Sunday, November 19, 2017
"The nastiest, hardest problem in finance"
Check out top pension blogger Henry Tapper on why 85% on those able to transfer their pensions out of a DB (defined Benefit Pension scheme) would be best advised not to take it (or F...k'n bonkers to do so - in my non financial advisor language)
"In July, John Ralfe wrote what (for me) is still the best summary of the situation facing members of the British Steel Pension Scheme. If you have an FT account you can read it here.
I will quote the section where John talks about the value of retaining rights to a pension as it is as relevant for a BSPS member as for anyone else. It is an exceptional piece of writing.
Cashing in a defined benefit pension means giving up a guaranteed monthly income, increasing in line with inflation, usually from age 65 until you die, and half this amount for your surviving spouse.
Once the pension is cashed in, the decision cannot be reversed.
A final salary pension provides complex guarantees, including longevity — not running out of money, however long you live — and investment performance, as the monthly payout will continue regardless of investment returns.
The value of these guarantees to an individual member may be low if they are wealthy and their chances of running out of enough money are tiny, however long they and their spouse live.
But most people are not so wealthy and because their pension is a large part of their overall wealth, these pension guarantees are very valuable.
Make no mistake, how much to spend in retirement, so you don’t run out of money, is the most complex financial decision anyone has to make. Even Nobel prizewinner Bill Sharpe recently described it as “the nastiest, hardest problem in finance”.
Anyone looking at cashing in their pension now with high transfer values shouldn’t think they are making a financial-genius play on future real interest rates, future equity returns and their life expectancy. They especially shouldn’t be fooled into thinking they can rely on holding equities for the “long run” to replace their guaranteed pensions. The expected return from equities is not a loyalty bonus, but is just the reward for taking risk".