What would you do with a £1million pension?

[JulianPH]

jon- said:

Defcon5 said:

What would he get from his pension if he kept it? Not only lump sum and yearly amount, but does a pension continue for his partner if they outlive him?

Now would be a 200k lump then 39k/year.

The partner has sadly passed on already, hence wanting to take it out. There is no transfer to siblings should he pass on.

To achieve the same result if he took the transfer value of £1m he would need to draw 4.875% a year from the £800k (after the £200k tax free cash) and would still have fund management/platform/adviser fees to add onto this then a further amount for inflation.

So if you want to factor inflation in at, say, 2% a year, fund/platform fees/advice at another 2% a year he would need to be getting an annual return of nearly 9% (8.875%) to be in the same position he would be in without having to take on any of the risks and costs involved in taking the transfer.

This makes no sense whatsoever unless there is serious doubt over the ability of the DB scheme to meet its liability or there is significant likelihood that he will not live long enough to enjoy the benefits of his DB scheme and taking the transfer is principally to ensure inheritance planning.

[CarlosFandango11]

JulianPH said:

jon- said:

Defcon5 said:

What would he get from his pension if he kept it? Not only lump sum and yearly amount, but does a pension continue for his partner if they outlive him?

Now would be a 200k lump then 39k/year.

The partner has sadly passed on already, hence wanting to take it out. There is no transfer to siblings should he pass on.

To achieve the same result if he took the transfer value of £1m he would need to draw 4.875% a year from the £800k (after the £200k tax free cash) and would still have fund management/platform/adviser fees to add onto this then a further amount for inflation.

So if you want to factor inflation in at, say, 2% a year, fund/platform fees/advice at another 2% a year he would need to be getting an annual return of nearly 9% (8.875%) to be in the same position he would be in without having to take on any of the risks and costs involved in taking the transfer.

This makes no sense whatsoever unless there is serious doubt over the ability of the DB scheme to meet its liability or there is significant likelihood that he will not live long enough to enjoy the benefits of his DB scheme and taking the transfer is principally to ensure inheritance planning.

In your example above, he had a pension fund, initially £800k and increasing with inflation which could be transfered onto someone else on death.

This isn't the same result as remaining in the DB scheme.

As you mention, he would be taking on the risks and costs associated with the transfer and I'm not suggesting that this transfer offer makes sense.

Edited by CarlosFandango11 on Sunday 16th April 13:14

[JulianPH]

CarlosFandango11 said:

In your example above, he had a pension fund, initially £800k and increasing with inflation which could be transfered onto someone else on death.

This isn't the same result as remaining in the DB scheme.

However, I'm not suggesting that this transfer offer makes sense.

Now I am confused...!

In my example above I was saying that the £800k in his pension (after taking the £200k lump sum) would have to grow by nearly 9% a year (after costs and inflation) to keep in line with the current scheme.

I don't believe this to be sustainable, so suggested that unless the primary motive for the pension transfer was to ensure the inheritance I would not consider it.

There is nothing whatsoever to suggest the £800k in a SIPP would increase with inflation, it could grow by more than inflation or fall in value at any given point.

Does that make sense!?

[CarlosFandango11]

JulianPH said:

Now I am confused...!

In my example above I was saying that the £800k in his pension (after taking the £200k lump sum) would have to grow by nearly 9% a year (after costs and inflation) to keep in line with the current scheme.

I don't believe this to be sustainable, so suggested that unless the primary motive for the pension transfer was to ensure the inheritance I would not consider it.

There is nothing whatsoever to suggest the £800k in a SIPP would increase with inflation, it could grow by more than inflation or fall in value at any given point.

Does that make sense!?

If £800k grows by 9% in a year, allowing for charges of 2% and withdrawing 5% results in the fund increasing inflation of 2% - the fund value remains the same in real terms.

If he dies, the SIPP fund value can be passed on to someone. (The OP's dad doesn't have a spouse so presumably there is no death benefit in this case for the DB scheme.) Hence your example isn't in line with the current DB scheme.

For an example to be in line with the DB scheme, I would expect the SIPP fund value to reduce over time, hence a lower growth rate would be appropriate. Obviously there is the transfer of risks, particularly longevity risk here.

[JulianPH]

CarlosFandango11 said:

JulianPH said:

Now I am confused...!

In my example above I was saying that the £800k in his pension (after taking the £200k lump sum) would have to grow by nearly 9% a year (after costs and inflation) to keep in line with the current scheme.

I don't believe this to be sustainable, so suggested that unless the primary motive for the pension transfer was to ensure the inheritance I would not consider it.

There is nothing whatsoever to suggest the £800k in a SIPP would increase with inflation, it could grow by more than inflation or fall in value at any given point.

Does that make sense!?

If £800k grows by 9% in a year, allowing for charges of 2% and withdrawing 5% results in the fund increasing inflation of 2% - the fund value remains the same in real terms.

If he dies, the SIPP fund value can be passed on to someone. (The OP's dad doesn't have a spouse so presumably there is no death benefit in this case for the DB scheme.) Hence your example isn't in line with the current DB scheme.

