Gentle reader, I have a confession to make. As I have written before, a short spell working for a FTSE 100 engineering firm in the early 1980s had left me with a generous-looking pension as I approached retirement.
For years – literally decades – I had filed the annual statements, marveling at how projections of my annual income in retirement inexorably rose.
Gold-plated pension
Seven or eight years ago, the engineering firm’s pension trustees launched an early retirement enhanced benefit scheme. The hope was to persuade pension fund members to transfer out, or take higher immediate benefits in exchange for lower longer-term benefits.
They paid for a firm of financial advisers to offer advice, and calculate projections. I duly filled in the forms, wryly noted the resulting recommendation to take the money – and then I did nothing.
Why cash in a gold-plated, and partially inflation-linked, final salary pension fund?
As I turned 60, this pension had become – again, quite literally – one of my most treasured possessions, offering a retirement income of £5,000 or so a year, for as long as I lived. Even better, a reduced widow’s pension would be paid to my wife, should I die before her.
No longer. As of early April, that pension is part of my past, not my future.
Take the money
What happened? Last autumn’s bond market turmoil, in short. As gilt yields plunged in the wake of the Brexit referendum result, pension transfer values rose accordingly.
Some pension fund members were being offered transfer multiples of 30-40 times projected annual pension income. Not surprisingly, they were tempted to take the cash.
Among those tempted was former government pension minister and retirement activist Ros Altmann, who saw the transfer value of two pension schemes roughly double, with the transfer value of one scheme reportedly rising from £108,000 to £232,000, and the transfer value of another climbing from £57,000 to £104,000.
She took the money. As did, according to the Pension Regulator, about 80,000 other people.
Among them me.
Gulp
Now, a few caveats.
For a start, I didn’t get a multiple of 30-40 times that £5,000. More like 20 – but certainly a helluva lot more than the same firm had dangled in front me of a few years previously.
In part, I suspect, that lower multiple is because I wasted several weeks trying to resist the temptation.
I dallied because while I’m a fairly confident and experienced private investor, a pension transfer is a lot more than a transfer of a pension.
It’s really the transfer of a risk, and an obligation.
As a member of its pension fund, my former employer was obligated to pay me that annual income, and to shoulder the associated risks.
No longer. As of the transfer, all of that is on my shoulders, instead.
Repent at leisure
Now, not for nothing are pension experts and the Financial Conduct Authority (FCA) alike concerned about the increasing frequency of such pension transfers.
Just because a transfer value happens to be high is not a sufficient reason for executing a transfer. Particularly if you have no or little experience in personal investing – and even more so if one of the prime motivations is simply to get your hands on the tax-free cash.
And it’s of little help to point out that the rules governing such transfers call for mandatory advice from a financial adviser if the sum involved exceeds £30,000.
For a start, that’s arguably too high, and – perhaps more to the point – the advice that such advisers are obligated to offer can be of little help in real-world decision-making.
Short-term pain, long-term gain
What do I mean by that? Simply that central to the FCA-mandated adviser calculation is something called the ‘critical yield’, which loosely translates as the rate of return that you’d have to achieve in order not to be worse off, in income terms, after the transfer transaction.
Which scarcely figured in my own calculations at all.
I know I’ll be worse off, in the short term.
But what I’m interested in is longer-term income, longer-term inflation proofing (hopefully 100%, not roughly two-thirds), and the prospect of a six-figure lump sum to leave to my heirs. That is the trade-off in which I was interested.
Dilemma
The timing of the now-complete transfer was unfortunate. (And not solely in terms of the recent health scare which has unfortunately delayed my promised follow-up column on actively-managed ‘smart’ income ETFs.)
Basically, you don’t have to be Howard Marks – prescient though he can be – to worry that we might be in bubble territory with the stock market.
So my six-figure sum is currently uninvested, sitting there as cash, while I figure out what to do.
- Sit it out and wait for a hoped-for correction? I’ve succeeded in that in the past. But I might have a long time to wait.
- Drip feed into the market as opportunities present themselves? The trouble is, at present those opportunities seem few and far between.
- Dive in and lock in income now, rather than remaining uninvested?
What would you do? Dear reader, my confession is complete. But I’d welcome your answers in the comments below, please.
Further reading: See our article on one reader’s experience of transferring a final salary pension into a money purchase scheme.
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The heading of the article says “….. by THE INVESTOR …..”. I suspect this should be “….. by GREYBEARD …..”
Did the exact same thing and bunged the lot in Vanguard Lifestrategy 80% after reading one of your articles..
http://monevator.com/weekend-reading-time-in-the-market-matters-not-timing-the-market/
Then again, I have another 25 years before I withdraw it so i can take a hit.
The alternative is to drip feed it in – gain the upside of what you put in, but have cash for a crash…
@Factor — Oops! Thanks for spotting that before Greybeard did! 😉
Hi Greybeard?
There is never a right time to invest but you must get that pile of money working!
4% -3% is the return to aim for
Decide your asset allocation -rough guide -have your age in bonds especially if your pile is big enough to generate this % return
Use index funds.Two are enough.A world equity index tracker and world bond index tracker (hedged)
Vanguard is a company to look at for these funds
That’s it
You can then tinker if you wish at yourleisure or do other more interesting things
Confession-been in retirement since 2003 with the above parameters
So far so good!
xxd09
Although not for the same reason, I too have recently been sitting on a bit of cash that unexpectedly came along. My decision has been to buy a tenanted BTL and in parallel drip feed into a Vanguard Life Strategy 60/40. Sadly retirement at 55 is still 4.5 yrs away.
At least for now whilst you wait to time the market, have you considered something like Ruffer Investment Trust, which is about as doon mongering as they come and whose share price has actually gone up in downturns. You can then move to your intended investments bit by bit when the market is doing what you are waiting for.
