DB Transfer Complete (nearly)
Discussion
Hi All
After much huffing and puffing, and fee paying, my final salary pensions are finally on their way to my workplace scheme. It's a fairly substantial sum.
The steer I'm getting from my IFA (which is just a suggestion), is to keep clear of UK equity (noting I already have a substantial UK investment in the existing pension) and put 75% into World (ex UK), Europe (ex UK) and North America, and 25% into gilts and bonds.
All funds are passive, which is my preference, especially as ongoing charges are negligible.
Other funds/investment types are available.
Seems like not a great time to be investing, in equities in particular, but I have to choose something.
Thoughts and cast iron predictions welcome
After much huffing and puffing, and fee paying, my final salary pensions are finally on their way to my workplace scheme. It's a fairly substantial sum.
The steer I'm getting from my IFA (which is just a suggestion), is to keep clear of UK equity (noting I already have a substantial UK investment in the existing pension) and put 75% into World (ex UK), Europe (ex UK) and North America, and 25% into gilts and bonds.
All funds are passive, which is my preference, especially as ongoing charges are negligible.
Other funds/investment types are available.
Seems like not a great time to be investing, in equities in particular, but I have to choose something.
Thoughts and cast iron predictions welcome
It's a very brave (or possibly foolish) man / woman / undefined who comes out of a DB pension in the current economic climate.
I'd have left it where it was and enjoyed the 3+% uplift for this tax year, obtained by doing absolutely nowt.
Next year it's likely to be nearer 10% if inflation sticks around for the next few months (which it will).
Pretty sure they can never reduce if RPI / CPI stay -ve either.
I'd have left it where it was and enjoyed the 3+% uplift for this tax year, obtained by doing absolutely nowt.
Next year it's likely to be nearer 10% if inflation sticks around for the next few months (which it will).
Pretty sure they can never reduce if RPI / CPI stay -ve either.
For sure it's a tough time to start carrying the investment risk, but it's not that simple. Investing is long term and if you're lucky you might be buying cheap now.
Whilst the annual pension will get further revaluation and cannot go down, the CETV isn't directly correlated. As you get older and closer to the normal retirement age the CETV tends to increase but recently annuity rates have been increasing. If the cost to secure broadly the same amount of income next year is less because bond yields have increased in a year the CETV could be a lot more than 3% less in a year's time.
In short, if you're definitely transferring then it might not be as mad as you think. On the other hand, the very concept of transferring out might be mad...
Whilst the annual pension will get further revaluation and cannot go down, the CETV isn't directly correlated. As you get older and closer to the normal retirement age the CETV tends to increase but recently annuity rates have been increasing. If the cost to secure broadly the same amount of income next year is less because bond yields have increased in a year the CETV could be a lot more than 3% less in a year's time.
In short, if you're definitely transferring then it might not be as mad as you think. On the other hand, the very concept of transferring out might be mad...
rfisher said:
It's a very brave (or possibly foolish) man / woman / undefined who comes out of a DB pension in the current economic climate.
I'd have left it where it was and enjoyed the 3+% uplift for this tax year, obtained by doing absolutely nowt.
Next year it's likely to be nearer 10% if inflation sticks around for the next few months (which it will).
Pretty sure they can never reduce if RPI / CPI stay -ve either.
I think most DB schemes have a cap on % uplift. May be RPI linked up to eg 5%, so this year effectively a 5% reduction. That 5% reduction stays with you for the rest of the life of the pension as the base for next years increase is -ve 5%I'd have left it where it was and enjoyed the 3+% uplift for this tax year, obtained by doing absolutely nowt.
Next year it's likely to be nearer 10% if inflation sticks around for the next few months (which it will).
Pretty sure they can never reduce if RPI / CPI stay -ve either.
May not be a bad idea to transfer out, depending on the cap and your view of long term inflation.
MarcelM6 said:
I think most DB schemes have a cap on % uplift. May be RPI linked up to eg 5%, so this year effectively a 5% reduction. That 5% reduction stays with you for the rest of the life of the pension as the base for next years increase is -ve 5%
May not be a bad idea to transfer out, depending on the cap and your view of long term inflation.
