferring until ten or more years of drawdown.

    2. the longevity insurance value, since it pays out however long life is.

    3. the comparison with cash as a relatively poor investment that people are likely to hold more of if they are less confident in their base income being sufficient.

    4. the effect of guaranteed income at moderate levels increasing the safe withdrawal rate in two ways:
    a. because it's not affected by the really bad sequences, the models end up able to hit targets at higher initial income levels.
    b. Blanchett's suggestion to use lower success rates as the guaranteed portion increases.

    Also worth noticing that I normally suggest both partners deferring and the initial guaranteed income in the younger years is often higher than the safe withdrawal rate income that the same amount of money would produce. If using the 4% rule - don't! - 5.8% inflation linked is more than 4% with inflation increases.
    • kidmugsy
    • By kidmugsy 1st Jan 18, 1:04 PM
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    kidmugsy
    Yes, but it's only apparently 5.8% p.a. Consider somebody who decided to base his calculation on 20 years more life. He defers one year: he loses 5% of his pension income because he'll be getting it for only 19 years. 5.8% - 5% = only 0.8%. Of course there're still advantages in deferring: (i) the index-linking, and (ii) the longevity insurance (he might live to 100 or beyond).

    These are rough calculations but they suggest to me that deferral is probably not a good idea except for considerations such as (i) rebalancing income between husband and wife, (ii) avoiding income tax, or even (iii) avoiding Inheritance Tax. In particular, a deferral that led to a higher income tax burden seems to me to be a dire idea.

    By contrast the deal with old-style pensions was terrific: 10.4% instead of 5.8%, and much of the extra pension inheritable by the spouse. That's why we have both deferred, that and the fact that my wife is from an unusually long-lived family.
    Free the dunston one next time too.
    • Silvertabby
    • By Silvertabby 1st Jan 18, 1:43 PM
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    Silvertabby
    Mr S is due his State pension next year (mine is too far away to bother chewing over) and we did briefly consider deferring it for a year or two.

    However, we've decided not to. He's fit and well, but no-one knows what's around the corner - so we're going to take it and put it into the highest earning safe savings account we can find. Yes, we won't get 5% - but the money will be there if we need it.
    • BJL55
    • By BJL55 2nd Jan 18, 12:01 PM
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    BJL55
    So, after allowing for using 5 * £16,000 = £80,000 of your pot for deferring and adding in the DC pot you have £436,000 - £80,000 + £82,000 = £438,000.
    If both our SP's are deffered for 5years that would entail living of the SIPP alone for 8 years! and with my recent health issues I can't gaurantee reaching 71 (who can?) so we would lose out on one SP as the survivour would only be entilted to 3 months back pension.
    Am I correct?
    Last edited by BJL55; 02-01-2018 at 5:12 PM.
  • jamesd
    If both our SP's are deffered for 5years that would entail living of the SIPP alone for 8 years!
    Originally posted by BJL55
    Yes, living on it is what it's for.

    with my recent health issues I can't gaurantee reaching 71 (who can?) so we would lose out on one SP as the survivour would only be entilted to 3 months back pension.
    Am I correct?
    Originally posted by BJL55
    Yes. For those who reach state pension age from 6 April 2016 there's neither a lump sum option nor normally an inherited increase by a spouse. Just three months backdated if no state pension had been claimed.

    Life expectancy is one of the big issues in planning. If you've good reason to believe that your life expectancy is well below normal you can take a substantially higher income and deferring your own state pension can become unattractive. Annuities also become more likely to be competitive. You still need to allow for the potential life expectancy of a spouse, perhaps at lower income. In general reduced life expectancy is likely to make deliberate taking of higher income at younger ages more desirable.
    • atush
    • By atush 3rd Jan 18, 3:44 PM
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    atush
    Mr S is due his State pension next year (mine is too far away to bother chewing over) and we did briefly consider deferring it for a year or two.

    However, we've decided not to. He's fit and well, but no-one knows what's around the corner - so we're going to take it and put it into the highest earning safe savings account we can find. Yes, we won't get 5% - but the money will be there if we need it.
    Originally posted by Silvertabby
    Why not put 2880 of it into a new DC pension? He can withdraw from it at will as will be over 55.
    • BJL55
    • By BJL55 10th Jan 18, 7:29 PM
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    BJL55
    Hi all, many thanks for the info so far, it has been most helpful, has made me aware of the different scenarios available which throw up questions that are hard to find in online answers.

    First up, Iíve more or less decided that I will take the CETV and head down the Flexi-access drawdown route.

    Pensionwise will only advise me for the DC fund, is this correct?

    A family member put me in touch with an IFA and Wealth Manager that she has used for 20+years, nothing like a positive recommendation to ease your mind, Iíve completed an initial risk assessment which went well, Iím being quoted circa 7K for the fund setup with a 1% annual fee for a bespoke managed fund Ė how does this compare?

    Iíve had a play with most of the online calculators (including my own Excel plays) but donít see one that emulates the following strategy and I wish to have some pertinent knowledge prior to the next meeting with my IFA.

    If I take a lump sum of 52K (10%) that will result in a crystallised fund of 156K and a UFPLS of 312K, from the start I will need 3K/month till August 2021 Ė 2.2K/month till Jan 2022 Ė then 1.6K/month thereafter (excluding inflation). How would this strategy play with the tax man and fund crystallization?

    My spouse will have an income of 3.5K till her SP kicks in Jan 2022, can I claim some of her tax allowance?
    • BJL55
    • By BJL55 18th Jan 18, 4:22 PM
    • 26 Posts
    • 5 Thanks
    BJL55
    I was maybe a bit late in replying to the thread so most probably missed my last post - sorry!

    Does anybody have any thoughts on my proposed strategy?
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