At least this way you will be invested in relatively “safe” assets at relatively low cost with a greater return potential then cash whist you are twiddling your thumbs.
Hmm … Not sure that 20x would tempt me. If you’ve swapped £5K pa for a £100K lump you now need to make a 5% real return going forward (assuming the pension was index-linked). Not straightforward from here, I think.
Of course, you mentioned the inheritance aspect, which must be more important to you.
I’ve resisted transferring so far, but DB pensions only make up 7% of my net worth. So I prefer to look at them as a kind of index-linked bond.
I could do what you’ve done but have decided not to. I’m 58. I have a SIPP in income draw down. In 7 years time when my final salary pensions are due (amounting in total to roughly your £5k and inflation proofed), I have no way of knowing what my SIPP will be like- will it be ravaged by hurricane force economic winds or in blooming health and exceeding the lifetime allowance? Who knows ? I certainly don’t. I look on the final salary pensions as a financial knight on the horizon, bearing bags of groceries at worst or cruise brochures at best. More technically, my reading of the dangers of sequence and volatility risks have minded me not to increase those risks further.
I’m also resisting. I see the DB pension (worth about £3.5k per annum) as useful diversification. I don’t need more investable assets.
Regarding how to invest – slightly surprised you hadn’t thought about this before making the decision (perhaps you have, and this is just for our edification)! Anyway I see no reason to invest this any differently from the rest of your portfolio (I assume you have eg a DC pot). Unless of course you have a different and specific objective for this portion. Otherwise the usual considerations apply – what’s your objective, what’s your risk tolerance, what’s your tax situation etc etc.
Greybeard,
I very nearly late last year did same thing on something promising over £400k on a DB of c. £13500.
I didn’t do it because that item was the main plank of my retirement planning and i didn’t have sufficient additional DC type investments to offset any future downturns.
It was just too big a plank. Mind you, I’ve wondered nearly every week since whether i did the right thing mind.
I listened to someone on money box on wireless recently imply that you needed to accumulate £250k to generate £12k per annum and whilst i questioned veracity of this i still wondered whether i’d done the right thing.
If i had done the transfer i believe it would have placed it into something like a Royal London Governed fund using a 50/50 stock / FI allocation from day 1 rather than attempt drip feeding from cash.
I continue to review my choice …of two advisers consulted one (who would have effected transfer) seemed to think it was a good idea, the other thought i was mad to consider it.
Best of luck with it and very interested in hearing where it ends up …..
I was offered 45x more or less in the summer of 2015. I accepted and felt I faced a similar conundrum – the market felt high just as it does now.
I opted for a 60/40 portfolio comprising bond etfs and VWRL basically and decided to invest equal tranches every quarter and over a couple of years. The only discretion I gave myself was to bring forward a quarter if the market fell 10% and to bring forward two quarters if it fell 20%.
I’m not quite fully invested and the post Brexit rally has spooked me somewhat and I have extended my averaging in period by a year.
Tough decision. I wonder if all DB pensions are created equally though – I’m with USS (uni pension scheme) and I don’t think cashing it in / transferring was ever an option. Now in receipt of said pension I was alarmed to read recently USS now boasts the largest black hole ever observed in the universe. I now wait glumly for a txt from a former pensions manager along the lines of “Got all your cash now – Soz!” ‘sent from my Apple Telsa yacht in Monaco’
I think I agree with the comments which suggest you need to stick to your current asset allocation, maybe keep £20k in cash – I use premium bonds in this way – and see that as 4 years at £5K p.a. oh and if you haven’t used all your ISA allocation, or your partners then stuff that first as all income untaxed going forward…
With dire warnings of interest rate rises, dire warnings of “corrections” in the stock market, brexit, trump, North Korea and even the conservatives having a pop at self-employed and btl landlords, the mattress is becoming lumpier. Having been a reader of yours for a year or so, taken responsibility for rooting out expensive portfolio costs and also taken on responsibility for my wife’s pensionGod help me if I get that wrong!)……I am stuck. I have most of my investments in cash. I think I will enjoy the summer if there is any and re-look in the autumn.
@bellabeck, and Greybeard I guess – is the cash not still in a pension wrapper? Thus taxable as income on withdrawal?
This is funny,
Your confession ended without the money shot!
I’ll never cash in my DB, but my kids JSIPPs have a lot of cash sitting in them I don’t know what to do with. I see a world fund as being 60% US (ish) and of course since just after Brexit we’ve moved from a low against the USD of $1.22 in October 16 to around 1.32 today or an 8% gain just through currency of sitting on the sidelines for 60% of the amount had it been invested in a world fund (with the euro still flat , although that had moved 6% higher until Xmas).
Of course the S&P500, in $ terms, has moved 15% in that timeframe – so still the wrong decision from me!
I just wish it felt more right to invest! There’s something holding me back!
Greybeard, the answer is obvious: go buy a Ferrari!
I’m with those who suggest investing at your normal asset allocation because it sounds like you will draw income from it. No need to come up with a new asset allocation for it then.
Invest a third each quarter and you’ll be able to rest easy knowing you didn’t get the worst price point (or the best but that’s life).
@Vanguardfan: Just to be clear, I *do* know how I’m going to invest it, it’s present price levels that I don’t like. @Bellabeck: the money is in a SIPP wrapper — it is a pension *transfer*, not a pension *withdrawal*.
Excellent, well done – I presume that this is an exam question in the sense that GB already knows the answer and has set it to see who has been paying attention in class. Maybe using the wisdom of the crowd to cross check his plan.
I presume that tax planning has been completed, such as avoiding pension fund lifetime limits, topping up ISA’s, buying an annuity for Mrs GB to use potential unused annual allowances, setting up trusts to avoid IHT (one for TI) etc.
