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A pension choice

General discussions about equity high-yield income strategies
odysseus2000
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A pension choice

#114687

Postby odysseus2000 » January 31st, 2018, 9:14 pm

A neighbour and acquaintance has reached retirement age and has a small pension that has been offered to him in three ways. He has taken multiple advice and got several steers and asked me if I could help. I said “No”, but he was a bit persistent and seemed troubled by the decisions and so reluctantly having known him for a while, I agreed to add my comments to the mix, telling him forcefully that these are just my thoughts and that he has to make the decision and should seek professional advice to which he complained that the professional advice left him more confused than before he started.

So I had a look and having considered things wondered if anyone here can give him a steer that I am missing.

Background, seems fit, happy, own house and various other income plus state pension to come. Spouse has her own income and they don’t seem to want. Doesn’t seem to have any desperate current needs, but of course who knows what the future brings which is perhaps the rub that is making his decisions hard given that this is a relatively small pension and he wants to optimise it as best he can. He didn’t go into his other income, savings etc and I don’t want to know, all he was focusing on was this decision. He wasn’t too bothered about tax, he was just focused on the choices he had.

The options he has

1) Standard: £3.6k, per year pension, lump sum £11k

2) Max income: £4.2k, lump sum zero

3) Max capital: £3.2k, lump sum £21k

The advice he has received is roughly.

A) Max income, Option 2, just sit back and enjoy, no hassles, easy. He was set on this till he got more advice.

B) Option 3, put the £21k, in a Wesleyan fund that he says he has been told will pay 7%. This seems a lot to me but another neighbours says she has a fund with them and it has paid her 7% for a long time now and she swears by the company.

If the 7% is genuine, then this would produce 21,000*.07 = £1470, making his option 3, a yearly pension of £4670, £470 more income than option 2 and still keeping his £21k which he likes as it gives him some flexibility if he needs to buy something etc and if not it can be part of their estate. However, as I understand it there is no possibility of capital growth and I believe here are penalties for fast withdrawals.

C) His bank suggests either Standard or Max Capital and put the lump sum in some ISA funds they manage which they say should give an income of around 3% plus some capital growth, all sheltered in the ISA making for easy times when doing taxes. If he took the max capital then he would receive 21,000*.03 = 630, giving a pension of 3.2+0.63 =£3.83k, about £400 less than max pension, but he would keep his £21k as in option B.

D) Another outfit suggested Max capital and buy an annuity, but the figures he got were not that impressive, just over 2% which seems low to me, but I am not in this field.

Thinking about what he seems to want, I was drawn to recalling Pyad’s HYP and I see that there are very many variants of this being pursued on the Lemon although I couldn’t find any links to Pyad and recall he left the Fool and went somewhere else.

I had a look at FTSE yields and was quite surprised at what is on offer (figures from:https://www.dividenddata.co.uk/dividendyield.py?market=ftse100)

If for example he put £2k into these 10 names he would have:

bp 5.5%
vod 5.8% or bt at 5.92% or half and half
ng 5.5%
sse 7.1%
psn 5.2%
Cna 9%
smds. 3.0%
Mrw 2.5%
svt 4.2%
uu 5.3%

Average yield of 5.31%, making on £21k, £1115, or a total pension if he takes all the income of 3.2+1.1 = £4.3k, just above the max income level. There is a bias to utilities, but generally they seem to have good reliable dividends.

There would be risks of a business going bust as happened recently with clln. but being as these are all FTSE companies he might get some warning via the media. On the plus side he would get to keep all his capital and as I recall pyads hyp there was both income gain and capital gain over the time he ran it. I don’t recall the figures, but by contrast his pension provider provided details of increases in pension over the last 20 years which averaged at circa 3%

According to his research life expectancy from age 65 is 84, so if that happened he would have this set up for 19 years, but of course who knows what will happen.

Looking at his options it seems to my, admittedly ignorant, gaze that an HYP would be best assuming he can tolerate all the media hype over potential nationalisation should Labour be elected. Once set up it should not require much messing with, which Pyad always advocated as the best policy.

It has been an interesting exercise looking at all of this things, very different to what I typically do. I have told him that he should not even think about messing with high beta tech like I do, although I have on previous occasions spoken of the moats that surround Amazon, Netflix, Apple etc and so he thought he might put a little into some of these even though I advised to stick to high yield. It is his money so what ever he does has to be his choice.

Anyhow I would be interested in any comments based on what he told me. I am aware that many will want to know much more about his personal circumstances, but he volunteered what I have put down and that is what I have worked on and I have told him he really ought to ask a professional for comments if he thinks about going for an HYP, which brought forth a look of disgust given what he has already spent to become more confused.