For an example to be in line with the DB scheme, I would expect the SIPP fund value to reduce over time, hence a lower growth rate would be appropriate. Obviously there is the transfer of risks, particularly longevity risk here.

I think we are at cross purposes here as I am saying the same thing as you. An average of 9% a year in drawdown is not likely - but is necessary to match the DB scheme. So unless this is being driven by the inheritance issue I wouldn't do it.

[CarlosFandango11]

JulianPH said:

I think we are at cross purposes here as I am saying the same thing as you. An average of 9% a year in drawdown is not likely - but is necessary to match the DB scheme. So unless this is being driven by the inheritance issue I wouldn't do it.

My point is that 9% pa doesn't match the DB scheme, it exceeds the DB scheme due to different death benefits: DB death benefit is zero, transfered death benefit is £800k.

A lower return than 9% pa would be required to expect to match the DB scheme.

I would agree with you that the transfer doesn't make sense, unless reasons are driven by inheritance. The transfer value too small compared to the DB scheme benefits and the risk that the OP's dad would take on following a transfer.

[JulianPH]

CarlosFandango11 said:

My point is that 9% pa doesn't match the DB scheme, it exceeds the DB scheme due to different death benefits: DB death benefit is zero, transfered death benefit is £800k.

A lower return than 9% pa would be required to expect to match the DB scheme.

I would agree with you that the transfer doesn't make sense, unless reasons are driven by inheritance. The transfer value too small compared to the DB scheme benefits and the risk that the OP's dad would take on following a transfer.

Ah... I understand where you are coming from now. Yes, you are correct in that sense, but equally a £800k whole of life policy may (I don't know) cost less than the costs (and risks) required to equal the benefits given up by transferring from the DB scheme...???

It is an interesting one.

[Ginge R]

jon- said:

A friends father has been offered just over £1m as a buy out from his final salary pension. He wants to take it.

He's speaking to a couple of wealth advisers about options. In an ideal world he wants £40k pa as a pension, with as little disruption to the £1m pot as possible (I feel my friend is very keen for this outcome too )

£1m working at 4% is achievable in funds at the moment, but obviously long term there will be ups and downs.

I'm more inclined to put maybe £200k into a UK based rental property as a fallback source of income should the markets dip for a period and keep at least a years cash sitting in easy accessible savings.

I believe we've all firmly missed the boat where buying an F40 would be the best option

I thought it was an interesting question. £1m used to be a lot of money, but it's definitely not when you're 65 and that's the last of your income.

SUCH a hot topic at the moment. This article over the weekend was made for your mate's dad.

http://www.telegraph.co.uk/pensions-retirement/fin...

[DonkeyApple]

Trabi601 said:

You think so?

Even if you didn't earn any interest, you'd be able to take £50k / year for the next 20 years. Plus state pension. That's a very decent retirement!

I used to have a link to a website which could do some fancy calculations with money - ie. start with £1m, 4% interest per year, and how much you could take each year for, say, the next 20 years, to leave you with nothing at the end. Can't recall what it is right now, though.

ETA: It looks like you could take £5500 / month from the £1m for the next 20 years before you ran out of money. That's pretty damned good!

Edited by Trabi601 on Saturday 15th April 15:44

I guess this all boils down to what £50k/annum will buy you in 20 years time because what you would really be doing is swapping what may be an inflation linked pension for one that isn't so it's all a big punt on what the GBP is worth over the next 30 odd years.

On top of that you also have to place the £1m at risk to create what will be an unguaranteed and unknown return. You might make 3% one year, 6% the next and then lose 2%/annum for 5 years in a row and need to eat into the capital sum that could already have been eroded in market value.

I would say that it all boils down to the quality of the pension that is currently in place and that if it is good enough quality that a fund would offer £1m for it then it's good enough quality to not sell.

[JulianPH]

DonkeyApple said:

I guess this all boils down to what £50k/annum will buy you in 20 years time because what you would really be doing is swapping what may be an inflation linked pension for one that isn't so it's all a big punt on what the GBP is worth over the next 30 odd years.

On top of that you also have to place the £1m at risk to create what will be an unguaranteed and unknown return. You might make 3% one year, 6% the next and then lose 2%/annum for 5 years in a row and need to eat into the capital sum that could already have been eroded in market value.

I would say that it all boils down to the quality of the pension that is currently in place and that if it is good enough quality that a fund would offer £1m for it then it's good enough quality to not sell.

This

[jon-]

Thanks guys, I really appreciate every ones input and love that we have great arguments for and against withdrawing.

Looking at the markets over the last 30 years there seems to be a general trend of up, so for the withdrawal option to be a total disaster, there will need to be a total disaster with the economy.

As others have pointed out, even if you average 0% on £1M over 30 years, you could still draw down £30k/pa for 33 years before you run out of money.

No body knows the correct answer at the moment, it's an interesting time. If all goes to plan, you'll be in a MUCH better place in 20 years with the withdraw option over final salary scheme, but you certainly lose security.

[bad company]

VoxPops said:

How interesting, I have a broadly similar quandary at the moment. My IFA has joined St James' Place and although he's splendid value I have no particularly high regard for the new proposition.