You say that you’ll be worse off in the short term, but want to protect against longer term inflation and leave some capital for the heirs, so that rules out buying an annuity. So that leaves (1) timing the market, and (2) what to invest in as the questions.
I’d view your decision to lock in the current low bond rates that produced the higher final salary pension buy-out as timing the low point in the bond market. I think you’re correct, but we both could be wrong and the rates could fall and go negative. Having forecast the low in the bond market I assume that your reticence in buying shares indicates you also think this market is reaching its peak. Again I’d agree with that position, hence you’re stuck holding cash. In summary therefore I think the bond market is at its low point and stock market at a high point.
As to the second question of what to buy. If my assumptions on market timing are correct and considering the current relatively low level of inflation then your default position of holding cash is quite reasonable. You could hang in there for a year or so and only suffer a relatively small fall in the capital value due to inflation. However, having made the decision on market timing I’d carry on that conviction and invest a quarter each in (a) short dated bonds, (b) commodities, (c) gold and (d) a property fund. Then, perhaps in a few years, once you’re happier with the bonds and stock markets you can move into a Vanguard 60:40 life strategy fund and then leave it alone.
I was fortunate enough to spent 18 years working for an FMCG company with a final salary pension scheme into which I put the maximum I could which was 5% of salary……..between 1986 and 2004. When I climbed the greasy pole and got to be a higher rate tax payer I also put my pay rises and bonuses into AVCs.
After leaving the fmcg company I had several jobs where I contributed into another three pension schemes. Four years later I started my own business, where I saved nothing and did not contribute to a pension for nine years.
When George Osborne relaxed the rules so a pension is now an asset which can be passed on……..God blesss him……….I thought I had better find out how I could make these new rules work for me. I found the Monevator site and devoured everything on it, wow what a site it is, changed my life…….thanks to all who contribute to it.
I received a final salary transfer value and really wanted to transfer it to my Sipp and invest it but I did not press the button because at 57 they were only offering me a 23 year multiple which I did not think was enough. My spreadsheet told me that I would need to achieve a 6% return to leave a worthwhile pot to my two children after my drawdown.
Had this been my only pension I probably would have taken the risk but all those bonuses, AVCs and also the results of having been contracted out of SERPS meant that I had other pensions worth £170k.
So I decided to take the final salary pension early and live off that, consolidate the other ipensions into one Sipp, pay off the balance of my mortgage with the 25% tax free lump sum from the Sipp, and invest the remainder in Lifestrategy 100 to be left to my kids.
All this happened around the Brexit vote. When I had consolidated the pensions, taken the lump sum and paid off the mortgage, I could not bring myself to invest the remainder as I thought the markets would tumble.
So I stayed out of the market from June last year to December missing out on the gains. Started drip feeding from December and now have £50k invested. Sitting on the remaining cash waiting for the downturn, which I know could take a while.
I’d plan to have it all invested in 2-3 years ( time for Brexit to sort itself out ) so would put a 1/24th or 1/36th into your investment choice each month. If we have a crash in the next few years, go wild and invest more when you think it’s the bottom, and if the crash doesn’t happen then you’ll be pleased you put some in at todays ‘high’ figures.
My understanding is that the evidence suggests you’re likely to do better if you just stick it all in now, in your chosen asset allocation, rather than worry about valuations and drip feeding into the markets. My experience (and the evidence) is that the more discretion you allow yourself, the more decision points you introduce, the more you are likely to fall prey to emotional biases which tend to result in buying high and selling low.
So, I’d sit down and write an investment plan, aiming to invest it quite quickly (if you think a single lump sum purchase might be too difficult, maybe do it in three or four monthly tranches), and stick to that plan – ideally by automating the purchases. Then resist the temptation to fiddle.
So, do tell what you have decided….
You mention inheritance suggesting this money is really earmarked for someone else, and probably not your wife? If so, is there anything they would use it for that would suggest a lower risk profile (e.g. House deposit)? If not, then it is probably a long term investment so I doubt it matters when you put it in the market. If there is an aim with it then you may want to take a lower risk approach – though of course this depends on whether the inheritance is likely to be 5, 10 or 30 years away (you mention health scare – I hope it was just that, a scare).
> from £108,00 to £232,000
Is there a missing zero?
I anticipate being in exactly the same position in about three months. As one reason for stepping away from a db scheme was concern about the limited index protection( inflation capped at 5%), inflation protection has to be a key objective. With a time horizon of 30+ years based on the apparent near immortality of women and existence of two heirs in waiting, suppose equities need to have a larger share than I feel emotionally comfortable with. I would’ve much preferred to have a direct holding of IL gilts and a equity bond ratio of something like 30:70.
My thoughts are along the lines of 33%:33%:33% cash:cautious fund:IL fund for time being.
L&G Global IL fund and HSBC Global Strategy Cautious fund were what I was thinking of while thoughts clarify since I already have significant equity holdings in ISAs.
However, what income you need had got to be a significant factor and I didn’t see that specified. My approach would get me less than 1.3% yield.
What amazes me about the DB faithful (usually a current FTSE employee), is that your reliant on 1 stock. Vs the message of investment diversification on this site. If DB company folds, there is some recompense but it goes against everything this site is about! This site is about diversification in your holdings at low-cost! If your offered a transfer (and have time on your hands), go-get in my view. A transfer of accumulated wealth across to an independent investment custodian DC (defined contribution or equiv) is surely diversification.
I’d dive in now. If current income is important then about 4.5% is achievable from investment trusts. You would need to supplement UK, international and Asia Pacific equity income trusts (some of which you have covered in earlier posts)with some high yield bond and commercial property trusts. You should get growth in income and capital from such an approach. Stretching for 5% income now on current valuations could undermine future growth. Waiting for a correction of 10% or more in valuations may be an option but my instinct would be to dive in.