So you're assuming 10% inflation ?May not be a bad idea to transfer out, depending on the cap and your view of long term inflation.
Mine DB's are either RPI capped at 5% or CPI capped at 2.5%.
However - my DC investments are significantly down......
As a result, I'm reasonably happy with the DB income, but don't want to take anything from the DC's right now.
IMHO there isn't a right answer and I'm very happy/lucjy to have approx 50/50
Did your IFA suggest it was a good idea to exit your risk free DB pension ?
What was in it for them ?
Expect you know that employers have been desperate to end DB pensions because; they are too generous; the employer bears the huge extra unforseen costs during periods of high inflation; life expectancy becoming longer, annual inflationary increases, etc.
Best of luck now coping with market risks.
Mind you, having said that, my annual equity income grew and overtook my annual DB pension, so you can do it, but need some luck and a little investment ability.
EDIT - I have just seen 25% into gilts and bonds.
Who suggested that, when interest rates are rising ? Ask them about the inverse movement with gilts and bonds. Doubt they could explain.
The value of bonds/gilts move inversely to prevailing interest rates.
A crude example. Say a bond costs £100 and pays annual interest of 4%. (Assume the 4% as being market interest rate.)
If interest rates moved to say 8%, would you still pay £100 to only receive 4% (when you could get 8% elsewhere) ?
No, so the 4% bond price drops to £50, thereby then giving an effective interest return of 8%.
The time to profit from bonds and gilts, is when interest rates are high, but anticipated to fall. Then values go up.
In the UK, with B of E interest rate at 1% and inflation near 10%, you can hardly expect interest rates to be falling soon.
The prospect of your 25% pot value reducing, seems high.
What to invest in? An almost impossible question.
I could now look back to 1st January 2022 and tell you exactly what equity holdings to have, for you now to be 18% up,
with dividend income having increased by 2%. Current dividend yield is 5%.
What will happen next week though with the same holdings, I have no idea (until next Friday).
A tricky game.
Edited by Jon39 on Saturday 14th May 14:33
MarcelM6 said:
I think most DB schemes have a cap on % uplift. May be RPI linked up to eg 5%, so this year effectively a 5% reduction. That 5% reduction stays with you for the rest of the life of the pension as the base for next years increase is -ve 5%
May not be a bad idea to transfer out, depending on the cap and your view of long term inflation.
For deferred DB pensions, caps are averaged over the period of deferrment. Inflation would have to be pretty high for a long period for the cap to take effect.May not be a bad idea to transfer out, depending on the cap and your view of long term inflation.
This is different to DB pensions in payment where the cap is for each year.
As 007 above states, you should not assume a CETV will always go up they don't.
The actuarial work in coming up with the final figure is full of assumptions and they have discretion as to what they are.
Largely they are driven by bond yields and often the 'will' of the sponsoring employer to either encourage or discourage transfers out.
The banks have for many years encouraged people to take the transfer from their schemes and thus offered some very generous CETVs but this is not necessarily a forgone conclusion that it will continue across the board especially as bond yields are changing.
It's a complex decision and isn't just based on the CETV having control to dip in and dip out of the fund is a huge appeal for many when compared to an annual pension paid to you whether you want it / need it or not.
Also do not ignore the death benefits as these are very different and broadly those in I'll health can be better off transferring out . A tax free lump sum of the total fund can be more appealing than a small residual widows pension.
Like I said it can be very complex but I see CETVs go up AND down its not a gtee.
The actuarial work in coming up with the final figure is full of assumptions and they have discretion as to what they are.
Largely they are driven by bond yields and often the 'will' of the sponsoring employer to either encourage or discourage transfers out.
The banks have for many years encouraged people to take the transfer from their schemes and thus offered some very generous CETVs but this is not necessarily a forgone conclusion that it will continue across the board especially as bond yields are changing.
It's a complex decision and isn't just based on the CETV having control to dip in and dip out of the fund is a huge appeal for many when compared to an annual pension paid to you whether you want it / need it or not.
Also do not ignore the death benefits as these are very different and broadly those in I'll health can be better off transferring out . A tax free lump sum of the total fund can be more appealing than a small residual widows pension.