You need a new IFA.

[otherman]

PurpleMoonlight said:

To transfer he must, by law, seek independent financial advice. If the advice would be negative then it's likely the advice will be withheld and the transfer cannot proceed.

You must seek advice but you're under no obligation to take it. It's to make sure you don't claim later to have not understood the process and try to take and action against the pension providor for allowing you to do so.

I'm with those saying leave it where it is. All risks carried by somone else, plus indexed linked. Take it out, and first - huge tax bill - the first 250k tax free then near enough 55% on the rest. Plus you take on inflation, interest rate and exchange rate risks.

[CarlosFandango11]

otherman said:

I'm with those saying leave it where it is. All risks carried by somone else, plus indexed linked. Take it out, and first - huge tax bill - the first 250k tax free then near enough 55% on the rest. Plus you take on inflation, interest rate and exchange rate risks.

Why a huge tax bill? The lifetime allowance is currently £1m, not £250k.

Longevity and investment risks are two big ones which would also be taken on.

Edited by CarlosFandango11 on Wednesday 19th April 01:47

[LeoSayer]

If that's his only income in retirement then I'd consider asking the trustees if he can turn half the pension into cash and continue with the other half as final salary.

That allows more income early in retirement when you're more likely to enjoy it and security for older age.

However I've never heard of a final salary schemes offering to split in this way.

[Jon39]

towser44 said:

I would sleep very very very very easy at night with that amount!

Interesting point, but there could be still be sleepless nights for some. Having bought my first shares with £200 thirty years ago, am fortunate now to have achieved some success and can relate to the OPs question. The income is not quite the figure mentioned by the OP, but it is growing steadily ahead of inflation as it should with stakes in good businesses, and is not too far short at £36k net.

One aspect which could perhaps hinder the sleep of some, are the continual share price changes.
Losing £50,000 in just one week does happen. If anyone wants to invest in equities they should only do so if they can cope with the ups and downs in capital values. Fortunately, 100 years of stock market history shows over the long-term, there have been more ups than downs. Hopefully that will continue, but nobody can tell.

Those on PH who are old enough to remember 'Black Monday' in 1987, will recall how serious the frantic selling was for several days. Huge percentage stock market falls all around the world. Take a look at the FTSE 100 chart now though, and remarkably you can hardly see that 1987 price crash. I seem to remember that it coincided with the BP privatisation. Private buyer applicants received an unfortunate lesson about stock markets, and many probably never bought another share in their life. I doubt that they ever realised, that the UK market was actually up over 1987 as a whole. In other words, don't panic and do not try to time the market during crashes.

This way of producing capital and income during retirement does not receive tax relief on money going in, but it is more tax efficient during retirement. No additional tax to pay on the income generated by your fund, and multiple withdrawals of any amount can be made at any time, without having to pay any tax or withdrawal fees. The only regular costs are £36 pa incl VAT.

Edited by Jon39 on Wednesday 19th April 17:15

[nigelpugh7]

I've also been looking at these schemes, and spoke to Mrs P about it too.

As always Mrs P is the sensible one, and rightly states that if something looks to good to,be true it probably almost certainly is!

But I still keep coming back to it, I wondering what a company like Tideway for example would pay out for my pension pot with £250k in the fund at present.

As mentioned in the thread earlier with the lifetime tax free allowance at £1M, you would be free of paying tax on the lump sum too?

So to,ask the obvious question, how do companies like tideway offer such large sums as a payout, but also make enough money for them to make it worth their while?.

[sidicks]

nigelpugh7 said:

I've also been looking at these schemes, and spoke to Mrs P about it too.

As always Mrs P is the sensible one, and rightly states that if something looks to good to,be true it probably almost certainly is!

But I still keep coming back to it, I wondering what a company like Tideway for example would pay out for my pension pot with £250k in the fund at present.

As mentioned in the thread earlier with the lifetime tax free allowance at £1M, you would be free of paying tax on the lump sum too?

So to,ask the obvious question, how do companies like tideway offer such large sums as a payout, but also make enough money for them to make it worth their while?.

Unless I misunderstand, they aren't guaranteeing anything. They are just investing money on your behalf and you bear all the investment risk, while they take investment management fees.

[nigelpugh7]

sidicks said:

Unless I misunderstand, they aren't guaranteeing anything. They are just investing money on your behalf and you bear all the investment risk, while they take investment management fees.

Ok understood, I think I see now, perhaps it's the way people from those type of companies word it in their pitch, bout at first look it appears as if they are paying out a lump sum, when in reality they are stil retaining your funds and putting them into their own investment wrapper.

[FredClogs]

There is a good reason they want him off the scheme.

This really hinges on how fit the DB scheme is and able to meet its commitments a word with a trustee over a drink or on the golf course should give an indication, it's possible he's not going to get through the next 30 years with the DB entirely intact, and it's not unreasonable to think that political pressures and the general economic outlook might steer the PPF from supporting people with large generous pensions when (if Brexiggedon happens) many of us young'uns could be eating out of the bins at the back of the retirement homes.

That said it's a lot of money to manage yourself.