I transferred out of my DB scheme at the beginning of the year.
A couple of thoughts…
There is an academic paper (linked on here previously) that showed the effects of lump sum investment versus drip-feed. The conclusion (iirc) is that a drip over 6 months or so will only lose you a couple of percent against the optimal choice of immediate full investment. Any longer than that and it really starts biting in to your returns although set against that is the psychological crutch of not having the market crash the day after you buy. Conversely, you could drip feed over 12 months in a rising market (increasing you cost average) only for it to turn the day after you complete the process.
I’m 10 years from drawing down and my critical yield is around 3% at current valuations so i’m looking at a more conservative approach which was my initial self-investment plan until I bottled it. Which brings me on to my next point…
The WM/IFA/fund costs come in at around 2% which is obviously 2/3rds of my critical yield each year going out in fees. I’m committed to one year at which point I will be definitely parting company with the IFA and will be looking to move half of my SIPP pot to self-management leaving the other half to the WM (if they will agree to it).
My half will be invested passively where there are clear reasons to do it. On my short list are the min vol ETF’s for the S&P, World and Europe along with possibly Japan. Where IT’s or OEIC’s have shown sustained out performance along with reduced volatility versus their benchmark or passive can’t properly capture that particular asset class then I will use active.
Transferring out of a DB scheme is a risk and I wouldn’t be choosing to invest at this point in the cycle but the reality is I think that inflated valuations in equities are a result of QE in part which has also lowered bond yields to a point where CETV’s have been inflated to levels making transfer out attractive.
Your house is invested in the UK, and that house may be your biggest equity-like asset. Your future state pension is a UK asset. Your remaining personal capital is presumably also a UK asset. So I’d look to diversify abroad. For index-linking, is there an ETF invested in TIPS? (hedged back into GBP if you insist). A bit of precious metals might be a useful modest diversification. Perhaps FX held as ETFs? Equities: Far East inc Japan via ETF or ITs?
Lord knows: I’d avoid Latin America and maybe non-Swiss European, but that may be none too rational. But why is this any different from investing in your money-purchase pensions and ISAs?
Another possibility: take your 25% tax-free lump sum and buy a little bit of woodland, as part pleasure-ground, part investment. Remember to allow for the cost of deer-fencing to stop Bambi eating all the ground plants, and presumably remember to insure against third party claims against you because Joe Idiot walked into the fence and purportedly suffered grievous injuries.
Once you get your head around compound interest the answer is simple.
Only three things matter:
Maximising income
Minimising costs
Maximising time invested.
@P — Darn it, there is indeed. Thanks for the heads up!
What should you do?
Well, in my view, yes, wait for a correction before heading into equities. But no, do not sit in cash, precisely because we do not how long the next correction will take to arrive and we have uncomfortably high inflation due largely to the Brexit vote error.
How to preserve your “cash” against inflation while not running the duration risks of long-dated index-linked gilts (not recommended)? I would choose one of, or a mix of, two options. Pop it into the M&G UK inflation-linked Corporate Bond Fund which is managed to a low effective duration or buy a short-dated ie less than five years index-linked gilt.
@Chris – Whilst diversification is important, it’s not the most important factor when it comes to switching from a scheme where the employer carries all the risk of providing a ‘guaranteed’ income into a DC fund, and particularly when there is the additional question of what is an acceptable transfer value. From age 60 onwards, all(*) my income will be from my DB scheme. A little under 20 years to go, and I’ve been offered a transfer value of 25x the annual pension. I’m tempted, partly by your argument about all eggs in one basket, partly by concerns about limited inflation protection in the DB scheme, but on the other hand, do I really want to take on that risk throughout my 30-40 year dotage?
(*worst case, currently living off savings and investments, and there may or may not be a remaining balance by that age.)
Not in exactly the same position but having worked for the NHS for nigh on 30 years and moving abroad a few years ago led me to consider transferring my gold plated safe as houses UK NHS final salary pension (worth about 30K pa) to a NZ QROPs…
Why?
Well, despite being eligible for a that reasonable pension once hitting 61 plus some inflation proofing, being out of the UK meant currency risk (currently around 25% in my favour), inflationary risk (NZ inflation is not the same as UK inflation), an inability to draw any money until I turned 61 and the probability that market gains would outweigh inflationary increases in the pension. Oh, and the UK Gov changed the rules so its no longer possible to do what I’ve done with a public service pension.
So I shifted it over when exchange rates were somewhat better and drew out my lump sum as soon as I could to get it out of the QROPs pension vehicle (charging around 1.2% pa) to a less expensive platform charging 0.75% and starting to draw down in to that less expensive vehicle annually but dissapointed that I can’t self manage as the type of platforms I was used to in the UK (such as Alliance, Hargreaves Lansdown etc) don’t exist here and need an advisor to be involved. Rent seeking collusion I suspect.
or maybe because the market is a lot smaller, funds are relatively expensive here and the major investment most kiwis have has traditionally been BTL (It’s changing with something called KiwiSaver – a pension scheme wrapper). There are also some punitive tax rules around holding non-Australasian investments. ETFs/Index funds are available but often in NZ company wrappers adding to costs – the base investment is often iShares or Vanguard.
Considering placing some money into UK ITs listed on the NZ stock exchange but not sure if they are overvalued just now or, according to some CAPE calculations, are at fair value. (eg Bankers, Henderson Far East, City of London, F&C, Mercantile, Templeton Em) some of which I used to hold in the UK (not impressed by Ruffer BTW).