Like I said it can be very complex but I see CETVs go up AND down its not a gtee.
LeoSayer said:
For deferred DB pensions, caps are averaged over the period of deferrment. Inflation would have to be pretty high for a long period for the cap to take effect.
This is different to DB pensions in payment where the cap is for each year.
Thanks for that. I had not realised. Just checked my policy and in deferment the escalation is the lower of RPI over the period or 5% COMPOUND. I always speed read over the word compound. Small word, big impact :-)This is different to DB pensions in payment where the cap is for each year.
Double Fault said:
b
hstewie said:
hstewie said: Look at minimising ongoing fees.
Fund and platform and advice.
The annual fees are just 0.09%.Fund and platform and advice.
Double Fault said:
Seems like not a great time to be investing
Lots of stuff is down 5% over the past month. So now is a better time to invest than, say, two months ago.Edited by Simpo Two on Saturday 14th May 11:29
Jon39 said:
Did your IFA suggest it was a good idea to exit your risk free DB pension ?
What was in it for them ?
Expect you know that employers have been desperate to end DB pensions because; they are too generous; the employer bears the huge extra unforseen costs during periods of high inflation; life expectancy becoming longer, annual inflationary increases, etc.
Best of luck now coping with market risks.
Mind you, having said that, my annual equity income grew and overtook my annual DB pension, so you can do it, but need some luck and a little investment ability.
EDIT - I have just seen 25% into gilts and bonds.
Who suggested that, when interest rates are rising ? Ask them about the inverse movement with gilts and bonds. Doubt they could explain.
Jon39 said:
The value of bonds/gilts move inversely to prevailing interest rates.
A crude example. Say a bond costs £100 and pays annual interest of 4%. (Assume the 4% as being market interest rate.)
If interest rates moved to say 8%, would you still pay £100 to only receive 4% (when you could get 8% elsewhere) ?
No, so the 4% bond price drops to £50, thereby then giving an effective interest return of 8%.
In your example, if the bond price fell to 50%, the return for a new investor would actually be c. 92% (on a 1-year bond) and increasing lower for investors which increasing longer maturity bonds!
In practice, in response to an (unexpected) rise in interest rates of 4%, a bond with 1-year to maturity would drop in price by c. 4%, not 50%. A bond with 25 years to maturity might drop in price by more than 50%.
Jon39 said:
The time to profit from bonds and gilts, is when interest rates are high, but anticipated to fall. Then values go up.
In the UK, with B of E interest rate at 1% and inflation near 10%, you can hardly expect interest rates to be falling soon.
The prospect of your 25% pot value reducing, seems high.
Given the various economic headwinds, the outlook for equities also looks significant in the short-term. Maybe a bigger allocation to cash in the short term is the answer, but then, when volatility calms down you would probably be investing at higher market levels! “Time in the market not timing the market…” etc
Jon39 said:
What to invest in? An almost impossible question.
I could now look back to 1st January 2022 and tell you exactly what equity holdings to have, for you now to be 18% up,
with dividend income having increased by 2%. Current dividend yield is 5%.
What will happen next week though with the same holdings, I have no idea (until next Friday).
A tricky game.
Edited by Sport_Turismo_GTS on Sunday 15th May 07:00
Sport_Turismo_GTS said:
Jon39 said:
The value of bonds/gilts move inversely to prevailing interest rates.
A crude example. Say a bond costs £100 and pays annual interest of 4%. (Assume the 4% as being market interest rate.)
If interest rates moved to say 8%, would you still pay £100 to only receive 4% (when you could get 8% elsewhere) ?
No, so the 4% bond price drops to £50, thereby then giving an effective interest return of 8%.
In your example, a bond with 1-year to maturity might drop in price by c. 4%, not 50%. A bond with 25 years to maturity might drop in price by much more than 50%.
Your explanation is of course correct.
I did say 'a crude example' and purposely kept it simplistic, to try to minimise confusion. Was just trying to explain the basic underlying principle, but avoid the additional complexities. Yes certainly, remaining maturity periods make an enormous difference to capital value changes.