Regards,

SalvorHardin
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Re: A pension choice

#114691

Postby SalvorHardin » January 31st, 2018, 9:23 pm

Quick response about one point. I'm a bit merry due to too much beer but there's still enough of my Actuarial skills working to make the following comment:

Re.the Weslyan fund. No-one can guarantee a 7% return in today's environment unless you are buying an annuity and are of a certain age.

tjh290633
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Re: A pension choice

#114694

Postby tjh290633 » January 31st, 2018, 9:34 pm

Presumably the pension is index linked in some way. The commutation rate is about 20:1 which sounds a bit mean, so he would need 5% indexed at least to keep ahead.

My feeling is to go for the maximum income, and invest any surplus in a suitable equity medium.

Alternatively if he has grandchildren, he could put that income into IT savings plans for them, using FRCL or Witan.

I would avoid that 7% option, as the odds are that it will make someone else rich at his expense.

TJH

odysseus2000
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Re: A pension choice

#114699

Postby odysseus2000 » January 31st, 2018, 9:44 pm

tjh My feeling is to go for the maximum income, and invest any surplus in a suitable equity medium.


Sorry a little confused

Do you mean he should take the max pension, zero lump sum?

or by max income do you mean the equity approach?

Regards,

Alaric
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Re: A pension choice

#114719

Postby Alaric » January 31st, 2018, 11:14 pm

SalvorHardin wrote:
Re.the Weslyan fund. No-one can guarantee a 7% return in today's environment unless you are buying an annuity and are of a certain age.


7% is depleting the capital in all likelihood. A DIY approach of setting up an online account and investing in "High Income" shares or their equivalents in Investment Trusts or OEICs is likely to be the best value, as in cheapest charges should he wish to pursue the "maximum capital option". The possible problem with doing this being that the initial "exchange rate" between income and capital isn't particularly good.

tjh290633
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Re: A pension choice

#114794

Postby tjh290633 » February 1st, 2018, 9:29 am

odysseus2000 wrote:
tjh My feeling is to go for the maximum income, and invest any surplus in a suitable equity medium.


Sorry a little confused

Do you mean he should take the max pension, zero lump sum?

or by max income do you mean the equity approach?

Regards,

Max pension, zero lump sum.

TJH

Darka
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Re: A pension choice

#114818

Postby Darka » February 1st, 2018, 10:17 am

tjh290633 wrote:Max pension, zero lump sum.
TJH


Completely agree on this, max pension, no lump sum - going to do the same with my wife's pension when it's due.

I already have a fair amount in HYP/IT's etc., but the stability of the guaranteed income from going with max income will definitely be reassuring for the future.

funduffer
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Re: A pension choice

#114917

Postby funduffer » February 1st, 2018, 1:51 pm

Given the commutation rate and assuming the pension is index linked and tax is not an issue, then he should take the max pension.

With the HYP approach you would need to beat 5% and for the income to keep up with inflation, which is quite tough.

If he needs the capital as a back stop, then the HYP approach you suggest is the next best.

MaraMan
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Re: A pension choice

#114963

Postby MaraMan » February 1st, 2018, 3:34 pm

Does it not depend on his income tax situation? If he is not paying any or much then take the max pension. If he paying 40% though I would be tempted to take the make cash sum and invest in an ISA and take the tax free income.

MM

taken2often
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Re: A pension choice

#115791

Postby taken2often » February 5th, 2018, 10:20 am

If he has no need of the money then I would suggest a transfer of the full sum into a SIPP. This secures the capital for his estate. Invest it across a number of investment trusts for income and forget it. If he needs funds then UFPLS would be ideal, and could be drawn from the annual income
25% of it tax free.

Bob

odysseus2000
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Re: A pension choice

#116005

Postby odysseus2000 » February 6th, 2018, 1:30 am

An interesting idea.

I had to look up UFPLS and still need to study it more, but perhaps it offers what he wants.

Thank you!

odysseus2000
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Re: A pension choice

#120208

Postby odysseus2000 » February 24th, 2018, 9:27 pm

Just an update & thanks.

He took the maximum income, zero lump sum which was his idea before he sought professional advice.

His logic was that although he gave up the lump sum he traded this for less risk on the income. He could potentially have had more income & capital by using some equity based approach, but the risk he didn't like was that he could make mistakes or the markets could enter a long bear market causing him to suffer.

He read all the posts here & did a lot of research & asked me to thank all the responders.

Regards,


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