Still having the (secret) freedom to say “shove yer job” to my boss earlier than age 61 adds a certain fillip to my everyday experience.
Still read Monevator weekly! Keep up the good work!
Clearly on the basis us that ‘time in the market’ leads to maximal returns over time.
But understandably at the age of 60 you are concerned about the downside risk of a significant market fall shortly after investing.
The other consideration is how much you already have invested in the market but given that you are concerned I assume this £100K is an important addition to your portfolio.
In this case I would put 1/3 to 1/4 into the market straightaway and then drip the rest in over 18 months. On William Bernsteins historical investment website there is an analysis based on rather old data showing that 12-18 months is a good balance between safety and reducing long term returns. (Type ‘dollar cost averaging Bernstein efficient frontier’ into Google)
Of course unlike me I think you are a fan of income investment trusts in which case you might just put the money into several of those. Take the 3% income and don’t lose sleep over the capital. !
I dont have this dilemma but a couple of my friends of mine do. One of them is financially savvy and the other, to be kind here, most certainly is not. In the case of the less wise friend, there is a significant benefit of leaving the DB pot where it is and so depriving him of the opportunity to get scammed or blow it on holidays (even though he has hardly any savings). The wiser friend is far less likely to be scammed or make poor choices with the new found riches. Lets just hope he never gets infirm or suffers cognitive degeneration which will hamper his investment management efforts in future years.
Were it me, I would have looked closely at the scheme and the company funding it. I think there is a world of difference between a FTSE giant and some others that offered DB schemes. That said, any of the schemes can fall over in the next 50 years. After all, there is clearly a reason they are trying to offload their liabilities….
Where to invest it? In something you dont already own enough of.
I would have kept the DB scheme myself.
Since you have already made the move, and given the scenario you have described, I would just buy shares in RIT Capital Partners then sit back and relax.
Many good suggestions above, not much value in repeating. Your consequences of failing to meet your planned objectives has to be your key issue.
What stands out for me is that you have to be in the market to have a chance of getting market returns.
I suggest you put 50% in market (diverse/balanced etc etc) straight away and hold half in case market falls significantly which case put the other half in. If after some time (greater than 6 months) nothing too serious has happened put the other half in. Could do it in thirds rather than halfs.
hope helpful
I hear the sound of distant ambulance chasers sirens as the PPI claims dry up as far as DB transfers is concerned. Whilst I can, and do, offer DB transfer advice, the whole subject is terribly complex (as I have said on here before) but boils down to:-
1) Do you want an index-linked guaranteed income for life as part of your retirement income stream; or
2) Can you forsake 1) and do better by taking on board, personally, the ongoing investment risks and costs of managing your own drawdown private pension from, say, 60 until you are dead?
OK, I know that the death benefits are a BIG thing for some – as they want to leave the kids a bundle of pension cash – but you can use whole life insurance you know (but you won’t ‘cos it costs “real” money).
Be very circumspect with DB transfers – I overheard a conversation recently at an IFA conference along the lines of “that was a quick £35,000 up-front fee and the sap agreed to 1.5% a year, too” as he (and its always a he) stepped into his new Porsche 911 convertible!
Look at the FCA website – they are getting worried and have been ordering quite well-known firms to stop activity in the area.
Choose your DB transfer adviser wisely, put your thinking cap on, be prepared to pay up (whether hold or fold – but not £35,000) and think about the fact that you will likely live far longer than you think.
Oh, the University Superannuation Scheme story last weekend made me laugh – read this from Henry Tapper to see why https://henrytapper.com/2017/07/31/is-the-university-superranuation-scheme-suffering-fantasy-deficits/
Best,
I would be careful about going all-in into the equities markets right now. I know firms roll-out studies on time in the market rather than timing the market but remember that they want their fees so, to paraphrase the excellent Mandy Rice Davies, “they would say that, wouldn’t they?” In my view, only someone whose ideology has got the better of their caution would go all-in when valuations are so high.
> you can use whole life insurance you know
That’s an impressive wheeze, I’d never heard of that. It seems a great win for people to give their adult and supposedly grown-up kiddies a bung when they cark it, which seems to be a massive concern of 99.9% of readers here.
Whatever happened to the old-fashioned concept of coming of age and standing on your own two feet, I wonder, but it’s good that there’s a solution to explicitly address this desire in a tax-advantaged manner.
From your picture, it looks as if you are close to death anyway. Perhaps paradoxically, that probably means you want to be more careful, not less, since you or your hopeful heirs may have less time to make up ground if equities tank. One thing I am worrying about there is that central banks seem to be leaning more towards tightening and the present valuations on income stocks could be much at risk from better bond yields. Anyway, the don’t try to time the market stuff may be fine if you’re 30 but maybe not so fine of you are already being measured up for the grave. Not so keen on your hiding in cash. Shorter duration bonds, in particular short duration inflation-linked bonds are one obvious choice; a genuinely cautious multi-asset fund like Troy Trojan may be another.
@ Ermine – use whole of life insurance
My dislike of “the State”, whatever that is, trying to help itself to my family’s inheritance is no secret. (The State seems to view itself as somehow in command of me, while I see it more as an inefficient and sometimes crooked butler). But note of caution. I think I recall that there were constraints around WOL insurance if it was not to be drawn into the IHT net. Something along the lines that you have to be able to show that you could pay the premium from demonstrably excess income. So if a person is really, really rich it would work well in size. If they are more on normal incomes it could fail to escape IHT. Why does this not surprise me.
@Ermine – you have to play by the rules the super rich play by to give your genes the best chance of multiplying (and ruling).
Diversify in time and class.
