DIY Investor Magazine
|
June 2017
48
SAVING UP AND DRAWING DOWN; WITH VALUATIONS AT
RECORD HIGHS, SHOULD YOU CASH IN A DB PENSION?
David A. Norman
CEO, MAPS and TCF Investment
Falling bond yields have driven up transfer values from
final salary or defined benefit (DB) pension schemes.
Some of these lump sums are life changing amounts
of money and, particularly after the introduction of
pensions freedoms (removal of the need to buy an
annuity), may look compelling; but transfers are not
without risk.
GROWTH AND INCOME
Key to making the decision to transfer from a DB
scheme is future returns; there are two different
elements to consider – the growth phase (accumulation)
and the drawdown / income phase (decumulation).
Clients and their advisers will have experience of
the growth phase (from ISA and SIPP investing
when maximising growth and contributions are key
- investment risk (volatility) and returns are primary
concerns with longevity risk, inflation risk, levels of
income and liquidity lower down the list of priorities.
In the income phase, returns are still important, but
longevity risk (living longer than the funds will last),
liquidity risk (access to income) and matching liabilities
(the long-term need for an inflation ‘protected’ income)
come more to the fore.
A sustainable level of income while maintaining an
appropriate level of capital is key; rather than simply
trying to maximise returns, investors are trying to
maximise ‘durability’ of income - exactly what the
trustees of the DB scheme have been trying to achieve
for years! Few investors may be equipped with the skills
and knowledge to manage this successfully.
In the long run
Figure 1. Long term annual real returns from UK assets
classes. Source: Barclays
In the long-run, equities have handsomely beaten
bonds, but over the last 10 and 20 years this trend has
been reversed; returns from bonds (post financial crisis)
have been driven up as interest rates and bond yields
fell and stayed low, and from the impact of Quantitative
Easing (QE).
The fall in bond yields has driven transfer values from
DB schemes up (cash equivalent transfer values /
2017
2016
10 years
20 years
50 years
117 years
UK Equity
13.5
2.5
3.7
6.0
5.1
UK Gilts
8.7
4.3
4.5
3.1
1.4
UK Corp Bonds
9.5
3.1
UK Index Linked
16.6
4.3
4.4
Cash
-2.1
-1.3
0.6
1.3
0.8
CETVs); as the discount rate for future returns has fallen,
the cash required today to cancel out a given future
liability has risen.
Note: CETVs are driven by the discount rate (usually
long dated bond yields adjusted for the scheme
asset allocation mix), inflation rates and the scheme
demographics. Rising inflation and falling long dated
bond yields typically increase transfer values.
