Pension fund from DB to Drawdown - your experiences?

[Air Support]

I’m looking for people’s experience regarding capped drawdown schemes and whether they find that they have worked successfully for them.

In particular, I’m now in a position to start taking my company pension and intend to start taking a pension whilst I carry on working for at least another 5 years.
If I decide to go down the drawdown route then I will transfer the funds from the company scheme (defined benefit) into a capped drawdown. Capped Drawdown would need to achieve about 4% return after charges to match company pension, but to achieve any sort of index linking I’d need nearer a 6% overall return (after charges).

The pros and cons seem to be as follows:
Company Scheme
No risk at all with the pension income, Income is predominantly index linked, guaranteed income for spouse on my death (approx. 60% of my pension), no charges
Capped Drawdown
Pros
More cash available as lump sum (c 30% more), more flexibility with income taken, spousal and family benefits are exactly the same as mine on my death and any remaining capital is retained for my family.

Cons
There are no guarantees on income and capital growth, I take all investment risk and longevity risk, there are management charges on the investment.

As stated already, I’d particularly like to hear from anyone who has taken this step and how they find things are going.

I’d also appreciate views on whether people feel a 6% return is achievable in the long term.

So is transferring from a DB scheme to capped drawdown sensible or just batst crazy?

Over to you……

[Air Support]

Ginge R said:

Thought provoking comments...

Ginge R

Many thanks for these well considered and sobering comments
I guess it's often too easy to get hooked on the positives and view that the downsides probably won't happen when in fact the consequences could be horrific.

A couple of points in case they make any difference to your analysis.

My IFA is suggesting that I would go for a natural income route and generate income from dividends, hence not needing to sell the underlying stock to produce income (3.5% to 4% target). The extra 2% pa growth is to provide inflation increases in income over time. Also, certainly for the first 5 to 7 years I would plan to be undertaking work and therefore could avoid withdrawing funds if the underlying investment has dropped.

I'd appreciate your thoughts

AS

[Air Support]

Claudia Skies said:

I'm not clever enough to do the calculations but I can confirm it's very unusual for it to make sense to leave a DB scheme.

CS

I absolutely agree that this would be unusual and my company scheme offers an index linked annual return of about 3.8% (at 55) dropping to 1.8% pa for surviving spouse/ children. So very safe and not to be sniffed at.
There is a lot of inertia once you are in a good scheme and you are certainly put off transferring out by some of the literature which arrives once you request a transfer value. I totally understand that most people wouldn't want to bother moving - far easier and safer to take what is on offer.

So I haven't yet decided what to do but the clock is ticking and I don't have long left to make my decision.
I'm sure that 3.8% should be matchable in the long term but it does very much come down to one's appetite for risk and if you are prepared/able to sit out any stock market fall over a couple of years. As I intend to carry on working for the next 5-7 years this would hopefully be less of a concern for me.

Time to crunch some more numbers I think........

[Air Support]

oop north said:

Around 15 years ago, I came across someone through my job who had converted his defined benefit scheme into a drawdown scheme. He lost very large chunks of it in investments that dropped dramatically. Under no circumstances would I want to do that myself - but I accept I am pretty risk averse

Thanks.
That's the sort of real world experiences I was hoping to hear about

[Air Support]

oop north said:

Around 15 years ago, I came across someone through my job who had converted his defined benefit scheme into a drawdown scheme. He lost very large chunks of it in investments that dropped dramatically. Under no circumstances would I want to do that myself - but I accept I am pretty risk averse

oop north
Do you happen to know how it went wrong for him or was it something like the impact of the telecom bubble which caused the issue?

Thanks

Edited by Air Support on Saturday 7th February 22:16