Make a plan now for your target asset allocation and give yourself two years to get into it. (Although I note you didn’t give yourself this length of time to get out of the DB). Short term feel free to leave it in cash — the expense of short-dated bonds isn’t worth it in the meantime and you won’t find anything better inside your SIPP wrapper (outside, a few quid in Zopa and or a 3% interest account — was Santander, perhaps now TSB? — would be ideal)
Make the plan now. Dispassionately. And set up the regular investment and then go and read a book. Or write book. Or sit on a beach.
Came across this site via retirement investing today. Excellent articles and comments and love the weekend reading.
When I received a relatively large bonus earlier in the year I paused and asked myself if I should invest this in one go (my employer allows me to sacrifice bonus into the DC plan). To help answer what I thought to be a difficult decision around how and when to invest this lump sum (particularly when markets at or close to all time highs), I reframed the question.
I asked myself if I would be happy to divest my existing DC pot at these levels? The answer was no so the bonus was promptly invested in the same mix. Not to do so would be inconsistent.
This exercise did make me think about my allocation in the round and I’ve since reduced my exposure to S&P500 and FTSE100 index trackers which I think are too heavily weighted towards several stocks trading at extreme multiples.
If you don’t change your allocation of your existing investments but then hold cash on the side you’ve made an implicit, arbitrary change in overall allocation which does not seem ideal (unless the market tanks and you get to buy in much cheaper but this will only be known with hindsight).
I still think that dithering on the sidelines because of high valuations is a behavioural bias. If capacity for loss/risk tolerance is an issue, that should be addressed via the asset allocation- ramp down the equities and increase the minimal risk assets, whether that is cash or short term gilts doesn’t really matter (have we forgotten Lars’ key messages already?). Make sure you have enough of the latter to cover several years of living expenses without being a forced seller of equities during a downturn. Ideally, fix a ‘floor’ of guaranteed income covering essential expenses from either annuities, a gilt ladder or other guaranteed pensions (oh, wait…..).
Alternatively, use the ‘take the income and never sell capital’ approach. This isn’t one I favour, at least not for income needed for heat and eat, because I think you need a very strong tolerance of volatility to cope with the inevitable capital (and dividend) fluctuations. However it seems to be an approach with wide appeal among U.K. private investors (though mainly I think those who already have a guaranteed basic income and therefore using investment income for top up discretionary spending).
So if it was me, I’d use state pension, DB pension and cash/gilts to make sure I covered the bills, and bung the rest in lifestrategy 60%. I’d probably be planning to annuitise if necessary to cover most expenses from 75. Having overseen my elderly father’s funds for the last 5 years, I’ve learned that a) simplicity is paramount and b) income needs in dotage are low, even with most going to care costs and c) with a good floor of guaranteed income, you don’t need a lot of investments, and such that there are can grow happily undisturbed.
Hi Greybeard,
A tough one – if you had 10+ years before you need the cash I would just invest the lot and be done with it, no worrying about time in or out of the market.
You could try doing a 50/50 split – so invest 50% of it all now and to hell with it, then use the other 50% waiting for a crash. That way if the crash never occurs you have still been getting some income, but if the crash comes in soon you havent lost everything.
The bigger question is how critical is that money to your retirement?
Cheers
FiL
Many DB schemes are now being very pro-active in pushing transfer “opportunities” for the very simple reason that the sponsors of the scheme (i.e. the employer) see it as an efficient vehicle for transferring all current risks from themselves to the member.
From many years of experience, the typical member will be relatively clueless about just exactly what risks they will be required to shoulder for the next x years.
The risk from staying in the scheme is the ongoing capability of the sponsor to support the scheme – which is why it is key that the member is fully aware of the strength of the covenant (usually reviewed by the Trustees every 3 years).
I read the articles with interest last year and finally asked for a transfer value in January. It looked excellent value to me at 46 times the payment and was only about 5% of my projected retirement income. So I paid my £1500 (through gritted teeth) to an IFA to confirm what I thought albeit with lots of cavaets. I’m currently still chasing my pension provider to transfer into my existsing SIPP. Plan will be to invest in the same proportion as my existing portfolio 75/25 global stocks/global bonds. Although I’d prefer some drawback in stock markets before then my plan is to drip feed it in over the next few months.
BTW I’ve enjoyed the articles on drawdown, investment trusts for income etc.
Three years ago I took £98k in lieu of £3k that will become payable in 2 years time, with limited inflation linking it has worked well for me so far but largely because it is about 5% of my investable assets…..it simply will not make a huge difference to my life if I had decided to go the other way.
To my mind this is the crux of the issue, if I had few investments or other pension/passive income then the reliability of the income the DB provides would be very valuable.
The next point is that few people will manage the money well on their own and whilst I have met one talented IFA, experience suggests mere competence is hard to find.
I am a fan of the Life Strategy approach from Vanguard ( or similar approach from other providers or a DIY) and this is the best chance of success for most people investing into a pension or drawdown , with sensible withdrawals.
I very much doubt if Greybeard needs any advice on Investing!
All you have to do is look at the charts to decide. Equities all the way if your invested for anything over five years! When I look at the charts from now and decades past equities always comes good in the end. All of the funds that I follow and put money into always come good. People say be wary of the volatile funds but as long as you are not invested in some niche part of the market you will be fine. Go for growth and not income and sell your units when you feel comfortable to realise their monetary value. Some of the funds mentioned here are so safe as to not worth the trouble to invest.
Interesting, with hindsight .. I jumped too soon – I took a transfer value out of a deferred annuity in 2013. The multiple was around 20. I agonised over the decision for months but what tipped the balance was
– high transfer value, it seemed at the time ..
– very low bond yields in general, with limited room to fall further
– uprating of the benefit was limited to CPI, which looked as if it might go negative, and the government was floating the idea of tinkering with the definition of CPI
– the possibility of passing it on to my children, who had both developed long term illnesses preventing them from working.