Sport_Turismo_GTS said:
Given the various economic headwinds, the outlook for equities also looks significant in the short-term. Maybe a bigger allocation to cash in the short term is the answer, but then, when volatility calms down you would probably be investing at higher market levels! “Time in the market not timing the market…”
The outlook at any time for equities is always uncertain. As you say though, more than usual at present, with so much happening at the same time. Even during dark times, there are some businesses that continue to prosper.
Think I must be an extreme example of, Time in the market not timing the market.
I learnt that rule about 35 years ago, after a brief period gambling with small company shares and new issues. Lots of work for uncertain and often tiny short-term profits.
Since then, the strategy has continually been constant investment, very long-term. Holdings rarely change and a good record of beating the market average has been achieved.
My experience so far this year, is that your suggestion to, 'maybe a bigger allocation to cash in the short term is the answer', would have cost me more than £100,000. Your comment, seems to contradict the 'time in the market' rule.
Anyone holding a worthwhile amount of Oils and Tobaccos in their portfolio, will have seen big YTD gains. Shell is 42% up, and Harbour Energy even more.
In just four months, we have witnessed an exceptional example of remaining 'in the market', then unexpectedly seeing part of your portfolio 'come alive big time', without any action at all by the investor.
Index funds will have remained almost flat YTD
Sorry, no plans to buy gilts now.
Edited by Jon39 on Sunday 15th May 07:39
Jon39 said:
Your explanation is of course correct.
I did say 'a crude example' and purposely kept it simplistic, to try to minimise confusion. Just trying to explain the basic underlying principle, but avoiding the additional complexities. Yes certainly, remaining maturity periods make an enormous difference to capital value changes.
Jon39 said:
My experience so far this year, is that your suggestion to, 'maybe a bigger allocation to cash in the short term is the answer', would have cost me more than £100,000. Your comment, seems to contradict the 'time in the market' rule.
I didn’t make any suggestion about cash, just that it might be an option for some people. It was also an option for now, going forward, not for earlier this year, so we don’t know whether it would cost you £100,000 or save you £200,000!Jon39 said:
Index funds will have remained almost flat YTD
S&P500 is down more than 15% YTD
FTSE 100 is up c. 0.5% YTD
FTSE All-share is down c 2.5% YTD
Edited by Sport_Turismo_GTS on Sunday 15th May 08:10
Jon39 said:
Since then, the strategy has continually been constant investment, very long-term.
https://monevator.com/weekend-reading-bonfire-of-t...
"Talking of The Accumulator, he’s been even more of a rubbish trench buddy than usual in 2022.
Don’t get me wrong, he’s exactly the sort of comrade-in-arms you should really want.
The Accumulator ignores the market. Doesn’t sell. Barely knows whether shares are trading today.
But for an active investing junkie like me, his ignorance of the gyrations can be infuriating."
Sport_Turismo_GTS said:
Jon39 said:
Your explanation is of course correct.
I did say 'a crude example' and purposely kept it simplistic, to try to minimise confusion. Just trying to explain the basic underlying principle, but avoiding the additional complexities. Yes certainly, remaining maturity periods make an enormous difference to capital value changes.
As usual with markets, no one knows precisely what is going to happen.
With the BoE rate now being 1% and a huge difference to inflation, possibly around 10% (with talk of further significant utility bill increases in October), do you think the BoE rate could rise by a considerable amount? I can remember it once reaching 15%. I suppose they need to consider the consequences for the consumers and businesses who are stretched.
Presumably long dated gilt values would move down, if rates increased by a large amount.
I still fondly remember making a good profit with gilts in the 1980s, when it became obvious that prevailing interest rates would fall.
Think that was the last time I owned any.
Jon39 said:
As usual with markets, no one knows precisely what is going to happen.
With the BoE rate now being 1% and a huge difference to inflation, possibly around 10% (with talk of further significant utility bill increases in October), do you think the BoE rate could rise by a considerable amount? I can remember it once reaching 15%. I suppose they need to consider the consequences for the consumers and businesses who are stretched.
Presumably long dated gilt values would move down, if rates increased by a large amount.
I still fondly remember making a good profit with gilts in the 1980s, when it became obvious that prevailing interest rates would fall.
Think that was the last time I owned any.
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