Once I’d made the decision – partly with the help of this site – and had taken the transfer into a SIPP , I bought 3 or 4 of the most general equity index ETFs I could find. The majority went into VWRL which has performed better than any of my personal choices.
What worried me most at the time was not being invested at all. I allocated it all as soon as I could. I saw that as part of the whole decision. It wouldn’t make sense to me to take a transfer without a clear idea of what I was going to do with it and what my break-even return would be.
My ex-colleague has recently cashed out two DB pensions (from 10 and 15 years’ employment respectively), his sole reason being that he wants to pass the cash onto his offspring when he pops his clogs. In two years’ time, he’ll be 55 so likely to be making a 25% withdrawal, which we all reckon will be used as a house deposit for one of his kids.
I didn’t ask for the exact transfer values but recall him mentioning something between 20-25%. The two pots have been invested by his ‘financial advisor’.
@PC @TheGreyBeard – Just realised I did not state earlier whether I’d committed to investment out of the cash transfer, which I did pretty immediately becoming totally invested in a mix of individual shares (with a bias towards Australasia), various bonds (mainly company) and a few mutual funds of various stripes (again, some Australasian but also including UK IT’s).
Rationale was to get in the markets and maximise any possible earnings/upside given the paltry interest being paid worldwide on cash….
Currently at a classic 60/40 having just sold ~50% of UK IT’s held and wish I could have better access to the ETF’s available in the UK and US!
@ermine, etc.
Very quickly, ‘cos I’m on hols, here is a bit about whole life assurance.
This is the oldest form of life cover, invented, I believe, in the early nineteenth century when life expectancy was rather lower than it is today. Whilst there have been many variants available over the years, including rather problematic unit-linked investment based arrangements, what we have available today is very simple.
All worthwhile policies, from the likes of AEGON, L&G, Zurich and others, offer guaranteed premiums and a guaranteed sum assured. There is no cash-in value or maturity vale, i.e. it’s a “pure insurance” arrangement.
You fill in a proposal form and this is then underwritten by your chosen insurer. Whole life is underwritten very carefully as, assuming you keep up the premiums, there will indeed be a pay-out one day when you die. Because of this, and due to the fact that most whole of life policies (excepting funeral plans) tend to have quite sums assured, the premiums are much more than for term, or “temporary”, policies.
When you buy a policy, the premiums will normally fall within the “normal expenditure out of income” IHT provisions as they will, obviously, form a long-term pattern. You MUST write a whole of life policy into a trust (freely provided by life offices) as this makes sure that the payment is outside of your estate on death and thus free of IHT – I commonly recommend Whole Life for IHT mitigation purposes.
What does it cost? Well, I have run a quick quote for me (I’m 54) based on £500,000 cover. If I qualified for standard non-smoker terms (unlikely as I have type 2 diabetes) than Zurich Assurance would charge £605 per month (I’d probably pay double – I have a policy that I took out long before diagnosis and I’m jolly glad I have it!).
That’s why people with big DB CETV’s won’t “put their money where their mouth is”. Even though they say the £500,000 in my SIPP/PPP is for the kids, they don’t really mean it as they won’t pay out £7,260 a year in life assurance premiums. They won’t even do it when their fund is £1,500,000!
Mind you, you don’t have to insure for the full whack, just some. To be fair, a handful of clients have taken just this approach, but it’s a very personal thing.
Watch out for DB death benefits by the way as they are often surprisingly awful as far as cash is concerned. You can cover that gap by a term life policy.
I hope that helps
I’m thinking of transferring a DB pension to my SIPP.
The pension pays c£10k pa from age 65. I’ve yet to receive a multiple, but let’s take a low value – say 20x.
Would you swap £10k a year for life from 65 for £200k now? I’m 50, so 15 years to go before I could draw the pension.
The pension is index-linked so will still be worth £10k pa in 15 years’ time, in today’s money.
If I take the assumed £200k and invest it I might get, on average, in real terms, 2.5% pa growth (my models assume 3% real growth less 0.5% fees).
At 65 my £200k will be worth nearly £300k in today’s money. Thus my 20x transfer is actually closer to 30x (if you accept my assumptions, and the inherent risk).
This is where I think those of us who are quite a few years away from DB scheme retirement age can potentially “win” – real growth in the SIPP between now and when I would otherwise be able to draw the DB pension vs no real growth if I keep the DB pension.
Plus all the other plusses of access to the capital, tax-advantages, inheritance advantages etc. But risk, as well…
Some have commented that the stock market seems high, and so if they do transfer they’ll stay in cash for a while.
I take the opposite view – it’s the state of the “financial world” that is giving such high transfer multiples. I’m not a market timer so I would invest – I may lose something in the short term due to the high market values, but my transfer value is high for similar reasons.
I’ll let you know what the offered multiple is and whether I take it…
@A Different Richard
I’ve looked at it along similar lines to you (I’m 18 years from being able to start drawing DB.) Assuming real growth, then the pot, invested, would be worth more in 18 years time than it will be as a deferred pension. The question is whether the growth is enough to cover the guaranteed payment for life I’d get by keeping it in the DB scheme.
I’ve been offered a multiple of 25. If I took the transfer and my investments kept pace with inflation(*) I’d break even at 25 years. If I have a 35 year retirement, then I’d need investment growth to be worth another 10 years of the annual pension I’d get by keeping it in the DB scheme. Is that achievable? Yes, if my pot achieves real annual growth of 2%. But then I’d still only be at break-even, so I need more than 2% in order for the transfer to be favourable (other than for reasons of access to the capital, inheritance, etc.)
So if somebody can guarantee me, say, 3% annual average growth I’ll make that transfer!
(*The DB scheme has some inflation protection, but it is capped. For simplicity here, I’ve assumed inflation never breaches that cap – not something I can say with confidence, so this could be another reason for taking the transfer.)
Hello Scott
If I’m offered 25x I’ll almost certainly take it. I think 2.5% real growth (after fees) over a 15 – 40 year horizon is very likely to be achieved, although not guaranteed.
Of course, by transferring you also get your sweaty little mitts on the capital sum. My maths says the capital in 15 years should pay me (as 2.5% real growth taken as income) the DB pension I would otherwise have got but with the capital lump sum sitting in my SIPP. Even if I have to draw down the capital that wouldn’t be the end of the world.
I’m fairly sure I would take a lacklustre 20x, as in 15 years it will probably (no guarantees!) be the equivalent of 30x. If I’m not prepared to take that level of risk to get my hands on a £300k (in today’s money) capital pot in 15 years’ time then I shouldn’t be investing in the stock market at all.
Of course it probably depends on your personal circumstances (spouse’s pension, etc) and other financial assets you may have.
So are you going to make the transfer? “you’ve gotta ask yourself one question: “Do I feel lucky?” Well, do ya, punk?” 🙂
Cheers
Richard
I was in a similar position a year ago.
Was offered x35, so a simple decision for me to take.
Over the following 6 months I drip fed into a passive index tracker 60/40 portfolio as I will be drawing down in next 5 years.
The biggest attraction for me was to be able to pass on any residual amount.
Good luck!
I’ve just taken the CETV, worked out at 25x and it’s a large sum, more then 500k, less than 1500k, problem now is how to drip feed. I like the Vanguard life strategy funds, prob 100% equity, but as the £ is so weak I’m reluctant to invest overseas until the £… I know what etf/active funds I’ll invest in, just wondered if anyone had any stats on drip feeding? E.g. 10% per month. Thanks.
@adi Drip-feeding is the lower risk, rather than higher-return, strategy, i.e. statistically speaking, the evidence says that it’s best to invest a lump sum in one go if your aim is to maximise return (because markets tend to rise over time), however, that doesn’t over-ride the fact that you could lose money, at least in the short to medium term, if you happen to invest it all at the ‘wrong’ time, which is where drip-feeding comes in. It gives comfort, as should markets fall whilst you’re still in the process off drip-feeding money in then only some of your money will be affected by the loss, and with your remaining cash you have the opportunity to buy at lower prices. I don’t think it particularly matters how you drip-feed (10% per month, 25% per quarter, etc.) although the longer time period you do it over, the lower your aggregate return is likely to be (again, because the trend of markets over time has been upward, so you’d be missing out on these gains.) The bottom line is nobody knows where markets are going to go in the short term, so you’re always going to be taking a bit of a punt whenever you invest.
Well…damp squib.
Just got my paperwork back. I can have £10k a year from age 65 (in 15 years) and a £30k lump sum…
…or…a transfer value of…
£185k.
Pah.
I think I’ll not bother but revisit this closer to when I’m 65 if my health’s not so good…
Rather ruined my Friday… 🙁
I have a transfer value 31x the pension. It’s a deferred DB scheme but they want me to transfer the associated DC scheme too as it sits on an old avc. Not sure what to do. As in the main article I know immediate income will be less but I wonder about an inflation cap of 5%, and the 50% spouse pension when she could have it all. Thinking…..
I had an option to make a transfer with a 20* multiple so did not take it. Had I been offerrred anything over 25 I would have taken it. At 31 I would have bitten their hand off.
when folk talk about a multiplier re. CETV , in case of a deferred DB pension , surely the multiplier must be forecast to what would be due at the scheme retirement age …ie need to be estimated in a deferred DB, not surely the muliplier at date of deferment ? Must confess i get confused over this issue, not least as my CETV (last year) of £423k related to a scheme of deferred in 2012 valued at £12.5k pa at NRA (63 years, 10 years after date of deferment. Estimating DB value at 63 is c. £14k pa, which makes a muliplier of c. x30, but c. X35 at value at date of deferment.
What a great website. I wish I’d found this sooner.
I’ve cashed in my DB pension which was £6018 per year when I turn 60. I cashed it in about 18 months ago when I was 39 for £392,000. By my maths that was 65x multiple.
I’ve already invested it all, initially in funds through my IFA. Having researched the funds that he’d chosen for me I gradually withdrew money from each fund at a profit and transferred the money to a SIPP. I was glad I did. All the funds bar 1 are lower today. The only fund I sold at a loss was Neil Woodfords fund which is currently locked up. How lucky do I feel now. My IFA had put in £72,000 to that fund. I lost £1,000 when I sold out but it would be worth much less today.
I do feel that I’m too heavily invested in one sector but intend to gradually change that over time.
Rather than paying 1.5% to the IFA and Aviva plus the fund fees and now paying £120 a year for my SIPP with Interactive Investor and I’m managing my own money. It is worth £444,000 today and I’m looking at predicted dividends of over £20k this year.
I’ve got a long way to go, and I will be looking to keep some of my money in cash to take advantage of the downturns in the future. I’m also going to move more of my money into funds not so much focussed on the UK.
I can’t help feeling lucky with my timing on more than one occasion since I started the process but I have no regrets. I will be careful and reduce my risk over time. I’d also like to move money into other currencies and then invest on other stock markets directly. But the weakness of the pound currently prevents me from doing so.
Good luck all.
Dean
Well done -you remind me of myself at that age-moving from opaque expensive Insurance Companies including Equitable Life through Mutual Funds finally to Index Linked funds
Now 72-16 years retired-2 Funds only-Equities and Bonds
Never stopped learning
Try John Bogles books plus Lars Kroijer,s videos and book
This site as you say is a great source of info
xxd09